The relationship between subsidiaries’ initiatives and subsidiaries’ roles in emerging markets

Espacios. Espacios. Vol. 31 (4) 2010. Pág. 9

The relationship between subsidiaries’ initiatives and

subsidiaries’ roles in emerging markets

La relación entre iniciativas subsidiarias y funciones subsidiarias en los

mercados emergentes

Felipe Mendes Borini* y Moacir de Miranda Oliveira Junior**

Recibido: 16-03-2010 - Aprobado: 15-06-2010

Contenido

Introduction

Theoretical background

Hypothesis

Traditional Subsidiaries (TS) in emerging economies

The Subsidiaries with Limited Relevance (SRL)

Strategically Relevant Subsidiaries (SRS)

Research methodology

Selecting Variables and Building

Results

Discussion

References

ABSTRACT:

The purpose of this paper is to analyze the

strategic relevance of the largest foreign

subsidiaries located in Brazil, under the

perspective of emerging economies, in order

to find out the most influencing factors in the

dynamics of the subsidiaries roles in the

multinational corporation. The exploratory

research was carried out in a sample of 118 of

the 1000 largest foreign subsidiaries in Brazil.

Statistical analysis presented three clusters of

subsidiaries in Brazil: the Traditional

Subsidiaries, the Subsidiaries with Limited

Relevance and the Strategically Relevant

Subsidiaries. Subsidiaries differ mostly in

terms of its international responsibility,

integrated innovation, and credibility of the

subsidiary.

Key-words: Subsidiaries‟ Roles; Initiatives;

RESUMEN:

El propósito de este trabajo es analizar la importancia

estratégica de las filiales extranjeras más grandes en

Brasil, bajo la perspectiva de las economías emergentes,

con el fin de encontrar la mayoría de los factores que

influyen en la dinámica de las funciones subsidiarias de

la corporación multinacional. El estudio exploratorio

fue realizado en una muestra de 118 de las 1000 filiales

extranjeras más grandes en Brasil. El análisis estadístico

presentado tres grupos de las filiales en Brasil: las

filiales tradicionales, las filiales con la limitada

relevancia y de las filiales de importancia estratégica. Filiales difieren principalmente en términos de su

responsabilidad internacional, integradas de innovación,

y la credibilidad de la filial.

Palabras clave: Importancia de las filiales; Iniciativas;

Mercados emergentes

Emerging markets

Introduction

Firms from large developing economies like China, India, Mexico and Brazil should

play a more important role in global competition in coming years. These firms include

subsidiaries of multinational corporations with investments in these large developing

economies. This paper deals with subsidiaries of multinationals corporations working in

Brazil. There is a growing interest in the area, and there are already some studies

analyzing aspects or sectors related specifically to foreign direct investment in Brazil

(Consoni and Quadros, 2003; Franco and Quadros, 2003; Quadros et.al.2001). The

purpose of this paper is to study the strategic relevance of the largest foreign

subsidiaries located in Brazil, under the emerging economies´ viewpoint, in order to

find out the most influencing factors in the dynamics of the subsidiaries roles in the

multinational corporation. By strategic relevance we understand the relative capacity of

the subsidiary to develop innovations that can be transferred and used by other

corporative units, so that they become a corporate competitive advantage. In this sense

Strategically Relevant Subsidiaries (SRS) are responsible for corporate value creation,

do own global competitiveness, when compared with other subsidiaries, and have her

competences recognized by the corporation. Based on the theory about subsidiaries

strategies, and the concept of strategic relevance, a typology of the multinational

corporation‟s subsidiaries in emerging economies was developed in order to:

1. Be able to classify the subsidiaries from the point of view of strategic relevance. The

fact is that, for emerging economies, attracting and keeping subsidiaries with strategic

relevance is a very important task. The use of advanced technologies and knowledge

tend to extend far beyond the borders of the firm, reaching suppliers, distribution

channels, research centers in the emerging economy, therefore improving the

international competitiveness of the country in the specific industry;

2. Be able to understand the factors that determine the dynamics of the subsidiaries‟

roles in emerging economies. Subsidiaries have roles in the global corporative network

that can change with time. The dynamics of these roles depends on internal factors of

the subsidiary, as well as factors related to external environment;

3. Be able to help in strategic decision-making regarding the subsidiaries‟ roles. A better

understanding of the different subsidiaries‟ roles in emerging economies, represent

executive support for multinationals corporations (in the headquarters and in the

subsidiaries), as well as for government‟s technicians in emerging economies.

Theoretical background

It‟s known that there are three main perspectives to explain the role performed by the

subsidiaries (Birkinshaw, 2001; Peterson and Brock, 2002): the perspective of

environmental determinism, the perspective of the headquarters policies regarding the

subsidiaries, and the perspective of the subsidiaries strategies. The first perspective of

environmental determinism is due to the fact that multinationals companies operate in

different strategic environments and, as the characteristics of location varies,

subsidiaries may have different strategic roles (Bartlett and Ghoshal, 1992). It is clear

that the more dynamic the local competition is, the more demanding the buyers and the

more qualified are the suppliers; therefore, higher the chances for the subsidiary to play

a role of strategic importance (Porter, 1990). Similarly, the higher is the global

competitiveness of the subsidiary, the higher are the chances of the subsidiary to

become strategically relevant for the corporation (Birkinshaw, 1996). The subsidiaries

are becoming more dependent and engaged with the productive chains located abroad,

also in activities of innovation and value creation (Frost and Zhou, 2000).

