The influence of subsidiary Control of MNCs
context and head office
strategic management style on
647
control of MNCs: the
experience in Australia
Lai Hong Chung
Nanyang Technological University, Singapore
Received September
1998
Revised July 1999
Accepted November
1999
Patrick T. Gibbons
University College, Dublin, Ireland, and
Herbert P. Schoch
Macquarie University, Sydney, Australia
Keywords Institutional analysis, Strategic management, Knowledge management, Control,
Multinational companies, Management styles
Abstract This study examines the control issues related to three major flows among MNC
subsidiaries: knowledge flows, product flows and capital flows. It also investigates the relationship
between the strategic management style of headquarters and the control approaches employed.
The results show the dominance of output control, even in situations where researchers have
argued that they should not be relied upon. The study also found that as knowledge flow
increases, reliance on financial control decreases and reliance on socialisation control increases.
Consistent with other studies, the dominant management style is the strategic control style, while
the least popular is the financial control style. The paper calls for using alternative theoretical
lenses, such as institutional theory, to provide additional insights not available through the
contingency lens.
Introduction
The role, evolution and management practices of multinational corporations
(MNCs) have attracted an ever-increasing amount of both popular and
research activity over the past two and a half decades. One of the insights
generated from this research is that MNCs economise on transaction costs as
they transfer firm-specific advantages across national boundaries (Caves,
1971; Buckley and Casson, 1976). Kogut and Zander (1993) highlight the
critical role that knowledge creation and transfer play in MNC growth. An
important role of subsidiaries is to contribute to growth by building firmThe authors wish to thank Professor Lee Parker and Associate Professor Jill McKinnon for their
constructive comments on an early draft of the paper. The authors also appreciate the
comments from participants of the 9th Asian-Pacific Conference on International Accounting
Issues, Bangkok, November 1997 and the participants of the Second Asian Pacific
Interdisciplinary Research in Accounting Conference, Osaka, August 1998. The authors also
benefited from the insightful comments of the two anonymous referees.
Accounting Auditing &
Accountability Journal,
Vol. 13 No. 5, 2000, pp. 647-666.
# MCB University Press, 0951-3574
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specific advantage through their strategic initiatives and transferring these
initiatives to other parts of the MNC network of subsidiaries (Birkinshaw
et al., 1998).
It is currently accepted in the management literature that MNCs differentiate
their local subsidiaries' roles (Taggart, 1998; Martinez and Jarillo, 1991; Bartlett
and Ghoshal, 1989) and that structures, management processes and control
practices will be differentiated to match the contexts of different national
subsidiaries (Ghoshal and Nohria, 1989). Prior research supports the notion
that there is an association between the context of the MNC subsidiary and the
design of the management control system. Aspects of the ``context'' which have
been addressed include: the interrelationships between subsidiaries (Baliga and
Jaeger, 1984), the environmental uncertainties (Brownell, 1987), the size of the
subsidiary (Baliga and Jaeger, 1984; Snell, 1992), the subsidiary location
(Schweikart, 1986; Daley et al., 1985), the nationality of the parent company
(Egelhoff, 1984; Kriger and Solomon, 1992; Ulgado et al., 1994) and the cultural
proximity of subsidiary to parent organisation (Baliga and Jaeger, 1984;
Schweikart, 1986). A few studies have also examined the relationship between
the mandates of MNC subsidiaries and controls (Gupta and Govindarajan,
1994; Birkinshaw, 1997). This study, while rooted in this research stream,
makes its contribution by taking an integrated look at the control issues related
to three major sources of transactional interdependence which MNC
subsidiaries face: knowledge, product and capital interdependencies. The
configuration of interdependence thus defines both the unique context of the
subsidiary and its role in the MNC network. In addition to the interdependence
among subsidiaries, headquarters-subsidiary relations are also of concern and
this study investigates the relationship between the strategic management
style employed by headquarters and the control approaches employed to
monitor subsidiary activities and performance.
The rest of the paper develops a series of hypotheses to guide the study,
outlines the research design and measurement approaches employed and
discusses the somewhat ``surprising'' results, concluding with implications and
suggestions for further investigation through the application of alternative
research theories, such as institutional theory, to gain greater understanding of
the complex social issue surrounding controls in MNCs.
Hypotheses
Controls in MNCs
Our hypotheses invoke traditional views of control as including output;
behavioural and normative controls. In addition, the study will also address the
control ``style'' used by headquarters in evaluating MNC subsidiaries.
MNCs can depend on ``output control'' (Ouchi and Maguire, 1975; Ouchi,
1977) which takes the form of performance reporting systems whereby
subsidiaries submit a variety of data to the parent. In order to assess a
subsidiary manager's performance, reliance is placed on achievements against
target (Egelhoff, 1984). Behaviour control, on the other hand, is described as Control of MNCs
specifying and monitoring the actions necessary to operate successfully
(Hamilton et al., 1996).
