INTERNATIONAL SUBSIDIARY
MANAGEMENT AND
ENVIRONMENTAL
CONSTRAINTS: THE CASE
FOR INDIGENIZATION
Laszlo Tihanyi, Anand Swaminathan
and Sarah A. Soule
ABSTRACT
We use insights from resource dependence, institutional theories and
social movement theories to examine the indigenization of subsidiary
management in the multinational company (MNC). We discuss the
effects of interdependence with local organizations, access to critical
resources, and MNC legitimacy in the host country on the indigenization
of subsidiary management. We consider the impact of local and extralocal social movement activity as well as the local political opportunity
structure in the host country. The organizational variables in the
framework include international strategy and experience. We suggest
implications for further international management research and practice
involving the operation of foreign subsidiaries.
Institutional Theory in International Business and Management
Advances in International Management, Volume 25, 373–397
Copyright r 2012 by Emerald Group Publishing Limited
All rights of reproduction in any form reserved
ISSN: 1571-5027/doi:10.1108/S1571-5027(2012)0000025021
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INTRODUCTION
Previous international management research provides convincing evidence on
the organizational benefits of placing expatriate managers in foreign subsidiaries. Expatriate managers tend to exhibit high commitment to their parent
organization (Gregersen & Black, 1992), reduce agency costs (Gong, 2003)
and facilitate knowledge transfer (Tung, 1984). As a public corporation,
however, a multinational company (MNC) is ‘as much a political adaptation
as an economic or technological necessity’ (Roe, 1991, p. 10). The long-term
survival of the MNC depends not only on its organizational efficiency but also
on its ability to adapt to the local institutional conditions of different countries
(Kostova & Zaheer, 1999). Employing indigenous managers can help MNCs
to increase their understanding of the laws and value systems of different
countries, to improve their ability to overcome the liability of foreignness and
to meet the demands of different interest groups (Foster, 2000; Gaur, Delios, &
Singh, 2007; Gregersen, Hite, & Black, 1996; Zhang, George, & Chan, 2006).
In this paper we explore a set of critical factors that may lead to the
indigenization of subsidiary management by MNCs. Indigenization of
subsidiary management is defined as the transfer of subsidiary management
from expatriate to indigenous managers of the host country where the MNC’s
subsidiary is located. Indigenous managers in our conceptualization are not
simply local nationals but professionals with strong ties to their home
countries via their education, language, culture and work experience. Whereas
most previous research considered international human resource practices to
follow: (a) uniform MNC staffing policies around the world, (b) practices of
the MNC’s home country, or (c) policies of the host country, our framework
acknowledges variations in country institutional conditions in which MNCs
operate. Therefore, we build on the stream of literature that has identified
differences in human resource management practices among the subsidiaries
of MNCs (e.g. Björkman & Lu, 2000; Hannon, Huang, & Jaw, 1995;
Rosenzweig & Nohria, 1994). We expect to see differences in subsidiary
staffing mainly because of the pressures exerted by the local institutional
environments in countries where the subsidiaries are located (Gooderham,
Nordhaug, & Ringdal, 1999). The examination of specific environmental,
institutional, and organizational factors and their effects on the level of
subsidiary management indigenization is the goal of our paper.
Our framework of subsidiary management indigenization is built upon
different theoretical perspectives with convergent assumptions: resource
dependence, institutional theories and social movement theories. From a
resource dependence perspective, we focus on the roles of interdependence
International Subsidiary Management and Environmental Constraints
375
and critical resources in the local task environment (Hillman, Withers, &
Collins, 2009; Pfeffer & Salancik, 1978). From the perspective of institutional theory, we emphasize the influence of normative pressures on MNC
behaviour (Kostova & Zaheer, 1999). We also consider the effects of social
movement activity and political opportunity structure on indigenization at
different levels of analysis (Davis, McAdam, Scott, & Zald, 2005; Strang &
Soule, 1998).1 Social movements targeted at the MNC are powerful political
forces that may challenge and modify the implementation of MNC
strategies (McAdam & Scott, 2005). Local social movements are the expressions of a broader national movement within countries where the
subsidiaries of the MNCs are located (Beveridge, 1991; Wilson, 1990). In
addition to social movement activity in the host country, we consider the
rise of movement activity around the world, including social movement in
the home country of the MNC. Increased extra-local movement activity
focusing on MNC behaviour is expected to lead to the further indigenization
of subsidiary management.
We assume that the indigenization of subsidiary management is a means
to increase the MNC’s chances of survival in uncertain host country
environments. Specifically, we argue that greater interdependence, a need
for critical local resources, and legitimacy in the host country require MNCs
to employ indigenous managers in their local subsidiary. We theorize that
indigenization will further depend on organizational characteristics of the
MNC. We expect greater levels of social movement activity in host countries
regarding the role of MNCs that will lead to increased indigenization in the
management of the MNC’s local subsidiary.