The second perspective considers that subsidiaries roles are determined by headquarters.

Headquarters determines structure, control, communication and autonomy, thus

defining the relative importance of the subsidiary (Roth and Morrisson, 1992). The

larger the integration between headquarters and subsidiary, in terms of communication,

knowledge and socialization, the larger the strategic importance of the subsidiary

(Nohria and Ghoshal, 1997; Frost, Birkinshaw and Ensign, 2002).

In fact, the autonomy of the subsidiary, when it does not valorize the integration with

the other units of the corporative network (headquarters and subsidiaries), complicates

the alignment of the corporative strategies and may be considered a negative point. A

high autonomy, when unrelated to the non-local competences of the multinational, may

be harmful (Moore, 2001). The excessive power of the subsidiary may cause several

agency problems because a very autonomous subsidiary may tend to develop projects

that are not integrated to the goal of the multinational corporation (Birkinshaw and

Hood, 1998).

Finally, the third perspective proposes that the role is a consequence of the subsidiary‟s

active interest in improving it within the corporate network. Resources and capacities of

the subsidiary, aspirations of their executives, and their own initiative determine the

subsidiary role (Roth and Morrisson, 1992). This is not an easy task, because there are

several barriers that prevent subsidiary autonomy, such as the dependence of the

headquarters, the lack of resources and corporative recognition.

In any one of the three perspectives only non-local competences developed by the

subsidiary may be transferred to other units of the corporate network (Rugman and

Verbeke, 2001). This competence may be represented as specific knowledge,

managerial techniques or processes. The strategic relevance of the subsidiaries depends

essentially on the non-local competences development, mostly in R&D and manufacture

(Birkinshaw, 1996; Birkinshaw and Morrinson, 1995; Birkinshaw, Hood and Jonsson,

1998).

An entrepreneurial orientation of the subsidiary is in the base of the new business

opportunities creation that may be led by the subsidiary. Therefore, entrepreneurial

orientation is essential for the development of the non-local competences (Birkinshaw,

1997; Birkinshaw, Hood and Jonsson, 1998). Without proper initiative to make

decisions and take risks, the processes of developing strategic relevance can hardly be

started (Birkinshaw, 1996; Birkinshaw and Hood, 1998).

Again, creation and development of competences, as well as entrepreneurial orientation,

are strictly linked to the innovations in the subsidiaries (Bartlett and Ghoshal, 1992;

Birkinshaw, Hood and Jonsson, 1998). However, although the initiatives of the

subsidiaries can induce and increase strategic relevance, it will take an extra effort to

keep up with demands of new competences along the trajectory of the subsidiary; and

this means a continuous effort of the subsidiary in seeking, building and developing

new business opportunities and getting the necessary support from headquarters

(Birkinshaw, 1997). In other words, the subsidiary needs credibility and recognition

regarding its strategic relevance from the headquarters.

Therefore, the three perspectives point out a series of certain factors of the subsidiaries

roles, namely: a) the competences allocation; b) the communication and autonomy

regarding the head office; c) the subsidiary entrepreneurial orientation; d) the subsidiary

credibility; e) the global competitive context; f) the national and industry competitive

context; and g) key factors related to strategic relevance (value creation, global

competitiveness and recognition of the subsidiaries by the headquarters).

As the conditions of these factors change so do the different roles and degrees of

strategic relevance among subsidiaries, what configures the differentiated network

(Bartlett and Ghoshal, 1992; Nohria and Ghoshal, 1997), and as consequence these

subsidiaries may show different strategic behaviors and innovation processes (Nohria

and Ghoshal, 1997), as well as different situations regarding the evolution of their

strategies (Birkinshaw and Hood, 1998).

Innovation processes in multinationals, for example, differ according to the location of

the several competences of the company and of the nature of the interlinking among its

different units (Nohria and Ghoshal, 1997). In the center-to-global innovation process,

the center – the headquarters or a centralized structure as R&D laboratory – creates a

new product, processes or systems for global use, mostly technological; usually, local

subsidiaries were not involved except for routine tasks as marketing or support during

the implementation process.

In the local-to-local process innovations are mostly created and implemented entirely by

a national subsidiary for local level uses, and they don‟t involve technology; except for

small modifications to adapt a technology, product or already existing system. Later on

these local innovations, developed for a specific country, may be used in other units of

the corporation abroad that may get involved in implementation processes.

The local-to-global innovation process happens by seizing the different resources and

competences of the network, seeking to integrate local solutions and global

opportunities, representing an excellent example of the application of the combinative

capabilities concept in multinationals companies (Kogut and Zander, 1992); and

involves collaborative work from the corporate network in solving problems rather than

just sharing answers coming from a sole unit (Nohria and Ghoshal, 1997).