Definitions of behaviour control in the MNC literature incorporate two
strands. Egelhoff (1984) and Baliga and Jaeger (1984) see the assignment of
parent company managers to key management positions of the foreign
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subsidiary as being consistent with behaviour control, in monitoring and
evaluating the activities and behaviours within the subsidiary[1]. Edstrom and
Galbraith (1977) on the other hand view the assignment of expatriates to upper
and middle management positions in foreign subsidiaries as part of ``control by
socialisation''. However, the term socialisation control has been used differently
by other authors. For example, Kuin (1972) refers to socialisation or corporate
acculturation as a control mechanism whereby the subsidiary objectives and
corporate goals are aligned. Socialisation control has also been described as the
process through which subsidiary managers' values become closely aligned
with those of the parent (Gupta and Govindarajan, 1991). When organisational
members become socialised with a similar world-view, one can expect that they
will behave in a similar manner under similar circumstances. Socialisation,
therefore, reduces the need for management to measure performance or directly
monitor behaviour (Hennart, 1991).
Govindarajan and Fisher (1990) have suggested that while socialisation
control had been assumed to be a form of behaviour control in their study of
SBUs, disentangling the two would be useful, especially in the multinational
context. In our study, socialisation control is used in line with the descriptions
of Kuin (1972), Gupta and Govindarajan (1991) and Ghoshal and Nohria (1989),
meaning an indirect means of controlling behaviours through influencing
subsidiary managers' goals and values by normative integration. Specifically,
such integration is intended to evoke domain consensus and shared values
among managers thereby facilitating co-operation and participative decision
making (Van Maanen and Schein, 1979; Ouchi, 1980). Socialisation is
important, therefore, in achieving the type of organisation culture an MNC
wants.
Consistent with Egelhoff's (1984) definition, for this study, behaviour control
is the assignment of parent company managers to key management positions of
the foreign subsidiary to monitor and evaluate the activities and behaviours
within that subsidiary. Compared with socialisation control, this is a more direct
means of ensuring appropriate behaviours in the subsidiary. The use of parent
company nationals allows headquarters to maintain informal linkages with
subsidiaries by means of corporate culture transmitted through these managers
who have been ``socialised'' while working at the home office. A study conducted
by Scullion (1994) on the staffing practices in British and Irish firms reveals that
the second major reason[2] cited for using expatriates was to control local
operations (this reason was cited by 35 out of the 45 firms interviewed). Scullion
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notes that ``expatriates were felt to be more familiar with the corporate culture
and the control system of headquarters, and this was felt to result in more
effective communication and co-ordination'' (Scullion, 1994, p. 90).
Subsidiary strategic context
World-wide competitiveness is partly based on a company's ability to coordinate and link subsidiary activities to achieve economies of scale, scope and
learning (Porter, 1986; Morrison and Roth, 1992). The co-ordination problem
can be analysed by conceptualising the MNC as a network of transactions that
occur along three distinct dimensions: knowledge flows; product flows and
capital flows (Gupta and Govindarajan, 1991; Dent, 1996).
Knowledge flow
Intracorporate knowledge flow is defined as ``the transfer of either expertise
(e.g. skills and capabilities) or external market data of strategic value'' (Gupta
and Govindarajan, 1991, p. 773). For a given subsidiary, knowledge flow can be
defined along two dimensions, namely: first, knowledge inflow which is the
extent to which the subsidiary ``imports'' knowledge from the rest of the
corporation; and, second, knowledge outflow which is the extent to which the
subsidiary ``exports'' knowledge to the rest of the corporation.
With knowledge flows, the effects on controls are hypothesised to be the
same, irrespective of whether the flow is an inflow or an outflow. However, the
rationale for the relationship differs. As knowledge inflows increase, outcome
uncertainty correspondingly increases as the subsidiary manager will have less
control over the outcomes of his/her actions (Snell, 1992). For instance, when
knowledge inflow is high, then its quality and accuracy affect the link between
the subsidiary's actions and any outcomes that accrue from those actions. In
other words, the causal link between actions and outcomes is contingent on the
subsidiary's receipt of adequate knowledge from other parts of the network of
subsidiaries. This increases the outcome uncertainty attached to the
subsidiary's actions. Moreover, as outcome uncertainty increases, outcome
measurements become more difficult and therefore output controls become less
appropriate (Eisenhardt, 1985; Ouchi, 1977). Gupta and Govindarajan (1991)
argue, therefore, that there will be more reliance on alternatives to output
controls.