In the following sections, we first review relevant research on international
subsidiary management. Next we consider the trade-offs in subsidiary
management indigenization using resource dependence, institutional perspectives and social movement perspectives. In this section, we present our
propositions on the relationships between relevant environmental, institutional, and organizational factors and indigenization. We conclude with
implications for international management theory and the practice of
subsidiary management.
INTERNATIONAL SUBSIDIARY MANAGEMENT AND
ENVIRONMENTAL PRESSURES
A large body of literature offers insights on how the management of international subsidiaries can help MNCs maintain fit with existing strategies,
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improve control and acquire knowledge (Edström & Galbraith, 1994; Zhang
et al., 2006). Models from a contingency perspective considered the fit or
reciprocal interdependence between the subsidiary management and the
strategies of the MNC (Bird & Beechler, 1995; Brewster, 1995; Fey &
Björkman, 2001; Lengnick-Hall & Lengnick-Hall, 1988). Extensions of the
contingency model, however, noted that the complexities associated with the
management of international subsidiaries might require MNCs to look
beyond their expatriates. Factors that can increase the complexities of
international subsidiary management include the need for flexibility and the
difficulties of negotiating the cross-national environment (Bouquet &
Birkinshaw, 2008; De la Torre & Toyne, 1978; Milliman, Von Glinow, &
Nathan, 1991).
The management of international subsidiaries presents a unique agency
problem as well. MNCs often face high-level uncertainty in different
countries owing to cultural and institutional variations and the divergent
interests of subsidiary and headquarter managers (Nohria & Ghoshal,
1994). Some of the resultant agency costs can be reduced by implementing
suitable staffing practices and reward systems (Tan & Mahoney, 2003). The
commitment of foreign subsidiary managers can be improved by using
appropriate incentive mechanisms, including managerial compensation
(Roth & O’Donnell, 1996) and selecting expatriates with longer tenure
(Gregersen & Black, 1992).
Expatriate managers are also valued because of their central role in the
transfer of knowledge and organizational capabilities between the headquarters and subsidiaries (Beechler & Yang, 1994; Gupta & Govindarajan,
1991; Kamoche, 1996; Taylor, Beechler, & Napier, 1996). Asea Brown
Boveri AG (ABB), for example, employs over 500 ‘missionaries’ to get its
international subsidiaries in line with its worldview. Although ABB’s
expatriate managers often work with local managers to improve efficiency,
their global perspective allows them to make sensitive local changes, such as
lay-offs and plant closures (Guyon, 1996).
Even though the transfer of expatriates to international subsidiaries yields
several benefits to MNCs, commitment by expatriates wanes as MNCs enter
new countries or manage their portfolio of subsidiaries for a long period of
time (Edström & Galbraith, 1994; Gaur et al., 2007). For instance, some
MNCs prefer host country managers because of their familiarity with the
local task environment and lower costs. Furthermore, MNCs can avoid the
adjustment problems faced by expatriates in culturally distant host countries
by hiring indigenous managers (Harzing, 2001). Conformity to the local
socio-economic environment also implies a more prominent role for
International Subsidiary Management and Environmental Constraints
377
indigenous managers (Kostova & Roth, 2002). Morgan and Kristensen
(2005), for example, argue that managerial authority is related to reputation
in the local environment in coordinated market economies, such as Denmark
or Japan. Because they lack legitimacy, expatriate managers may trigger
opposition and destroy the capabilities of their subsidiaries with their actions.
Furthermore, current business opportunities for international expansion tend
to be in multicultural emerging economies, such as China, India or Russia.
Legitimacy in these and other emerging economies can be established through
an intimate understanding of local values, including nationalism and
concerns about foreign direct investment (Inglehart & Baker, 2000; Zhang
et al., 2006). MNCs may be able to respond effectively to local institutional
constituents, such as customers, governments, and interest groups, by hiring
indigenous managers (Foster, 2000; Gaur et al., 2007).
SUBSIDIARY MANAGEMENT INDIGENIZATION:
PROPOSITIONS
The Effects of Resource Dependence in the Task Environment
From a resource dependence perspective, the basis of subsidiary survival is
its access to critical resources (Casciaro & Piskorski, 2005; Hillman et al.,
2009; Pfeffer & Salancik, 1978). When hiring expatriate managers, local
subsidiaries improve their access to the resources of the headquarters and
other subsidiaries (Björkman & Lu, 2000; Newburry, 2001; Martinez &
Ricks, 1989). Indigenous managers may have better skills to cope with local
environmental contingencies (Hannon et al., 1995; Schuler, Dowling, & De
Cieri, 1993). Accessing local resources and recognizing local interdependence are particularly difficult tasks for MNC headquarters because
of the diversity of country environments in which subsidiaries tend to
operate. Perhaps the most complex among these interdependencies is the
relationship between the MNC and the local political environment of
individual countries (Ring, Lenway, & Govekar, 1990). The indigenization
of subsidiary management can be a means to reduce uncertainty, improve
performance and increase the chances of survival. When considering the task
environment of their subsidiaries in a foreign country, MNCs need to
address conflicting demands from different actors. To examine the importance of subsidiary management indigenization, we consider two focal issues
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in resource dependence theory: how MNCs cope with critical interdependencies and how they access resources (Oliver, 1991).
