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Role of Subsidiaries Within Multinational Corporations

One can pick any random business related book published after 1990 at a good library, open it on page one and read about how the world has gone through tremendous changes over the last few decades. The birth of the Internet moved people and businesses around the globe closer together, the increased availability of commercial air-travel, mass-production, mass marketing, the lowering of trade barriers and tariffs, and so on and so forth. Along this evolution the Multinational Corporations (MNCs) have been growing in size and influence, expanding their global operations. MNCs have even in some instances grown so large that the day-to-day operations have become too hard to handle with their current structures, even though these structures have endured the last century.

MNCs are more and more heading towards a flatter, more flexible and interdependent structure that is more responsive to this new global environment (Bartlett et al, 2003), adopting the strategy of the transnational corporations1 (TNCs). MNCs, therefore, have more transfers of all kinds between its units. This has led to more of a focus on, and increased importance of, the subsidiary as a unit and its operations. Simultaneously, this trend leads to more subsidiary independence and more cooperation with

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other subsidiaries and the parent company. This paper will, mainly, focus on two questions; why the role of the subsidiary has changed; and moreover, how does its role change? This will be done by reviewing, historically, the known structures of international entities as a whole, as seen by Bartlett et al (2003), but with emphasis on the subsidiary and their strengths and shortcomings.

When dealing with the concept of MNCs, researchers have been baffled by its size and complexity. According to Birkinshaw (1994) research in the field of MNCs, has mainly focused on the parent-subsidiary relationship and the subsidiary role. In a subsequent paper Birkinshaw and Hood (1998, p. 5, cited in Luostarinen and Marschan-Piekkari, 2001) add a third stream of research: the subsidiary development, which emphasizes more the evolutionary aspect of subsidiary activities. The reason behind this third stream is the above-mentioned complexity of the MNC, e.g. when research focuses on the MNC as a whole it tends to be generalizing. However, when the focus is narrowed, for example on the subsidiary role, it tends to disregard important variables.

All three streams will be covered in this paper. The first part of the paper will address the parent-subsidiary relationship along with the subsidiary role. The traditional role as well as the contemporary role will be addressed here. An explanation of the third and last stream – the subsidiary development – will then follow, since this factor is more dynamic in nature, than the two other factors, and thus, explains the continuous process of change, derived by the other two streams. This will enable a better approach to answering how the activities of subsidiaries in large and geographically dispersed MNCs are changing over time.

In the context of subsidiary evolution the concept of Centers of Excellence will be introduced. Thus, this paper will focus on subsidiaries in developed countries thereby delimiting the discussion from, for instance, asset-exploiting subsidiaries of the less-developed countries. The last part of the paper will present the case of LMD – the Danish subsidiary of Ericsson. Here, four different competencies within LMD will be presented and analyzed, and used in the context of our findings from the preceding parts of the paper.

“…each company is influenced by the path by which it developed – its organizational history – and the values, norms, and practices of its management – its management culture. Collectively, these factors constitute a company’s administrative heritage. (Bartlett et al, 2003)” A MNCs administrative heritage (Bartlett et al, 2003) is maybe the greatest asset it has, but it can also be the worst thing a MNC has do carry into the future – and sometimes both.

In the majority of cases it is probably both since it involves some factors that are the MNCs key competences, but these competences might also be the very factors that halter necessary change. This might, for example, be a manager or management in a foreign subsidiary that refuses to adapt to new policies or ways in management, set forth by the parent company. However, the same manager might have been employed for a whole generation and been one of the most value-adding assets the MNC has had. Thus, he has become both the greatest asset and a serious obstacle towards change.

According to Bartlett, Birkinshaw and Ghoshal (2003) and consistent to Dickens’ (2003) elaboration on Bartlett’s and Ghoshal’s framework, there are, historically, three archetypes of MNCs; the Multinational Company, the International Company, and the Global Company. They argue that a major part of the differences between the three archetypes lies in the administrative heritage. In order to understand what is meant by the term archetypes and how the three differ, it is helpful to clarify them one at a time. The same fundamental drivers – namely those of market access and securing key supplies, initially shaped all three archetypes.

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