In the case of knowledge outflows being extensive, the subsidiary is
expected to not only deliver results for its own discrete operations, but more
critically, is expected to contribute knowledge and expert support to other
subsidiaries in the network. This expectation increases the ``role complexity'' of
the subsidiary, and this in turn makes setting pre-determined outcome
measures difficult. Instead, it would be expected that more flexible control
mechanisms be employed to facilitate mutual adjustment and communication
between subsidiaries sharing knowledge. Thus, building a cadre of managers
with similar backgrounds would facilitate the exchange of information
(behaviour control). Alternatively (or additionally), ensuring that these
managers share the same decision premises through a process of acculturation Control of MNCs
would also achieve a similar integration (socialisation control). Hypotheses
H1a to H1c follow:
H1a: Reliance on output control will decrease as knowledge flows (both
inflow and outflow) increase.
H1b: Reliance on behaviour control will increase as knowledge flows (both
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inflow and outflow) increase.
H1c: Reliance on socialisation control will increase as knowledge flows (both
inflow and outflow) increase.
Product flow
The product flow across units depends on the nature of interdependency
among the subsidiaries. As more products (including raw materials,
components, sub-assemblies and finished goods) flow from one unit to another,
whether domestic or foreign, the interdependency between units increases.
Thompson (1967) differentiates between three forms of interdependence. The
first, pooled, involves minimal direct interdependence between activities. Each
unit, constituting a relatively isolated pocket of activity, renders a discrete
contribution to the organisation as a whole. The second form of
interdependence, sequential, involves a direct link between sequential elements
of the value chain, such as manufacturing and marketing. There is both a
``pooled'' form of interdependence, in the sense that each element must perform
adequately to ensure overall corporate performance, but in addition, there is a
direct interdependence between production and marketing as the latter is
totally dependent on the former for throughput. The final, and most complex,
form of interdependence is reciprocal interdependence, where the outputs of
each stage of the value chain become the inputs for the next stage and vice
versa. This is the most complex form of interrelationship as it involves
elements of both pooled and sequential interdependence. The implications of
this trichotomy are important because in addition to requiring more
integration, as one moves from pooled interdependence to reciprocal
interdependence, qualitatively different forms of integration and control
devices are necessary (Mintzberg, 1979; Snell, 1992).
Prior research on the relationship between interdependency and
management control has usually focused on domestic units or SBUs within
diversified organisations. For instance, Eccles (1983) proposed in his theoretical
framework that given little interdependence among domestic units, the main
control mechanism is through the measurement of business unit results (output
control). On the other hand, where units are more interdependent, top
management needs to be more directly involved in day-to-day operations and
exercises control directly through interaction with subordinates (behaviour
control). Finally, where reciprocal interdependence exists between units, some
degree of normative integration is necessary to control the organisation
(socialisation control).
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Empirical support for Eccles' (1983) propositions is provided by Snell (1992)
in his study of 102 US firms. His results showed that increased
interdependency is associated with decreased usage of both control based on
results achieved and control based on imposed standards and procedures of
subordinates' behaviours and superiors' observation. As interdependencies
increase, knowledge of cause-effect relations decreases (Snell, 1992; Brass,
1985) and it becomes more difficult to prescribe behaviours and routines for
individuals. Similarly, the lack of knowledge of cause-effect relations limits the
ability to set standards of desired performance. These findings can be extended
to the case of foreign subsidiaries, suggesting that as the extent of product
flows among foreign units increases, the use of output controls becomes less
suitable, and more emphasis will be placed on alternative controls such as
behaviour control and socialisation control. In a study of a US MNC,
Boyacigiller (1990) reported that with greater interdependence between a
subsidiary and headquarters, more US nationals are placed in high level
positions in the subsidiary to manage the uncertainties. Hypotheses H2a to
H2c follow from the above discussion:
H2a: Reliance on output control will decrease as product flows increase.
H2b: Reliance on behaviour control will increase as product flows increase.
H2c: Reliance on socialisation control will increase as product flows increase.
Capital flows
Capital flows depend on the strategic mission of the business unit. Various
typologies of strategic mission exists in the literature (e.g. Hofer and Schendel,
1978; MacMillan, 1982) and can be conceptualised as falling on a continuum
between a build and a divest strategy (Gupta and Govindarajan, 1984). The
build mission has a goal of increased market share, even at the expense of
short-term earnings and cash flows. Thus, a build business is expected to
experience net capital inflows. The hold mission is geared to the protection of
the business unit's current market share and competitive position. Hold
businesses usually have equal capital inflows and outflows. With a harvest
mission, the goal is maximisation of short-term earnings and cash flows, even
at the expense of market share. A harvest business would be a net supplier of
capital, that is, it will experience net capital outflows. Finally, a divest business
is preparing for liquidation and sale. These missions have capital flow patterns
ranging from net capital inflows to net capital outflows[3].