Firms can reduce uncertainty by developing links with other organizations. Their involvement with others, however, leads to increased
interdependence with limited freedom for future decisions (Provan, 1982).
Interdependencies emerge ‘whenever one actor does not entirely control all
of the conditions necessary for the achievement of an action or for obtaining
the outcome desired from the action’ (Pfeffer & Salancik, 1978, p. 40).
Interdependencies can be competitive and symbiotic (Pfeffer & Nowak,
1976). Competitive interdependence exists between functionally similar
firms in terms of markets, products, or services. Symbiotic interdependence
can arise along the vertical value chain, including interdependencies between
the firm and its buyers and suppliers. Although interdependence is
important in any environment, it tends to increase as MNCs cross borders.
Thompson (1974), for example, suggests that within nation-states, the polity
can guarantee a relative stability of the infrastructure and thus impede
interdependence. Such guarantee is often lacking between nations leading to
increased interdependence for MNCs operating in different countries. Using
expatriates to manage local subsidiaries under conditions of high
interdependence with other native organizations may lead to a reduction
in decision-making autonomy (Provan, 1982). Indigenization can help
MNCs to effectively cope with interdependence within different countries
and increase the autonomy of the subsidiary. Indigenous managers may be
able to reduce the MNC’s uncertainty by their knowledge of the local task
environment.
Proposition 1. The greater the degree of interdependence with local
organizations in a host country, the higher the need for indigenization in
the MNC’s subsidiary management.
Indigenization may also help MNCs to improve their subsidiary’s access
to critical resources in the local environment. As MNCs enter international
markets, they face increased uncertainty and instability regarding steady
resource inputs for their operations. Beyond the growing difficulties
associated with the intra-organizational resource flows, MNCs’ access to
their existing suppliers may become limited (Martin, Swaminathan, &
Mitchell, 1998). Furthermore, the discretion of MNCs over the acquisition
and allocation of resources is often restricted in foreign countries. MNCs
often operate with shared discretion because of the variety of laws and
norms and the high density of organizations and interest groups. Limited
control over resources in the international environment is another factor
International Subsidiary Management and Environmental Constraints
379
that can adversely influence MNC subsidiaries in different countries. To
exert control over their resources, MNCs need to rely on the social systems
of foreign countries, which form the basis of ownership rights protection
(Pfeffer & Salancik, 1978). On the one hand, subsidiaries staffed with
expatriates may have problems forming relationships with local suppliers or
buyers. For instance, expatriates may have limited knowledge about local
property laws and thus can only partially control the intellectual property
rights of their MNC. On the other hand, indigenous managers in the local
subsidiary can facilitate the MNC’s access to critical resources by securing
supplies from local firms. They can also improve discretion and control over
the MNC’s existing skills and knowledge.
Proposition 2. The greater the need for local resources in a host country,
the higher the need for indigenization in the MNC’s subsidiary management.
The Effects of Normative Pressures in the Institutional Environment
In addition to the importance of local resource dependence, managerial
practices across subsidiaries within the MNC likely vary because of the
cross-national differences in institutional structures (Gaur et al., 2007;
Gooderham et al., 1999; Rosenzweig & Singh, 1991). The local institutional environment often mandates cultural requirements, regulations,
manufacturing, and accounting practices (Rosenzweig & Nohria, 1994).
The adaptation of local subsidiaries is complicated by the diverse interests
of constituents, including the state, public opinion and local and external
interest groups (Scott, 1987). The environment of the local subsidiary is
‘the dynamic outcome of the actions of many formal organizations seeking
their own interests’ (Pfeffer & Salancik, 1978, p. 190). Legitimacy in the
local environment reflects the acceptance of the subsidiary’s actions by
other local societal actors and thus is highly influenced by constituents
outside the MNC organization, such as customers, suppliers and governments (Pfeffer & Salancik, 1978; Polos, Hannan, & Carroll, 2002). MNCs
can justify the operation of their local subsidiary if they can demonstrate
that the subsidiary’s existence is consistent with the goals of local
constituents in a country.
Although MNCs tend to invest significant amounts of resources to
establish their status upon their entry into foreign markets, they often
experience problems with respect to social justification. The perception of the
MNC’s local operation by the outside constituents in a country can increase
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the costs of doing business over the costs normally faced by local firms.