These last processes are the most common regarding strategic relevance of the

subsidiaries, but this does not mean that all the subsidiaries should perform processes of

local-to-global and global-to-global innovation, since in this case managing a

multinational would be too complex and strategic goals would hardly be accomplished.

Although the functions related to center-to-local and local-to-local innovations are of

smaller strategic relevance, and more susceptible to internal competition (Birkinshaw

and Hood, 1998), they also have some strategic implications in the sense that: a) means

application of technology and competences „overtaken‟ in other countries, thus

recreating and extending life cycle of the products and corporative profits; b) increases

economies of scale by mass production in countries where conditions may be more

advantageous; c) attends specific market needs exploring the volume of potential sales.

Table 1 shows the different degrees of strategic relevance of the subsidiaries as related

to innovation processes (Nohria and Ghoshal, 1997) helping to determine key factors

for relevance, as argued above. This panoramic view may help the reader in the

discussion that follows, trying to find out the key factors for each type of subsidiary. In

the table, SRS refers to Strategically Relevant Subsidiaries, while TS and SRL means

respectively, Traditional Subsidiaries in Emerging Economies and Subsidiaries of

Limited Relevance. SRS creates and transfer competences and innovations. TS just

implement and adapt innovations generally coming from the head office for the local

market or create innovations only for local purposes. SRL implement competences

coming from head quarters and help linking the net to increase corporative value; and

when they develop innovations, they are more specific recovering a product or

competence that is of no use anymore elsewhere. Next section will be dealing with these

categories.

Table 1: Strategically Relevance of Subsidiaries in Emerging Economies

Source: Authors

Hypothesis

Traditional Subsidiaries (TS) in Emerging Economies

According to their roles one may consider two types of Traditional Subsidiaries in

Emerging Economies: Implementator and Local Creator.

The Implementator has been those that need to control their resources without any

access to critical information. It is a subsidiary that practically neither creates nor

transfers innovations. It just acts as a great receptor of knowledge (Gupta and

Govindarajan, 1991). The responsibilities of these subsidiaries are limited to the

national borders, and do have very restrict autonomy. They are the most dependent of

the corporative headquarters (D‟Cruz, 1986) or of a Global Center.

In Brazil, the Japanese (Toyota and Honda) and French (Peugeot-Citroen and Renault)

assemblers are characterized by a larger centralization of the decisions and innovations

in the head office or regional centers; actually, the Brazilian branches just do small

adaptations for the local market, and there is a relation of strong subordination and

dependence of the subsidiaries from headquarters (Consoni and Quadros, 2003).

They are subsidiaries with little credibility, with low autonomy and interchange

communication and mostly controlled by the headquarters; and hence resulting in an

absence of competences for non-local creation, and a culture that does not stimulate

entrepreneurship.

Local Creators is the other category of Traditional Subsidiaries. Generally speaking they

are local market leaders and important revenue generators (Birkinshaw, 1996). They

stand out by their focus on the needs of local markets, like the case Unilever's powdered

soap in India (Bartlett and Ghoshal, 1998). Their role is strongly influenced by

industries that show great variations of consumer needs, coming mostly from cultural,

economic and social difference between markets (Herbig, 1998). It is an autonomous

kind of subsidiary (Jarillo and Martinez, 1990; D‟Cruz, 1986), which develops basically

all the activities of the value chain relatively independent from other subsidiaries or

headquarters, which may subsidize it due to certain credibility in their decisions, and in

facts that brings results for the corporation. However, as the innovation is locally

created it may hardly be transferred to other units of the corporative network (Gupta and

Govindarajan, 1991).

In Brazil, Unilever's Brilliant stone soap is a typical case. This soap is not in use in

developed countries. Its demand in Brazil is mostly due to the low purchasing power of

the population and because there is a belief, for cultural reasons, that dirt must be

manually removed. The soap eventually gained a new consumer-oriented name

“brilliant” and a blue color. Another case is Ala powdered soap; this product is oriented

to a very low purchasing power population, mostly located in the Northeast of Brazil

(Unilever Brazil, 2001).

Implementators and Local Creators subsidiaries are respectively characterized by

center-to-global innovation and local-to-local processes, typical of the Traditional

Subsidiaries of the Emerging Economies. In terms of competences creation, the role of

these subsidiaries is at most restricted to competences for local market. Hence, inside

the corporative network, they are the most susceptible to discontinuance of investments

by the headquarters (Birkinshaw and Hood, 1998)

The discontinuance of investments by the headquarters occurs when, for determination

of the headquarters, the strategic guidelines and the investments in the subsidiary

decrease, causing the loss of the responsibility about certain products, technologies or

markets and, in this way, taking the subsidiary to a state of gradual atrophy.

In these cases the strategy of the corporative headquarters is to give preference to more

active subsidiaries of its business portfolio. The business portfolio logic tends to prevail,

in search of the rationalization of the activities and administrative costs. The decision

for investments or discontinuance of investments in certain subsidiary may mean costs

reduction or focus on other subsidiary where there is a business opportunity that would

help to maximize the overall earnings of the corporation.