The control implications of different business strategic missions have been
investigated in the context of local SBUs (Govindarajan and Gupta, 1985) and
the results can be extended to MNC subsidiaries which face discrete
competitive environments. The basic thesis is that due to the different levels of
uncertainty faced by units pursuing different missions, the units would require
systematically different management control systems (Govindarajan and
Shank, 1992). For example, since build units tend to face higher uncertainty
than harvest units, less reliance should be placed on output controls in build
units than in harvest units (Govindarajan and Shank, 1992). Instead, for build Control of MNCs
units, reliance is placed on behaviour control. We also postulate that build
businesses will rely more on socialisation control than harvest and divest
businesses. In a given business, the portfolio of products or services may have
different strategic missions. Thus, the capital flow will be a function of this
combination of strategic missions. Since build units are characterised by net
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capital inflows, while on the other extreme, harvest and divest units are
characterised by net capital outflows, the net capital flow into the business will
increase as the proportion of build strategies increases. Hypotheses H3a to H3c
can be stated as follows:
H3a: As the net capital inflow increases, there will be less reliance on output
control.
H3b: As the net capital inflow increases, there will be more reliance on
behaviour control.
H3c: As the net capital inflow increases, there will be more reliance on
socialisation control.
Strategic management style
The strategic management style employed by corporate headquarters in
managing a diverse range of businesses affects the types of controls used.
Goold and Campbell (1987) identified three main styles in the management of
diversity. These are strategic planning, strategic control and financial control.
Headquarters with a strategic planning style participate in and influence the
development of business unit strategy by establishing a planning process and
contributing directly to strategic thinking. Headquarters place less emphasis
on financial controls and performance budgets are set flexibly, and reviewed
within the context of long-term progress. In contrast, headquarters using a
financial control style limit their role to approving investments and budgets
and monitoring performance. They have little influence in developing
strategies and do not formally review long-term plans. Strategic decision
making is delegated to the business unit managers. The strategic control style
combines some of the characteristics of the other two management styles.
Firms that employ a strategic control style believe in the autonomy of unit
managers, although they are still concerned with the plans of their units. Plans
are reviewed in a formal planning process but headquarters do not advocate
strategies or interfere with major decisions. Control is maintained by the use of
financial targets and strategic objectives. These targets and objectives are
agreed with headquarters and unit managers are expected to meet them.
Each style implies a different control approach. Firms that use a financial
control style limit their role to agreeing and monitoring short-term financial
targets for the businesses. Hence, the emphasis is on output control. Behaviour
control is not emphasised as headquarters delegate responsibility for strategic
decisions to the business units. On the other hand, the strategic planning style
involves active participation in strategy formulation by headquarters. In order
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to obtain information for this purpose, close interaction with the business unit
is required. This implies heavy reliance on behaviour control. Finally, firms
with a strategic control style have a strong commitment to decentralisation.
The centre reviews and challenges business unit strategies and aims to assess
strategic as well as financial performance. In order to give units the necessary
autonomy, it is essential that the unit managers have been socialised into the
philosophy of the headquarters. Reliance is placed on managers making the
appropriate decisions as their behaviours cannot be monitored. Thus, we
hypothesise the following:
H4a: Output control is emphasised more by headquarters with a financial
control style than by those with a strategic planning or strategic control
style.
H4b: Behaviour control is emphasised more by headquarters with a strategic
planning style than by those with a financial control or strategic control
style.
H4c: Socialisation control is emphasised more by headquarters with a
strategic control style than by those with a strategic planning or
financial control style.
Research methodology
Sample and procedure
This study is restricted to MNC subsidiaries in a single country, Australia, in
order to control for extraneous variations introduced by differing national
contexts. There is some evidence that Australia has been a net beneficiary in
both knowledge and capital inflow from MNCs operating in the country. The
sample was selected from the BRW (Business Review Weekly) Top 1,000
corporations operating in Australia in 1996. Of these, 787 operate in
manufacturing and wholesale sectors. A total of 165 (21 per cent) Australian
subsidiaries of MNCs were identified from these two industry sectors.
MNCs in the sample originated from the USA (32 per cent), Japan (20 per
cent), the UK (13 per cent), various other European countries (22 per cent), New
Zealand (7 per cent) and Asian countries (6 per cent). The initial survey resulted
in 49 completed questionnaires being returned, with seven more responses
from a follow-up with 50 companies, for a total of 56 responses, giving a
response rate of 34 per cent. Although the response rate is low, other
management-related studies in Australia have reported similar or even lower
rates (e.g. Ratnatunga et al., 1988 (34 per cent); Gul, 1991 (21 per cent); Clarke
and Mia, 1995 (19.8 per cent); Warwick et al., 1997 (33 per cent)). As a check for
response bias, the general approach suggested by Oppenheim (1992) is used.
Comparisons are made between early respondents (the first ten) from the initial
mailing and the respondents from the follow-up mailing (seven) in terms of
demographic variables of size of subsidiary (measured by annual sales),
relative importance of subsidiary to headquarters and designation of
respondent. Comparisons were also made using the independent variables,
knowledge, product and capital flows; strategic management style as well as Control of MNCs
the dependent variables output, behaviour and socialisation controls. None of
these measures were significantly different across the two groups.