These costs are studied under the umbrella of liability of foreignness in the
international business literature (Zaheer, 1995; Zaheer & Mosakowski, 1997).
The perceived legitimacy of a subsidiary is further complicated by legitimacy
spillovers in a country environment if other subsidiaries of the MNC in the
same country experience legitimacy problems (Kostova & Zaheer, 1999).
Increased level of indigenization in the subsidiary management provides an
opportunity for MNCs to form their subsidiary’s goals consistent with that
of the local social system and thus effectively establish and maintain their
legitimacy. Furthermore, indigenous managers can help to communicate with
and respond to the demands of the local public during times of legitimacy
crises (Kostova & Zaheer, 1999).
Proposition 3. The greater the legitimacy pressures within a host country,
the higher the need for indigenization in the MNC’s subsidiary management.
THE EFFECTS OF ORGANIZATIONAL
CHARACTERISTICS
Although MNCs in general face with increased uncertainty in foreign
countries, they may cope differently based on their organizational
characteristics. A subsidiary can be interdependent with other subsidiaries
within the MNC’s portfolio, can obtain resources from other units, and can
be affected by the legitimacy of other subsidiaries in the same country
(Taylor et al., 1996). Variations in organizational characteristics may
influence the level of association between the subsidiary’s resource
dependence in the local social system and the indigenization of its
management (Ferner & Quintanilla, 1998; Hannon et al., 1995). One of
the most important variations is the place of the MNC organization on the
continuum between global integration and local responsiveness. Subsidiaries
of MNCs emphasizing global strategies tend to exhibit higher interdependence with other subsidiaries (Devinney, Midgley, & Venaik, 2000; Kobrin,
1991; Roth, 1995). MNCs following multidomestic strategies seek to
respond to local customer needs. The subsidiaries of these MNCs need to
obtain legitimacy locally and rely more on local resources (Rosenzweig &
Singh, 1991). The mix of firms using global and multidomestic strategies
likely varies across industries. For instance, whereas the strategies followed
by MNCs in the electronics and automobile industries tend to be more
International Subsidiary Management and Environmental Constraints
381
global, the strategies of MNCs in the consumer products and food industries
tend to be more multidomestic.
Subsidiaries of MNCs that follow global strategies, on the one hand, will
be less dependent on external resources and thus be able to rely more on
expatriate managers. Because of their extensive relationships with the
headquarters and other subsidiaries within the MNC, these managers can
facilitate access to intra-organizational resources (Boyacigiller, 1990;
Devinney et al., 2000). Subsidiaries of multidomestic MNCs, on the other
hand, will be more dependent on local resources. Their increased reliance on
local organizations and pressures for local legitimacy provide an enhanced
role for indigenous managers. In summary, subsidiaries of MNCs following
a more global strategy may exhibit a weaker relationship between resource
dependence and indigenization but a stronger relationship is expected for
subsidiaries of MNCs following a more multidomestic strategy.
Proposition 4. Higher levels of global strategy will moderate the relationship between resource dependence and subsidiary management indigenization in such a way that the resource dependence effects will be weaker on
indigenization.
Proposition 5. Higher levels of multidomestic strategy will moderate the
relationship in such a way that the resource dependence effects will be
stronger on indigenization.
The link between resource dependence in the local environment and the
level of the indigenization of subsidiary management may be influenced by
another important organizational context, the international experience of
the MNC. Specifically, the lack of international experience in different
country environments increases the resource dependence of a new subsidiary
(Fang, Wade, Delios, & Beamish, 2007). For example prior operations in
developed country environments provide little guidance for MNCs to set up
subsidiaries in emerging economies. Coping with a higher level of
uncertainty owing to the lack of prior experience in similar environments
may lead to a higher demand for indigenous management.
For MNCs with extensive international experience, the need for
indigenous managers to respond to higher levels of local resource
dependence may be lower. The international experience of MNCs can be
transmitted to new subsidiaries by expatriate managers with longer tenure
(Björkman & Lu, 2000; Milliman, Von Glinow, & Nathan, 1991). Despite
their deep knowledge of the local environment, indigenous managers will be
less informed about the prior experience of the MNC in other countries.
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Thus, by operating in a diverse set of countries, MNCs can learn how to
cope effectively with local environmental uncertainty and reduce the risk of
international operations (Hitt, Tihanyi, Miller, & Connelly, 2006).
Furthermore, a broad scope of international operations can help establish
legitimacy in the international environment, leading to positive spillovers for
the local subsidiary (Kostova & Zaheer, 1999).
Proposition 6. Greater MNC international experience will moderate the
relationship between resource dependence and subsidiary management
indigenization in such a way that the resource dependence effects will be
weaker on indigenization.