These subsidiaries are very exposed to internal competition for resources in the

corporate network (Birkinshaw and Lingblad, 2001), and hence depend on the strategic

responsibilities of the subsidiaries. A discontinuance of investment process will threaten

in a smaller scale those foreign subsidiaries dealing with competences at a larger level.

Both Implementators and Local Creators do not have practically any competitive

advantage, except in terms of, for example, better access to raw materials, cost of labor

work, and consumer market; therefore are the most susceptible to lose investments on

the corporate internal competition (Dunning, 1993). These considerations suggest that:

H1a: TS are subsidiaries without strategic relevance, so they do not create initiatives, or

when they created are strictly for the local market.

H1b: TS are subsidiaries without strategic relevance, therefore with lower performance

compared to other subsidiaries.

The Subsidiaries with Limited Relevance (SRL)

We have the Subsidiaries with Limited Relevance (SRL), which in emerging economies

may be subdivided into Global Platforms and Specific Creators.

Typical examples of Global Platforms are the subsidiaries of automobile multinationals

companies in Brazil, electro-electronic platforms in Asia and 'maquiladoras‟ in Mexico.

They are subsidiaries that implement innovations coming from headquarters, but they

act mostly integrated with global business, having better possibilities to play a strategic

role.

According to Roth and Morrison‟s typology (1992), they represent Globally

Rationalized Subsidiaries, which are embodied with some international responsibility,

but still show dependence regarding decision-making processes. In general, these

subsidiaries are responsible for one or more value adding activities of the corporate

network, they tend to be highly integrated dependant on the network in terms of

material and sales (Jarillo and Martinez, 1990), and are specialized in certain product or

process becoming part of the global business of the corporation (D‟Cruz, 1986).

Therefore one may observe an initial process of center-to-global, allocating resources

and capacities that in the course of time and development of the activities gains larger

importance in view of the interdependence relations with other activities of the

subsidiaries; this moves the corporation as a whole to become dependent of that

activity, rather than the opposite to be true.

As an example at Brazil, one may consider the case of an automobile assembler to

decide which of the subsidiaries to install a platform for Completely Knocked Down

Production and main components that will be exported for many countries (Consoni and

Quadros, 2003). All manufacturing process was developed in the head office, or in

some other subsidiary that acts as regional center, and the decision of installing the

productive park in the subsidiary X or Y results from factors associated to the

competitive context, as well as from the credibility of the subsidiary.

Therefore, Global Platforms result from an attribution of strategic responsibility for the

subsidiary conceded by the corporate headquarters. The subsidiary may have some

competences, but not enough to guarantee strategic relevance. These competences may

be transferred to the subsidiary, if the corporate headquarters finds that the subsidiary is

the one that may better shelter these competences. This will, in turn, increase the

competences of the subsidiaries, in a process always totally directed and coordinated by

the corporative headquarters. Although the subsidiary may have some influence in the

process, mostly in reason of its high performance, the development of the competences

only initiates after some delegation of strategic relevance made by the corporate

headquarters (Birkinshaw and Hood, 1998). The subsidiaries have credibility to gain

competences, but not to create them.

The other subgroup of SRL to be considered is the Specific Creators. Typical cases are

subsidiaries that accomplish innovations for the local market, which, may be used by

other subsidiaries after the product is ready. It is a typical local-to-global process, but

with some limitations.

One of the possible problems is the lack of integration, which may lead to duplicate

efforts along the network in terms of developing processes for the same purpose,

causing needless resources outlay, even though they may be trying to attend demands

against the external competition. One of the central issues in this case is that their

innovations can only be taken advantage as final products. They are typical cases of

subsidiaries‟ specific competences (Rugman and Verbeke, 2001; Moore, 2001).

Innovations are developed in the subsidiaries, which then could be taken advantage

globally, but there is a problem when implementing elsewhere because of lack in the

socialization and communication processes. Thus the innovation is only transferred as a

final product

Holm and Perdersen (2002) report the case of a director in the R&D area of a French

Multinational subsidiary in Denmark, showing how the competences developed in the

subsidiaries may be managed to be transferred. Many times a subsidiary has solutions

for the problems faced by other subsidiaries and then is called to supply such a solution.

Although the problem can be solved, the subsidiary checks only for the immediate

resolution of the problem. In the case other problems arise there or elsewhere, they will

need this support again. This happens because instead of transferring the competence to

solve the problems, the subsidiary transfers only the solution. One of the reasons may

be due to the corporate characteristics and the competitive context where the

competence was developed (Denmark).

Innovation process of the subsidiaries is developed exclusively by efforts built in the

subsidiary. It not necessarily involves the best practices transfer or external

benchmarking. For example, it may just consist in an improvement in terms of costs and

quality of the internal capacities. Important to notice that, although there is not direct

involvement of the head office, the process of reinforcing the competence of the

subsidiary allows a better performance with consequent improvement of their results,

raising the credibility and visibility of the subsidiary naturally, to the point of preserving

the recognition of the head office concerning its strategic relevance.

Usually, the results of these processes are local innovations that reinforce other

innovations created in the subsidiaries that have global scope (Moore, 2001; Rugman

and Verbeke, 2001). However, it may happen that the whole effort in the developing

competences and seeking advantage of new opportunities does not achieve success or

helps strategic relevance, which may happen for example if the innovations are not

considered as value creators by the corporative head office, or if they are not

strategically aligned with the business of the corporation.