A questionnaire was developed to test the hypotheses. The objective of the
questionnaire was to collect data for measuring the strategic context of the
MNC subsidiary, the strategic management style of headquarters and the
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control approach used by headquarters. A letter explaining the nature and
objective of the study and requesting participation was addressed to the chief
executive officer (or other appropriate title). It is expected that the CEO is the
most knowledgeable individual in the subsidiary about its strategic context
(Huber and Power, 1985). The questionnaire, together with a self-addressed,
stamped envelope, was enclosed. As an inducement to complete the
questionnaire, the findings of the study were offered to the participants. Ten
respondents indicated that they wished to receive the results. The balance of
the responses were anonymous.
The majority of respondents (65 per cent) are the most senior executives
including chairmen, presidents, managing directors, and chief operating
executives. The balance of the respondents are senior managers with functional
or operational responsibilities. Of the respondents, 64 per cent had been with
their organisations for more than ten years. These subsidiaries are large in size,
with 91 per cent generating annual sales of more than A$100 million. However,
relative to the company's total sales, the Australian operations represent a
small percentage for most of these subsidiaries: 84 per cent of the subsidiaries
account for less than 25 per cent of their company's total sales. At the other
extreme, 11 per cent of the subsidiaries account for more than 75 per cent of
their company's total sales.
Measurement of dependent variable ± control
Our output control measure is congruent with Egelhoff's (1988) measure: a total
of 15 control items which were combined to produce three separate scales of
output control for the functional areas of finance, manufacturing and
marketing. The items measured the frequency with which various types of
financial, manufacturing and marketing information were received by the head
office from the subsidiary[4]. The frequencies were measured on a five-point
scale, with 1 indicating ``weekly'', 2 ``monthly'', 3 ``quarterly'', 4 ``annually'' and 5
``not at all''. The higher the frequency of reporting (as indicated by a lower
score), the more reliance is placed on output control. The scales were
constructed by averaging the normalised scores of each item within the
functional area. Reliability tests were conducted for each scale and the
Cronbach alphas obtained were 0.52 for financial, 0.90 for manufacturing and
0.71 for marketing. While the latter two are acceptable according to Nunnally's
(1978) guidelines, the former is low. However, for broad constructs, Van de Ven
and Ferry (1980) have suggested that acceptable values for alpha would range
between 0.35 and 0.55. We argue that financial outcome control is a ``broad''
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construct because financial measures incorporate and summarise multiple
dimensions of business performance. We have therefore used the financial
output scale.
Behaviour control is measured by the number of parent company nationals
in key management positions in the subsidiary. The respondent is asked to
indicate the number of top five jobs in his/her subsidiary that are held by
nationals from the country where headquarters is located. The higher the
number, the greater the use of behaviour control.
Socialisation control is measured by the efforts made by headquarters in
developing a strong organisational culture such that all subsidiaries know and
share the main goals of the firm (cf. Martinez and Jarillo, 1991; Ghoshal and
Nohria, 1989). Respondents are asked to indicate on a seven-point Likert scale,
the extent to which management at headquarters make efforts to develop such
a culture (1: little effort, 7: greatest effort).
Measurement of independent variables
Knowledge flow about key value chain activities is measured in terms of both
the inflow into the focal subsidiary and outflow from that subsidiary.
Knowledge inflow is measured by the extent to which the subsidiary engages in
soliciting and acquiring knowledge from the rest of the corporation while
knowledge outflow is measured by the extent to which the subsidiary provides
knowledge to the rest of the corporation. The key value chain activities are
purchasing, manufacturing, marketing, research and development and the
sharing of market intelligence. These items were selected because they
represent key primary activities of the value chain (Porter, 1986). Respondents
were asked to indicate the extent of the flows for each area on a seven-point
Likert scale (1: no knowledge sharing, 7: extensive knowledge sharing). These
responses are averaged across the five areas for both knowledge inflow and
knowledge outflow. The Cronbach alphas for the knowledge inflow and
outflow scales are 0.79 and 0.86 respectively, which are acceptable according to
Nunally's (1978) guidelines.
Further, to test for construct validity, the respondents were asked to indicate
on a seven-point Likert scale their answer to the following: ``What is the extent
to which distinctive knowledge and insight of the head office and your unit are
effectively transferred to and shared with the opposite party?'' (1: little extent, 7:
great extent). Both the knowledge inflow and outflow scales are significantly
correlated with the response to the above question (r = 0.37 and 0.39
respectively), lending support to the validity of the scales.
Capital flow is measured by evaluating strategic mission of the business, as
discussed by Gupta and Govindarajan (1984). Paragraph descriptions of build,
hold, harvest and divest strategies are provided. Respondents are asked to
indicate the percentage of their firms' current total sales that are accounted for
by products or services represented by each of the descriptions, to accurately
capture the potential variety of mandates across diverse product lines. In
addition, values of 5, 4, 3 and 2 were multiplied by the percentages allocated by Control of MNCs
the respondents to the four categories. This produces a continuous index
ranging from 5.0 (pure build) to 2.0 (pure divest).