The Effects of Social Movement Organizations
Although MNCs’ organizational interests may dictate the use of expatriates
in local subsidiaries in some countries, local governments, interest groups,
and public opinion will likely prefer the transfer of subsidiary management
from expatriate to indigenous managers. Indigenization in a broader context
means the transfer of interests from foreign to indigenous parties because of
local pressures (Beveridge, 1991; Kobrin, 1980; Luckham, 1971; Minor,
1994; Wilson, 1990). Indigenization, however, does not limit the interest of
the MNC in the local subsidiary. Through the employment of indigenous
management the MNC’s commitment to long-term local operations and its
participation in the development of the local business environment may
increase.
Local institutional constituents based on their shared worldview may
participate in social movements to influence MNC staffing policies
(Simons & Ingram, 1997). Social movements are collective enterprises by
mutually acquainted organizations and individuals who share their
ideologies about social arrangements and accomplish collective action to
change those arrangements (Davis & Thompson, 1994). Such movements
may originate in governmental agencies or in different interest groups. The
interests of governments are illustrated by the following quotation.
Regarding Japanese investments into its country, the prime minister of
Thailand noted that, ‘Thailand has no intention of asking foreign investors
with large investments to turn over their management, or the majority of
their equity structure, to Thai nationals. What we ask is that foreign
companies should work here as partners, so that your investments here can
be meaningful in terms of financial gains and at the same time should
International Subsidiary Management and Environmental Constraints
383
benefit my country’ (Taira, 1980, p. 389). Nevertheless, to pressure MNCs
local governments can change tax policies, modify the terms of foreign
direct investments or set up quotas for the number of expatriates MNCs
can employ in the country (Biersteker, 1980). Whereas governments have
the power to directly influence MNC behaviour, interest groups can
pressure MNCs to change their staffing directly (Manheim, 2001; Spar &
La Mure, 2003) or by coercing governments into policy changes (Soule &
Olzak, 2004).
Our approach views social movements as outsiders to the MNCs that they
target, which adopt ‘oppositional identities’ (Taylor & Whittier, 1992) that
pit their interests against power-holders in corporations. Throughout this
process of challenging corporations, movements adopt ‘outsider’ tactics
(Soule, McAdam, McCarthy, & Su, 1999; Walker, 1991) to complement
their status of outsiders to the corporations. As such, we take a decentralized view of power and politics in this paper – one in which movements
present themselves as alternative democratic voices outside of the corporations that they challenge.
In thinking about how movements can affect MNCs’ staffing policies, it
is useful to consider the variety and magnitude of effects that movements
have on other organizational outcomes. Social movements have been
shown to affect the financial health of corporations via boycotts and
threatened boycotts (Pruitt & Friedman, 1986; Pruitt, Wei, & White, 1988)
and through protest demonstrations. For example Epstein and Schnietz
(2002) found that Fortune 500 firms suffered declines in equity following
the 1999 Seattle WTO protests and that the losses were greatest among
those firms suspected of mistreating labour and damaging the environment. Social movement organizations have been shown to affect corporate
policies regarding emissions controls (Maxwell, Lyon, & Hackett, 2000)
and other issues (see review in Manheim, 2001). Social movements have
also been found to affect stock price returns in the United States (King &
Soule, 2006) and to improve working conditions at factories in Mexico
(Kay, 2005). These studies provide a backdrop to our arguments about
how movements can affect the management practices of different MNC
subsidiaries.
Based on their shared interests about the MNC’s business practices, local
and external organizations and interest groups may engage in social
movements to change the practices of the MNC. Specifically, we offer three
related propositions. First, we expect that social movement activity
occurring in the country in which the MNC subsidiary is located will have
a direct effect on the management practices of the subsidiary. Social
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movements about MNC local business activities tend to be based on
national interests with respect to the MNCs’ contributions to the local
society and infrastructure. MNCs usually help the economies of foreign
countries by creating new jobs, increasing demand and by being a factor of a
country’s balance of payments (Dunning, 1993). Regardless of the positive
macroeconomic influence of MNCs, their entry is often viewed by distrust
locally, especially, if their subsidiaries are controlled by expatriates from
other countries. The entry of MNCs into a foreign market often increases
competition and, if local firms fail, reduces tax revenue. MNCs may lay off a
high number of local employees because of the closure of inefficient plants.
Further, they may choose to repatriate their profits to their home country.
Local governments, customers, firms, as well as labour unions in general,
prefer MNCs to increase their commitments to the local economy. MNCs
can co-opt local interest groups (Selznick, 1949) and demonstrate their longterm local commitment to a country by the indigenization of their subsidiary
operations. Increasing the share of indigenous managers can help MNCs to
respond to the concerns of native social movement organizations and better
understand the demands of the local social system.