Hence, next propositions follow from that:

H2a: SRL are subsidiaries with some strategic relevance that create specific initiatives

that guarantee a global competitiveness, but that only may be taken advantage as final

products.

H2b: SRL are subsidiaries with some strategic relevance, therefore with performance

inferior to SRS, but superior to ST.

Strategically Relevant Subsidiaries (SRS)

Finally, we have the Strategically Relevant Subsidiaries (SRS). The innovation

processes for these subsidiaries may be local-to-global or global-to-global. These

subsidiaries have a high degree of strategic competences and acts in strategic markets

(Bartlett and Ghoshal, 1992). They may have global or regional responsibility for a

product line, business area or all the business of determined geographical area, and they

are responsible for the management of their own activities independently of the head

office (Birkinshaw and Morrinson, 1995).

Relevance may be the result of a local innovation; these are the so called Innovative

Subsidiaries. The Brazilian subsidiary of the British multinational FOSECO is a typical

example of local to global innovation. FOSECO, whose business is the foundry of

ferrous and not ferrous material, have more than 20 subsidiaries around the world. The

Brazilian subsidiary developed a foundry process with higher quality and smaller cost,

initially aimed to overcome the local competition. However, the excellence of the

innovation overcame the expectations of a local innovation, becoming global in the

sense of starting on the corporate network elsewhere. Today, the Brazilian subsidiary is

one of the four centers of excellence of the corporation, the other centers located in the

USA, Germany and Japan (Oliveira Jr et. al, 2008).

The Innovative Subsidiaries attain their roles in a process that demands building up the

competences along the time (Hakansson, Waluszewski, 2002). The process demands

initiative and entrepreneurship orientation by the subsidiary (Birkinshaw, 1997), and is

the result of a continuous effort of the subsidiary in seeking new business opportunities

to gain recognition and credibility by the head office, regarding the importance of the

competences and business been developed (Birkinshaw, 1997; Birkinshaw and Hood,

1998). This process involves three steps or stages running through the subsidiaries.

First, the execution of an initiative developed by the subsidiary in search of new

opportunities, in the local or global market, or even inside the multinational corporation

(Birkinshaw, 1997). Second, building up and sustaining the necessary significant

competences. And finally, the third step is to introduce to the corporative headquarters

the competence developed by means of the business opportunity (Birkinshaw, Hood and

Jonsson, 1998). Corporate headquarters needs then to agree in leaving the strategic

responsibility for the subsidiary, in case that the competence created really provides the

sustained value creation for the corporation and guarantees global competitiveness.

Another important group within the SRS is the Integrated Globally, in other words,

those that inside the multinational corporation act like the global center for some area of

the corporation in the manufacture, R&D, marketing or sales of some products. It does

not mean that certain activity needs to be performed only at the subsidiary. The

manufacturing activity, for example, may be developed in several subsidiaries, but the

strategic decision-making, global responsibility and coordination belongs only to those

that are SRS (D‟Cruz, 1986). However, differently from an isolated initiative and

property of the subsidiary, it‟s an integrated, typical initiative of a process of global-to-

global innovation.

The subsidiary may develop integrated initiatives that guarantee a larger strategic

importance. Such initiatives result not only by having an entrepreneurial orientation by

the subsidiaries (Birkinshaw, 1997), but mostly because of the organizational

competences development (Fleury and Fleury, 2000). In the case of the automobile

industry mentioned before, the recent projects of the GM´s Celtic, and VW´s Fox

(project Tupi), both in Brazil, have been developed by means of competences of several

subsidiaries having the coordination of the headquarters in the project (Consoni and

Quadros, 2003). In the case of the HP, Singapore‟s subsidiary was initially responsible

for the coordination of subcontracting the equipment production for low cost regions,

like China and Southeast Asia, it become globally responsible for the development,

production and commercialization of all the products for portable HP such as calculators

and palmtops (Frost, Birkinshaw, Ensign, 2002).

Finally, it may happen that an SRS Innovative and Integrated Globally with high

strategic relevance, may loose its role because of lack of essential effort to keep up its

strategic relevance. In this case, the subsidiary starts losing its competitive capacities

progressively (Birkinshaw and Hood, 1998). Many times the process happens without

the proper perception of the company. For example: a certain contract that guarantees

for earnings of the subsidiary for leading a productive process for a certain number of

years leads to conditions where the subsidiary doesn‟t need to make an effort to increase

that productive process in terms of innovation, quality, costs. Consequently, the

competences of the subsidiary tend to become obsolete due to the external competition

(other competitive companies) or even internal (subsidiary with the same functions, but

better enabled).