Product flow is measured by the nature of product interdependency across
subsidiaries. Descriptions of the three possible patterns of movement of
products: pooled, sequential and reciprocal, are provided to the respondents
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who are asked to indicate which best describes their situation.
Strategic management style
The characteristics of the strategic management style are summarised in
paragraph descriptions based on the three styles developed by Goold and
Campbell (1987). Respondents were requested to indicate the one paragraph
that best describes the style used by their headquarters. The use of paragraph
descriptions to measure typologies of strategies is established, and is one way
of identifying a holistic construct such as strategy (Snow and Hambrick, 1980).
Results and analysis
Descriptive statistics for the three control approaches, knowledge flows and
capital flows are presented in Table I. The frequency distributions of product
flow and strategic management style are shown in Table II.
H1a is tested by conducting correlations between the extent of knowledge
inflow and outflow with the three output control measures. These correlations
are presented in Table I. None of the correlations of knowledge flows with the
output control measures were significant. Thus, H1a is not supported.
To test H1b and H1c, knowledge inflow and outflow are correlated with
behaviour and socialisation controls. Since the correlations with behaviour
control were not significant, H1b is not supported by our results. H1c is
partially supported since knowledge inflow is significantly correlated with
socialisation control (p = 0.036). As knowledge inflows increase, headquarter
management increasingly rely on socialisation control. There are no significant
effects for knowledge outflows, which can be partly explained by the fact that
the vast majority of subsidiaries in our sample do not engage in a large amount
of knowledge dissemination. This may be due to the fact that the Australian
subsidiaries are relatively new, and are therefore likely to be net importers of
knowledge ( James, 1997).
H2a, H2b and H2c are tested by performing one-way ANOVAs with product
flow pattern as the independent variable and output control, behaviour control
and socialisation control respectively as the dependent variables. The results of
the ANOVAs are summarised in Table III.
From the results, we note that the emphasis on financial, manufacturing and
marketing output controls does not differ across the three types of
interdependencies. There is also no difference in the use of behaviour or
socialisation controls among the three types of interdependencies. We did not
find support for H2a, H2b and H2c.
Table I.
Descriptives and
correlation coefficients
of control, knowledge
flows and capital flow
measures
0.51
1.12
0.69
1.51
1.71
1.28
1.51
1.07
0.338*
0.489**
± 0.09
0.052
0.170
± 0.039
± 0.353**
Fin
0.434**
± 0.119
0.053
± 0.194
± 0.116
± 0.091
Mnf
± 0.088
0.106
± 0.024
0.06
± 0.266*
Mkt
0.051
0.200
0.202
0.257***
Beh
0.288*
0.005
± 0.188
Soc
a
Kout
0.522**
± 0.129
0.066
Kin
Notes:
This measure is reverse-scored, a larger number implies less frequent reporting. The means and standard deviations are based on the
average score.
* Significant at the 0.05 level
** Significant at the 0.01 level
*** Significant at the 0.10 level
2.42
3.21
2.64
1.59
5.29
4.98
4.10
3.94
Std deviation
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Output controla
Financial (Fin)
Manufacturing (Mnf )
Marketing (Mkt)
Behaviour control
Socialisation control
Knowledge inflow (Kin)
Knowledge outfow (Kout)
Capital flow (Cap)
Mean
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Hypothesis H3 predicts that with greater capital inflow, the use of output Control of MNCs
control will decrease while the use of behaviour and socialisation controls will
increase. Pearson correlation coefficients are calculated and the matrix is
presented in Table I. We found that net capital inflow is positively correlated
with financial output control (p = 0.008) and marketing output control (p =
0.047). This is in the opposite direction to our prediction in H3a. The correlation
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with manufacturing output control is not significant. Capital flow is also
positively correlated with behaviour control (p = 0.056), thus supporting H3b.
The correlation with socialisation control is not significant, thus H3c is not
supported.
H4a, H4b and H4c are tested by conducting one-way ANOVAs with
strategic management style as the independent variable and output control,
behaviour control and socialisation control respectively as the dependent
variables. The results are summarised in Table III. The results are marginally
significant only for the area of manufacturing output control. The means show
that headquarters with a strategic control style require manufacturing output
information less frequently than those with a strategic planning style and
financial control style. The use of behaviour control and socialisation control
does not appear to be significantly affected by the strategic management style;
thus H4b and H4c are not supported.