Similarly, we expect that movement activity in other countries (to which
the subsidiary may or may not be connected) will increase the level of
indigenization of subsidiary management in a country. That is, as the overall
level of movement activity directed at encouraging MNCs to hire indigenous
managers increases, we expect to see more and more subsidiaries adopting
this management practice. At times, this can be a preemptive measure on the
part of an MNC; that is, they can hire indigenous managers to prevent
social movement activity in other countries of their operation.
Institutional constituents in the home country may also engage in
collective action regarding the management practices of MNCs but for
different reasons. They exert pressure on MNCs to hire indigenous
managers by targeting the MNC’s home business activities. By employing
expatriate managers in foreign countries, MNCs show their commitment to
worldwide organizational integration (Boyacigiller, 1990). A higher level of
integration may indicate that MNCs seek to exploit opportunities for cost
reductions and are willing to relocate their production to low-cost countries.
Reduced interest in their home markets coupled with increased focus on
foreign operations may prompt an increase in social movement activity by a
broad range of institutional constituents at home. Labour movements for
instance may exert pressure because of their concern about plant closures
and resulting loss of employment. Social movement organizations will likely
pressure MNCs to hire indigenous managers to international subsidiary
International Subsidiary Management and Environmental Constraints
385
positions to reduce the dependence of foreign subsidiaries on the headquarters and thus facilitate the integration of foreign operations into the
local markets.
Proposition 7. The greater the local social movement activity regarding
MNC behaviour, the higher the need for subsidiary management
indigenization.
Proposition 8. The greater the extra-local social movement activity
regarding MNC behaviour, the higher the need for subsidiary management
indigenization.
Proposition 9. The greater the social movement activity in the MNC’s home
country, the higher the need for subsidiary management indigenization.
The Mediating Role of the Political Opportunity Structure
The concept of the political opportunity structure (hereafter, POS) is one
element of the broader political process model (McAdam, 1982) and may be
defined as the ‘consistent y dimensions of the political environment that
provide incentives for people to undertake collective action by affecting
their expectations for success or failure’ (Tarrow, 1994, p. 85). Over the past
decade or so, researchers have identified a fairly consensual list of the
dimensions of the POS in an attempt to clarify this basic definition. The key
dimensions identified by this tradition include (1) the presence of divided
elites; (2) the presence of elite allies; (3) a general receptivity to challengers’
claims on the part of the political elite; and (4) lower levels of state
repression against dissenters (McAdam, 1996). The key argument is that
when the POS is more favourable to dissenters, we ought to see either the
emergence of or increases in social movement activity.
Although the concept has been used to explain protest mobilization in a
number of contexts, researchers also argue that the concept should also be
used to understand policy outcomes of social movements (Andrews, 2001;
Jenkins & Perrow, 1977; Kitschelt, 1986; Kriesi, Koopmans, Duyvendak, &
Giugni, 1995; McCammon, Campbell, Granberg, & Mowery, 2001; Soule,
2004; Soule et al., 1999; Tarrow, 1994). Essentially, the same set of factors
that stimulate protest should, in turn, affect the outcomes sought by the
movement.
Early statements about the effects of the POS on policy outcomes
(e.g. Kitschelt, 1986) suggest that the political climate, quite independent
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of movement mobilization, affects policy outcomes (see also Amenta,
Dunleavy, & Bernstein, 1994). However, the political mediation model
suggests that social movement mobilization will only have positive effects
on policy change when mediated by an advantageous POS (Amenta,
Carruthers, & Zylan, 1992; Amenta et al., 1994; Amenta & Young, 1999;
Cress & Snow, 2000; Schneiberg, 2002).
Stability in POS is expected to strengthen the effect of social movements
on indigenization. A political climate with shifting political power raises the
bargaining power of MNCs with governments and provides an opportunity
to follow their shorter term organizational considerations. A political
climate characterized by disagreements about national interests will also
reduce the power of social movement organizations on MNC policies.
Although concentration in political power may allow the emergence of
different views by various institutional constituents, it provides a ground for
a consensus on national interests and thus strengthens the effect of social
movements on subsidiary management indigenization.
Proposition 10. The political opportunity structure of a country will
mediate the relationship between social movement and subsidiary management indigenization such that the effect of local social movements will be
stronger in states with higher concentrations in political power.
DISCUSSION
In this paper we develop a framework of MNC subsidiary management
from an indigenization perspective. Although previous international
management research has focused on organizational efficiency considerations, our conceptualization outlines the social context of subsidiary
management. We propose that local country environmental factors
influence subsidiary indigenization. Specifically, we suggest that the level
of indigenization in a country is influenced by the level of interdependence,
the need for critical resources and the requirements of legitimacy in the local
environment. Consistent with prior research (e.g. Devinney et al., 2000;
Hannon et al., 1995; Roth, 1995) we discuss the roles of two moderators:
international strategy and prior international experience. We argue that
resource dependence effects on indigenization are weaker on MNCs that
follow global strategies. MNCs with multidomestic strategies are faced with
stronger resource dependence pressures on their use of indigenous
managers. We also propose a weaker relationship between resource
International Subsidiary Management and Environmental Constraints
387
dependence and indigenization in MNCs with higher prior international
experience.