This last condition, of internal competition, deserves some highlight. It is crucial that

the subsidiary is alert regarding the maintenance of its competences, not only in view of

the menace of the competitors, but mostly of the other subsidiaries The atrophy of the

strategic relevance may happen even though the subsidiary has accomplished

increments in her competitive capacities, but that did not go so significantly to the point

of standing in a better position regarding competences of other subsidiaries. This

internal competition among subsidiaries is an essential characteristic of multinational

organizations that helps strengthen the subsidiary in the local arena. Actually, the

subsidiaries of the multinationals manage to build superior competitive advantages in

the market, even though the competitors do not demand such effort, since each one

needs to develop sustainable competences continuously to keep on its strategic

relevance. This discussion leads to the following propositions:

H3a: SRS are the subsidiaries with larger strategic relevance in the corporative network,

therefore are subsidiary‟s initiatives creators that aggregate value to the corporation.

H3b: SRS are the subsidiaries with larger strategic relevance in the corporative net, with

superior performance in relation to most of the others subsidiaries.

Research methodology

We selected the universe consisted on the 1000 largest, in terms of capital, multinational

subsidiaries located in Brazil. A questionnaire was mailed to the corresponding CEO´s

of each of these 1000 firms. Some of the addresses were repeated and some were not

available; so out of the 1000 we came to universe of 853, of which we had a return of

118 multinational subsidiaries (14 %). For this kind of survey this is quite expected.

Our sample shows 55% of business on the industrial sector, 32% on services, and the

rest on agribusiness and financial areas; which is representative of the universe of the

largest multinational subsidiaries in Brazil. They come from 21 different countries,

mostly from the US (32%), Italy (8.5 %), Germany (8.5%), Spain (7.5%), and UK (6%).

On the average 480 employees, although almost 30% have more than 1000 employees.

Selecting Variables and Building

Models Multiple choice questions using Lickert scales (1 to 7) were applied.

Four variables were selected as dependent variables to represent SRS (Birkinshaw,

Hood e Jonsson, 1998): the contribution of subsidiary for adding value to the

corporation; Whether the subsidiary is globally competitive in its own area of activity;

headquarters positioning in relation to the importance of the subsidiary as strategically

relevant; A mean strategic relevance variable formed by the average of these three

variables.

Competencies were analyzed in relation to the following areas: R&D, production, sales,

marketing, management of international activities, management of interface with

headquarters, innovation, and entrepreneurship.

Regarding to the SEO - Subsidiaries Entrepreneurial Orientation, five variables were

considered (Birkinshaw, 1996; Birkinshaw, 1997), asking for each one the degree to

which: they feel support from top management regarding entrepreneurial activities, top

management have experience on innovation activities, they feel support for individual

decisions involving risks, they feel support for calculated risk activities, and if the

subsidiaries consider assuming risks as a positive attribute.

In relation to communication and integration between subsidiaries and headquarters

(Nohria and Ghoshal, 1997) questions have been asked regarding the extent to which:

there is work relations between subsidiaries and headquarters, there is sharing of

information between managers at headquarters and subsidiaries, and there is good

understanding of the top management at headquarters about the subsidiaries´

competencies.

About autonomy of the subsidiary (Birkinshaw, 1996), eight variables have been

selected to check where the decisions were taking place, at headquarters, at a regional

subsidiary, or at the subsidiary itself regarding: change in design of products/services,

hiring top executives autonomy for outsourcing of activities, decision for entering new

markets, approving annual budget, introducing new products, organizational changes,

change in production processes.

Regarding credibility of the subsidiaries (Birkinshaw, 1996) and well as its past history,

the next variables were considered: the accomplishment of the goals of the subsidiary

along the operations of its business in the country; the development of essential

competences along time in the subsidiary; the experience in the activities regarding

international sales; and (4) if the international sales grew along the last years.

In relation to global competitiveness of industry, the question was focused in business

area and asking whether: needs of consumers/suppliers are worldwide standard; there

are competitors in all key markets; local competitiveness is intense International

competitiveness is intense; business activities are susceptive to global scale economies;

main product/service has world recognition ; production technology is standard and

worldwide available ; competitors are commercializing a worldwide standardized;

introduction of new products happens simultaneously on the main markets (Birkinshaw,

Hood e Jonsson, 1998).

To test some of the hypotheses, two more blocks of variables were formulated

representing the performance of the subsidiaries and its initiatives.

Regarding the performance of the subsidiary the variables considered were related to:

investments return; earnings; productivity; sales and market share.

Some initiatives of the subsidiaries were analyzed regarding international responsibility

(Birkinshaw, Hood and Jonsson, 1998; Birkinshaw, 1997), namely: the new products

development to Brazilian market and subsequently exported; results of successful

corporative investments in Brazil; activities of international business created in Brazil;

increment and adaptation in the products line already adopted internationally new

corporative investments in R&D or productive processes obtained by the subsidiary.