Discussion
The results of the study have provided insights into the control mechanisms
employed by MNCs operating in Australia. In this study we found that as
knowledge inflow increases, reliance on financial output control decreases and
reliance on socialisation as a control device increases. This is an important
Product flow
Frequency
Percentage
28
14
14
50
25
25
Pooled
Sequential
Reciprocal
Control approaches
Output
Financial
Manufacturing
Marketing
Behaviour
Socialisation
Strategic management
style
Strategic planning
Strategic control
Financial control
Product flow
F-value
Probability
0.855
2.18
2.23
0.66
0.06
Frequency Percentage
0.43
0.12
0.12
0.52
0.94
9
42
5
16.1
75
8.9
Table II.
Frequency distributions
of product flow and
strategic management
style
Strategic
management style
F-value
Probability
0.27
2.89
0.86
0.93
0.07
0.76
0.07
0.43
0.40
0.93
Table III.
ANOVA results of
control approaches
across product flow
and strategic
management styles
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finding because it reinforces the rationale for the emergence of the MNC. As
discussed earlier, MNCs economise on transaction costs through the
internalisation of transactions, particularly transactions involving knowledge
(Kogut and Zander, 1993) and other invisible assets (Itami, 1987). In order to
enhance control over the exploitation of these assets, MNCs emphasize the
development of shared values as a form of ``clan control'' (Ouchi, 1980). Our
inability to find support for the hypothesis relating to behaviour control could
be due to the limited reliance on this control mechanism by firms in our sample.
Overall, the modal score for behaviour control, which represents the number of
parent company nationals in the top five management positions in the
Australian subsidiary, is zero. The next most frequent score is one.
A consistent theme running through our results is the dominance of output
control, even in situations where researchers have argued that they are
imperfect and should not be relied upon. It appears that as product flow
interdependencies increase, the greater the reliance placed on marketing and
manufacturing output controls. Moreover, reliance on financial output controls
does not differ across interdependence levels. These findings suggest that with
increased interdependence, both manufacturing and marketing controls
become more salient to headquarters. At the same time, it appears that
financial output controls are used as ``diagnostic'' controls (Simons, 1994),
providing a routine set of data to headquarters.
A number of additional potential explanations can be provided for the
popularity of output controls. First, it may indicate a comfort zone provided by
frequent output reporting, which is supplemented by other controls. This
dominance of output control in Australian subsidiaries may be related to two
contingency variables ± size of the subsidiary and nationality of the parent
company . This is to some extent supported by Brownell (1987) and Egelhoff
(1984). Brownell examined the role of accounting information, environment and
management control in the Australian subsidiary of a large US multinational
company. While recognising the problems of generalising the findings from a
single case study, Brownell nevertheless reported that ``control of the foreign
subsidiary's operations appears to be dominated by output controls to the
apparent exclusion of behaviour controls'' (Brownell, 1987, p. 11). In one of
Brownell's (1987) interviews with the international controller for the region of
the company in question, it was stated that ``Australia is a much smaller
organisation and it is a lot easier to tailor-make the kind of information systems
that are required . . . .'' (Brownell, 1987, p. 12). By extrapolating this finding to
the current study, it is noted that the vast majority of Australian subsidiaries
contributed only a very small proportion to global sales of the MNCs ± 84 per
cent of respondents contribute less than 25 per cent to the total sales of the
MNCs. Hence the relatively small size of the Australian subsidiaries may well
be a contingency factor explaining the dominance of output control as found in
this study.
Egelhoff (1984) also reported that the nationality of an MNC appears to have
a strong influence on the type of managerial control for the foreign subsidiary.
US MNCs appear to monitor subsidiary outputs and rely more frequently on Control of MNCs
reported performance data than do European MNCs. His findings lend support
to the dominance of output control in Australia, since the highest proportion of
respondents (32 per cent) in this study have a US parent.
As capital flow into the local subsidiary increases, the reliance on financial
and marketing output control increases. However, due to the imperfect nature
661
of output measures, behaviour control is also increasingly emphasised. This is
to be expected: with units receiving more funds, headquarters will feel a greater
need to monitor the progress more intensively by putting trusted home country
nationals in top management positions as well as by requiring more frequent
reporting of outcomes.
In our sample of 56 MNCs operating in Australia, the dominant management
style of headquarters is the strategic control style (42 firms) while the least
popular is the financial control style (five firms) (see Table II). Our hypothesis
testing related to strategic management style is limited by the uneven
distribution of styles. However, such a distribution is not peculiar to our
sample. The popularity of the strategic control style in our sample is consistent
with the finding by Young and Goold (1993) that 50 per cent of UK companies
surveyed indicated the use of the strategic control style. The small percentage
of firms using the financial control style could be due to the nature of doing
business in a global environment. Goold et al. (1983, p. 55) suggest that ``. . . the
essence of the Financial Control style remains its ability to improve
performance in autonomous, stand alone businesses. In general, the Financial
Control style is much less suited to a portfolio of `core' businesses or to
businesses engaged in truly competitive global competitive battles, in which
different national businesses must co-ordinate their strategies to achieve
success''.