In a broader social context, the actions of institutional constituents are
expected to have important impact on the subsidiary management of
MNCs. We propose that increased local and extra-local social movement
activity is associated with higher levels of indigenization. Further, we
suggest that the POS of a country acts as a mediator in the relationship;
stronger movement effects with respect to indigenization should be observed
in countries with higher concentration in political power.
Theoretical Implications
The indigenization perspective provides a different explanation for
subsidiary management than previous theoretical arguments. Although
the trade-offs inherent in employing expatriate and indigenous managers
have been discussed previously, organizational efficiency considerations
have led researchers to conclude that the transfer of expatriate managers to
foreign subsidiaries is a superior solution for MNCs in most cases. We
present an alternative view of subsidiary management by looking at
indigenization as a social process. Although we examine important
organizational characteristics, our approach shifts the focus from the
MNC’s internal mechanisms to environmental and institutional pressures.
We believe that this alternative theorization may contribute to a closer
study of the social environment in international management research, and
in a broader context, advance interdisciplinary research between management and economic sociology (Baum & Dobbin, 2000; McAdam &
Scott, 2005).
The indigenization perspective places the MNC’s decision making in the
context of the society with an array of complex political and economic
interests. In addition to focusing on the quest for the MNC’s organizational
efficiency, previous international research viewed subsidiary management
staffing as mostly a practical issue for the headquarters of the MNC. The
results of recent studies, however, helped establish the importance of
subsidiary staffing for successful international expansion (e.g. Gong, 2003;
Zhang et al., 2006). Viewing subsidiary staffing from an indigenization
perspective takes this recent research further; it adds the influence of
different constituents outside the MNC and its headquarters. According to a
social movement perspective, institutional constituents may engage in
collective action over MNC staffing policies based on their political views.
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Despite ideological differences among local social movement organizations,
their political views have some common characteristics. For example they
tend to focus on perceived national interests and they are often based on
non-economic preferences (Simons & Ingram, 1997).
Another potential contribution of the present framework is the
consideration of variations in country institutional environments.
Although we examine environmental, organizational and institutional
factors associated with the level of indigenization, our framework does not
assume the same level of indigenization in every host country associated
with the MNC’s portfolio of subsidiaries. Variations across country
environments, including institutional structures, are underrepresented in
the literature on international subsidiaries (Ferner & Quintanilla, 1998;
Gooderham et al., 1999). Although the study of variations in the MNC’s
national markets has been an increasingly popular area of research, a large
number of prior studies on subsidiary staffing appeared to overlook these
variations. Instead, most prior studies emphasized the benefits of global
integration and control. Variation in the home environments of MNCs is
another, related limitation in prior research. Along this line, we argue that
social movement organizations in the MNC’s home country influence
subsidiary-level decisions. Furthermore, the potential variation in the
portfolio of MNCs (e.g. the extra-local social movements in this paper)
could be an important explanatory factor in international management
research.
Resource dependence theory has been used to address organizational
problems related to international human resources (e.g. Schuler et al., 1993;
Taylor et al., 1996). Resource dependence, however, tends to affect
subsidiaries within and outside the MNC’s portfolio of businesses. Whereas
prior research focused on internal resource flows, our framework considers
the subsidiary’s resource dependence on its external environment. In
contrast to subsidiaries in the domestic environment, subsidiaries of MNCs
are surrounded by greater environmental complexity. Understanding the
behaviour of international subsidiaries should broaden international
management research as well as contribute to the generalizability of the
resource dependence perspective.
Incorporating the effects of social movements is important for theory
development on MNC subsidiary management. Understanding the role of
social movements in relationship to subsidiary indigenization, in turn, can
contribute to recent social movement research. For example, to advance
research on social movements, it is critical to examine movements in
connection with organizational actions. Our framework has been developed
International Subsidiary Management and Environmental Constraints
389
along this line of inquiry. Because MNC subsidiaries deal with institutional
constituents at multiple levels, the framework included social movements in
the host and the home countries of MNCs. Further, we argue that the POS
of a country should matter when the role of social movements on
organizational actions is examined.
Managerial Implications
This paper is in line with a growing body of research that recommends
MNC top managers to rethink the role of their foreign subsidiaries. In
contrast to other studies that view subsidiaries as sources of new knowledge,
we argue that subsidiaries are important in terms of MNC survival in an
uncertain international environment. Specifically, we suggest that subsidiary
management goes beyond organizational efficiency concerns. Subsidiaries in
foreign environments deal with increased resource dependence and interact
with multiple institutional constituents. One of the outcomes of increased
resource dependence, liability of foreignness, has been known to MNC
management as a source of the increased costs of international operations.