Results

As shown in table 2 a factor analysis using the variables of global competitiveness,

autonomy, communication and integration, competences, entrepreneurial orientation

and credibility; gives significant results (p<0.000) with KMO showing 0.644. There is

internal consistency of the factors and those with eigenvalues greater than 1 already

explain 70% of the variance of the sample. The first one that may be called

Entrepreneurship refers to aspects dealing with the entrepreneurial orientation

(Birkinshaw, 1997). The second factor that may be called International Responsibility is

the result of the experience in international sales and competences in the manufacture,

R&D and management of international activities. The third one Credibility is related to

the development of the competences in the subsidiary along the time and the capacity of

making these competences be comprehended by the headquarters. The next one Global

Competitiveness depends on how much the activities of the sector are internationalized,

while the factor Global Standard is related to standardization of the products and

activities world-wide. The Domestic Competitiveness is associated with competitors in

the market to motivate subsidiaries to develop marketing and sales competences. The

Autonomy means larger autonomy for local decisions and it‟s related to better

receptivity of the head office for the decisions of the subsidiaries, while the related

factor Integrated Work corresponds to a working information and intense relationship

between head office and subsidiary. Finally the Integrated Innovation factor

corresponds to the competence of the subsidiary in creating innovation aligned to the

world corporative goals, by means of the management competence of the interface with

the head office.

Table 2: Factors

Source: authors

Considering these factors each one represented by index obtained as an average of the

Likert values of the variables, a clusters analysis has been executed using the Varimax

method. Table 3 shows the centers of the factors for each of the three clusters selected

with it‟s between distances,. One may naturally refer clusters 1, 2 and 3 to TS, SRS and

SRL, respectively.

Table 3. Final Clusters

Source: authors

Now starting from these previous results a discriminant analysis has been executed to

find out the relative importance of the factors regarding differences among TS, SRS and

SRL.

From this analyzes (Table 4) it follows that the three types of subsidiaries (ST, SRL and

SRS) differ mostly in terms of its international responsibility, integrated innovation, and

credibility of the subsidiary. Other factors such as global competitiveness and

standardization and autonomy are significant, but at a much lesser degree.

Table 4 Discriminant Function

Source: Authors

Once the differences regarding conditions for the strategic relevance of the subsidiaries

are detected, one may seek to find out to what extent differences in strategic relevance

are related to performance and initiative of the subsidiaries.

The ANOVA of table 5 shows that the performance difference of the subsidiaries

regarding the several subsidiaries of the corporation in world scope happens related to

the market share regarding the corporation, to the return on the investment (both with p

< 0,01) and regarding the productivity and to the profit (both with p < 0,05).

Table 5. Subsidiaries Performance

Source: authors

Table 6 shows that, regarding performance, the SRS are the ones that have the best

results comparatively to the other subsidiaries of the corporation, supporting H3b.

Actually about 55% of SRS have a larger market share in comparison to the others

subsidiary of the corporation. Moreover, 50% of them have higher earnings, 45% better

productivity and 40% higher return on investments. On the other hand, it‟s interesting to

observe that at least in terms of earnings and return on investments TS behave better

than the SRL, contradicting H1b and H2b. However in terms of productivity and market

share SRL overcome TS, hence supporting H1b and H2b.

Table 6. Subsidiaries‟ Roles and Performance

Source: Authors

Finally table 7 shows that, regarding the initiatives, the strategic relevance does

distinction related to the new products developed in Brazil and sold internationally, new

investments in R&D and processes (both with p < 0,01) and larger responsibility due to

successful previous investments

Table 7. Subsidiaries Initiatives

Source: Authors

Actually, about 75% of SRS obtained larger responsibility due to their previous results,

against 45% of SRL and barely 33% of TS. From the SRS, 60% developed new

products that are sold internationally, against 20% of SRL and 33% of TS. Finally, only

SRS, and practically 40% of them, received or accomplished new investments in R&D

and productive processes. It‟s interesting to observe that while SRL do not introduce

investments in productive processes or R&D, some TS (15%) do introduce investments

in this direction.

These support H3c, but rejects H3a and H3b, except for the biggest responsibility due to

previous investments accomplished by the subsidiary.

Discussion

This paper deals with a different empirical approach to the study of typologies of

multinational subsidiaries‟ roles, in the sense of focusing exclusively the subsidiaries in

the emerging markets, considering the critical aspects related to the evolution of the

subsidiaries‟ roles (Birkinshaw and Hood, 1998) and the multinationals innovation

processes (Nohria and Ghoshal, 1997). For this purpose, previous research suggests

considering three types of subsidiaries: SRS, TS, and SRL. SRS meaning Strategically

Relevant Subsidiaries, while TS and SRL means respectively, Traditional Subsidiaries

in Emerging Economies and Subsidiaries of Limited Relevance. This taxonomy is based

on recent research of subsidiaries' roles (Birkinshaw, 2001; Frost, Birkinshaw and

Ensign, 2002; Paterson and Brock, 2002), from which the concept of Strategically

Relevant Subsidiaries was developed, going beyond the idea of subsidiaries with

International Responsibility, or World Mandate subsidiaries. SRS actually means

competences creation and transfer of innovations along the corporate network, while the

subsidiaries with World Mandate based mainly on the idea of international

responsibility, doesn‟t necessarily transfer capacity of the innovation as a practice or

final product, and hence doesn‟t consider the recognition and utilization of that

innovation by other corporate units. The concept of Strategic Relevance allows a better

differentiation of the subsidiaries' roles, mostly when aligned with the innovation

processes of the multinationals corporations and with the evolution of the subsidiaries

roles. Following these ideas we may consider further divisions of subsidiaries roles.