Moreover, the prevalence of the strategic control style displays the changing
expectations on MNC subsidiary managers. Recent research suggests that
subsidiary initiative contributes to building firm-specific advantages.
Furthermore, subsidiary initiative is strongly associated with the leadership
and entrepreneurial culture in a subsidiary (Birkinshaw et al., 1998). Rather
than merely ``implementing'' policies and strategies that are formulated
elsewhere, the strategic control style encourages more entrepreneurial and
direction-setting activities from the subsidiary general manager. Given that
context, a strong reliance on embedding cultural values into general managers
is expected, and this is found, as evidenced by the high average score (5.3)
obtained for socialisation across the sample (see Table I).
The strong emphasis on socialisation control attests to the need of
headquarters to find, in addition to output control, other means of maintaining
control. The low reliance on a trusted cadre of home country nationals may be
due to the relatively high costs associated with the transfer of expatriates to a
foreign subsidiary. Moreover, the low reliance on home country nationals may
also reflect the small national cultural distance between the USA, the UK and
Australia.
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Implications
The study did not set out to provide normative guidelines for managers on the
efficacy of different control combinations. However, the study provides insight
into managerial practices and the relationship between theoretically derived
assertions and that practice. In particular, contingency theory explanations of
linkages between various forms of transactional interdependence and control
approaches were not widely supported. Instead, we believe that our study lends
some support to the alternative perspective of the existence of strategic choice
(Child, 1972), with managers choosing specific control approaches which they
are familiar with, or which can provide redundant signals or triangulated
information which assists monitoring. With strategic choice, the role of the
subsidiary in the MNC network is largely open to subsidiary managers to
define for themselves (Birskinshaw et al., 1998).
In mapping out alternative theoretical lenses to apply to the issue of controls
in MNC subsidiaries, the diffusion of ``best practices'' in control across and
within MNCs is an interesting topic. Perhaps a cross-national study of MNC
subsidiaries within a single or limited number of MNCs could test the forces for
standardisation. In addition, institutional theorists (e.g. DiMaggio and Powell,
1991) would argue that control practices in MNCs would converge globally due
to economic, coercive, normative and mimetic pressures (Granlund and Lukka,
1998). Our limited positive findings may be partially explained by this
phenomenon. We found that many of our hypotheses failed because of lack of
variation in reported practice across the sample. This has made us sympathetic
to the institutional view, which argues that normative pressures and mimetic
processes influence social conduct. As Ghoshal and Bartlett (1990, p. 619)
suggest: ``. . . mimetic and normative forces of isomorphism may be getting
stronger''. This may be particularly true in the accounting and control arena
where professional norms, certification, and continuing education diffuse ``best''
control practices rapidly.
In assessing directions for future research it is noted that this study was
cross-sectional in nature. We know that MNC subsidiary mandates change over
time (Taggart, 1998; Birkinshaw, 1997), and it would be interesting to track the
dynamic interaction between changing mandates and control approaches. Our
preliminary analysis, based on a positivist approach, of the complex issue of
controls in MNCs, could usefully be augmented with qualitative research. For
example, our reported result that net capital inflow is positively correlated with
financial output control, contrary to expectations (H3a) could be further
explored through the use of in-depth, longitudinal studies of MNCs operating in
different environments. Field research should be considered as an alternate
approach to conduct such studies in order to gain greater insights into the
behavior of participants associated with the process and decisions in designing
of control systems in situations of net capital inflows. Field research, it is
argued, provides ``the only reliable method to mine human experience using
the people involved in the behavior under study'' (Atkinson and Shaffir, 1998,
p. 45).
In terms of a theoretical lens to shape future research in this area, we proffer Control of MNCs
that interpretive perspectives, such as institutional theory, may provide
different insights not available through the contingency lens. This echoes the
call for paradigmatic pluralism as a means of understanding a complex social
issue (Covaleski et al., 1996; Hopper, 1999). The triangulation of research
theories and methods of inquiry on the shared issue of relating the role of the
663
subsidiary to the control, managerial and performance evaluation criteria
applied to the subsidiary will further enrich our understanding of the
organisational complexities of the modern MNC.
Notes
1. Baliga and Jaeger (1984) refer to this type of control as ``personal'' control.
2. The first major reason cited was the lack of availability of management and technical
skills in some countries.
3. With multiple product lines, a single subsidiary could simultaneously pursue different
missions across its various lines. This is dealt with in the measurement section.
4. The output control scale was represented by the following. Marketing control: total sales
revenue; sales revenue by product line; sales to specific accounts; total selling expenses;
components of selling expense; selling expense by product line. Manufacturing control:
total manufacturing expense; components of manufacturing expense; cost of specific raw
materials; units of output by product; manufacturing variances from standard cost; quality
control data. Financial control: subsidiary total profit; subsidiary profit by product line;
inventory levels; accounts receivable turnover.
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