Supervising Across Borders: The Case of Multinational Hierarchies

Abstract

This paper examines how multinational corporations (MNCs) selectively assign supervisory responsibilities to units in countries with varying levels of institutional quality. Arbitraging across institutional contexts is an important function of MNCs, but it also creates coordination challenges. The choice of organization structure, such as the differential assignment of supervisory responsibilities, is an important tool for managing these coordination challenges. Using data on the business activities and supervision relationships within U.S. multinational manufacturers in 1996-2008, I find that frontline subsidiaries in countries with weaker institutions are more likely to be supervised by foreign rather than domestic supervisory units. Foreign supervision is even more likely when subsidiaries in weak-institution countries conduct activities that are more central to or interdependent with their parents' global operations. These findings confirm that MNCs use differential supervision to enhance global coordination. The paper highlights one of the most unique features of MNCs: a multinational hierarchy that resides within firm's boundary but across national borders. It also connects MNCs' hierarchical structure with institutional imperfections that give rise to the emergence of the firm in the first place.

Reconceptualising Hierarchies: The Disaggregation and Dispersion of Headquarters in Multinational Corporations

“…Furthermore, it has become axiomatic that headquarters continue to play an important role in large corporations. For instance, headquarters have been shown to influence business unit performance and innovation, cross‐unit coordination, and the ways in which firms address and profit from the different institutional environments to which they are exposed (e.g., Dellestrand and Kappen, ; Goold and Campbell, ; Makino et al, ; Martin and Eisenhardt, ; Mudambi, ; Nell and Ambos, ; Parmigiani and Holloway, ; Poppo, ; Zhou, ). These studies have also shown that providing a clear definition of “headquarters” is evidently not a trivial undertaking.…”

“…We launched this Special Issue in the Journal of Management Studies in recognition of the need to revisit what we know about the role and organization of headquarters in multinational corporations (MNCs). This recognition stemmed from the fact that most of the existing empirical and theoretical work has tended to employ a rather simplistic concept of headquarters and its activities (Hoenen and Kostova, ; Zhou, ). Frequently, corporate headquarters has been viewed as a single, identifiable unit at the apex of the organization, which is located in one place and has dyadic relationships with its subsidiaries (e.g., Bouquet and Birkinshaw, ; Ciabuschi et al, ; Monteiro et al, ; O'Donnell, ; Roth and O'Donnell, ).…”

“…While using such a reductionist view of headquarters has been useful in generating valuable insights on headquarters–subsidiary relationships and on the role and functioning of headquarters, this view seems to increasingly clash with empirical observations. Recent research has shown that headquarters activities are often geographically dispersed and configured in increasingly complex ways (Baaij and Slangen, ; Birkinshaw et al, ; Decreton et al, ; Goold and Campbell, ; Zhou, ). For example, Desai (, p. 1284) notes that we are now witnessing firms that are ‘ Bermuda‐incorporated, Paris‐headquartered (…), listed on the NYSE [New York Stock Exchange] with US‐style investor protections and disclosure rules, a chief information officer in Bangalore, a chief finance officer in Brussels and a chief operating officer in Beijing ’.…”

“…For example, Desai (), Baaij and Slangen (), and Birkinshaw et al () provide interesting insights into how firms, such as General Electric (GE), HSBC, IBM, Lenovo, Nokia, and Royal Dutch Shell, have disaggregated and dispersed their financial, legal, and managerial headquarters activities across different locations. Current research, however, falls short of accounting for the implications of this new phenomenon, and numerous scholars have called for more research on multi‐layered hierarchical structures and the roles of multiple (intermediary) headquarters and their (re)location patterns (Benito et al, ; Hoenen and Kostova, ; Laamanen et al, ; Menz et al, ; Meyer and Benito, ; Zhou, ).…”

Ownership Control of Foreign Affiliates: A Property Rights Theory Perspective

“…Andersson et al (2005) maintain that sharing the same industry makes it more likely that knowledge transfer will occur, in both directions (Andersson, Forsgren, & Holm, 2007;Driffield et al, 2010;Mudambi & Navarra, 2004). Arguably, firms develop strategies to mitigate risks in such investments from the start, and establish stable ownership structures that best address the trade-off between risk and opportunism (Zhou, 2014). One could therefore assume that this influences not only the initial ownership structure, but also the likelihood of changes in that structure as the relationship develops, making a change in a firm's holdings less likely.…”