Two types of SRS: The Innovators and the Global Integrated; two types of TS in

emerging economies: The Implementators and the Local Creators; and two types of

SRL: Global Platforms and Specific Creators.

This subdivision respects the previous typologies, refining their roles considering

important aspects regarding the relationships with the innovation and evolution

processes of the subsidiaries, which one may consider another contribution of this paper

to the literature on the area. The typologies always appear lightened of the innovation

processes, described and searched by Bartlett and Ghoshal, (1992) and Nohria and

Ghoshal, (1997). Actually, the attempt to better understand the relationship of SRS, TS

and SRL with innovation lead to the more specific classification of subsidiaries roles

presented for the first time on this paper.

TS are mostly characterized by its autonomy and enterprising orientation. Surprisingly

it seems that in emerging economies like Brazil, TS credibility appears just next to SRS

and much superior to SRL. This may be due to their positive results in the development

of their activities, providing a significant contribution to the total corporate sales. These

subsidiaries need to keep on permanently creating innovations, generally local

innovations, to stay competitive in the market. Hence, we may consider, within the

sample considered in this survey, the TS of the largest foreign subsidiaries in Brazil, as

Local Creators Subsidiaries. Local Creators focus on market innovations and the short

term results provide better earnings and returns on the investment than the SRL, as

indicated also by the results of Birkinshaw's study (1995). Moreover it‟s interesting to

observe that these Local Creators developed more initiatives than the SRL in terms of

developing products for international sales. This represent an interesting case of local-

to-global innovations processes without necessarily the subsidiary receiving the role of

a SRL; actually, as explained later on, at least in Brazil, most of the SRL belong to the

kind of Global Platform and not Creator Specific. This may be explained by the fact that

although the Local Creator Subsidiary reaches a given competence for developing an

international product it may not continue on the process of evolution of its role. This

may be happening because an innovation may have been developed for local purposes,

but later expanded, just by chance, to the international market; and the subsidiary is not

yet mature enough to be able to invest own resources and efforts to develop new global

initiatives and to win the recognition of the corporate headquarters. Actually, the head

office decision in how much to invest in a subsidiary and to assign higher relevance role

may come from the lack of trust in the ability of the subsidiary to develop this new role,

due to the subsidiary limitations in terms of technical resources and management, and

local business network for innovations, which may be the case in particular in emerging

economies.

SRL, on the other hand, seem to be characterized by the lowest levels in terms of

entrepreneurial orientation and integrated innovation; and very low autonomy, which

configure a condition more likely to innovation receptor than to innovation creator, even

when considering the subsidiaries specific competences. However, their strong points

are related to high global standardization and responsibility that guarantees their place

in the global corporative network, characterizing a condition of predominance of center-

to-local innovation processes. Hence, in Brazil, SRL are typically Global Platforms.

According to Birkinshaw (1995) these subsidiaries have a lower performance in terms

of earnings and returns on the investments as compared to other subsidiaries. On the

other hand, due to scale production and global distribution of parts or final products, in

terms of market share and productivity, this paper shows that in Brazil they perform

better than the TS reinforcing previous results by Fleury and Fleury (2000). However,

hardly ever these subsidiaries create products or processes, since they are the less

responsible for developing global products, at least until head office transforms them

into a SRS.

Finally, SRS appear characterized basically by its high degree of International

Responsibility, Integrated Innovation and Credibility. Clearly the role of the innovation

inside SRS in the development of competences (mostly in terms of R&D and productive

processes) and in the management of competences with the headquarters, guarantees

innovations to become global. Naturally, autonomy is actually an exclusive aspect of

SRS, since once subsidiaries start developing local-to-global or global-to-global

innovation processes they loose autonomy, due to the need to strengthen interface

management coordination; so, seeking excessive autonomy may be even harmful for the

development of subsidiaries. Surely enough in terms of initiatives and financial results,

SRS are highly superior to the other subsidiaries; moreover they are the solely

responsible for R&D, in particular when related to new productive processes. Therefore,

if emerging economies want to have top innovations they need to attract SRS that need

to guarantee an appropriate business environment for innovation development.

A question remains as how to distinguish SRS from being Innovators or Globally

Integrated subsidiaries. Perhaps a case study may help to find out which factor makes

the difference, in either case, or how they become one or the other along the time

analyzing their evolution process. By now, it seems that the process of evolution of

subsidiaries roles may follow two ways: to be headquarters oriented or to be

autonomous development. The SRS Integrated Globally may come from Global

Platforms, which in turn come from a fast evolution of Implementators, as in the case

mentioned before of automobile assemblers. In case a corporation has no interest in

keeping an Implementator subsidiary, it will close it because results are inferior to Local

Creators, or else it will transform it into a Global Platform. On the other hand, SRS

Innovators seem to come from Specific Creators that in turn come from Local Creators.

As a matter of fact, the role of Specific Creators is very brief and many times not even

formally recognized; the example of FOSECO, considered along the text, supports this

idea. The study of the evolution process of subsidiaries of multinational corporations in

emerging markets is an open-ended, very interesting, and important problem for

defining appropriate policies, both for the multinational corporation (headquarters and

subsidiaries) and for the Government of these countries.

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