When doing business internationally, managers should also consider the
environmental factors that impinge upon MNCs confronted with increased
interdependence with local organizations, limited access to critical resources,
and higher requirements for legitimacy. Although hiring expatriates to
manage subsidiary operations solves the initial problems of coordination
and control, such managers are less capable of managing resource
dependence in the local environment.
As MNCs enter international markets, they interact with multiple
institutional constituents. Subsidiaries of MNCs have high failure rates
owing to the frequently hostile international environment. Local governments, organizations and interest groups tend to welcome the initial
foreign direct investment, but long-term MNC operations are often
viewed with scepticism by these local constituents. Their shared view may
be explained by the traditional foci of MNC activity: governments and
local customers. The collective actions of interest groups should be better
understood and addressed by MNC managers. For instance, the growing
concern about MNC behaviour in recent years is abetted by the lack of
attention MNCs pay to social movement activity through various interest
groups. Once again, we argue that indigenous managers can facilitate
communication with local interest groups as well as governmental
agencies.
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When MNC headquarters decide about the management of their foreign
subsidiaries, they tend to underestimate the value of indigenous managers.
Expatriate managers can effectively transmit tacit knowledge to subsidiaries
and thus can increase MNC performance during international expansion.
Expatriate managers, however, may have limited knowledge about the
interests of diverse groups of local constituents. Transferring expatriates to
manage subsidiary operations, nevertheless, is normally a temporary
solution owing to the high costs and family complications. Despite their
extensive understanding of the local environment, indigenous managers may
have poor business knowledge and a lack of understanding of the MNC’s
business. Hiring local managers to learn about the organizational culture
from expatriates can help MNCs to find out more about the local
environment while maintaining organizational control. When a mix of
expatriate and indigenous managers is employed, MNCs should provide
extensive training to indigenous managers about the aspects of their
business. Furthermore, indigenous managers should be valued for their
environmental knowledge as well as business skills. Accordingly, incentive
systems should be designed to reduce turnover among indigenous managers
who may later develop into boundary spanners in the local environment.
Future Research Directions
Most importantly, future studies in international management should
conduct empirical investigations of the relationships we proposed in this
paper. Such empirical research should be based on interdisciplinary grounds
using theories from management, sociology, political science and other
fields. Although our framework focused on MNC actions in relationship to
general environmental conditions, further research could do well by
studying subsidiary management practices in different industries and
countries. We sketch several possibilities below.
First, a particularly promising context for such research exists in countries
that are undergoing a transition to market economies. In general, these
economies can benefit more from foreign direct investment than developed
economies. However, parallel with their economic development, these
countries may develop a strong sense of national identity and thus represent
a fertile ground for the growth of social movement activity with respect to
foreign direct investments.
Second, pressures for indigenization may also depend on the differences
between the home and host environments of the MNC. On one hand,
International Subsidiary Management and Environmental Constraints
391
similar institutional conditions may allow MNCs to gain legitimacy with
relatively minor changes in their subsidiary management. On the other
hand, hiring indigenous managers in a country with similar cultural
traditions to the MNC’s home country does not present a trade-off for
organizational efficiency. Regional integration may also present an
interesting issue regarding the institutional differences between countries.
For instance, indigenous managers are expected to provide value in the
member countries of the European Union but employing them may
provide additional benefits owing to their country’s membership in the
Union.
Third, future research should consider, in addition to the factors that we
describe here, the diffusion of the indigenization of subsidiary management. During times of uncertainty, MNCs may monitor what other MNCs
are doing with respect to indigenization of the management of their
subsidiaries. In an attempt to attain or maintain legitimacy, MNCs may
imitate the practices of other MNCs. This kind of mimetic process may
legitimize the indigenization of management as an acceptable (or even
desirable) organizational strategy. In other words, further research could
examine multiple levels of effects, organizational, state-level (as we describe
here) and inter-state effects (Schneiberg & Soule, 2005), on management
decisions.
Finally, prior studies have shown that social movements take place in
complex institutional environments with actions and reactions from
different constituents (Meyer & Staggenborg, 1996). Since local social
movements may focus on nationalist sentiments, collective action among
MNCs can discredit the indigenization efforts by local governments and
interest groups. If MNCs in a particular host country coordinate their
actions, they may influence legislation regarding foreign direct investments. In this case, government policies influencing MNC behaviour
may be based on the outcome of movements and counter-movements.
Thus, another potentially interesting area for future research is the
study of counter-movements by MNCs opposed to the pressures of
indigenization.
NOTE
1. ‘‘A social movement is a set of opinions and beliefs in a population which
represents preferences for changing some elements of the social structure and/or
reward distribution of a society’’ (McCarthy & Zald, 1977, pp. 1217–1218).
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LASZLO TIHANYI ET AL.
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