Understanding Agency Problems in Headquarters-Subsidiary Relationships in Multinational Corporations: A Contextualized Model

Abstract

This paper proposes an agency model for headquarters-subsidiary relationships in multinational organizations with headquarters as the principal and the subsidiary as the agent. As a departure from classical agency theory, our model is developed for the unit level of analysis and considers two root causes of the agency problem—self-interest and bounded rationality. We argue that in the organizational setting, one cannot assume absolute self-interest and perfect rationality of agents (subsidiaries) but should allow them to vary. We explain subsidiary-level variation through a set of internal organizational and external social conditions in which the headquarters-subsidiary agency dyad is embedded. We then discuss several agency scenarios reflecting various levels of self-interest and rationality that lead to different manifestations of the agency problem. The proposed framework can inform more relevant applications of the agency perspective in organizational studies and motivate future research.

Regional Headquarter’s Dual Agency Role: Micro‐political Strategies of Alignment and Self‐interest

“…Despite this, studies incorporating agency perspective have largely focused on the CHQ–subsidiary dyad, ignoring the significance of the RHQ (Nohria and Ghoshal, ; O'Donnell, ). As such, we answer calls for a multiple agency perspective of the MNE (Deutsch, Keil and Laamanen, ; Hoenen and Kostova, ; Kostova, Nell and Hoenen, ; Steinberg and Kunisch, ), illuminating that a variety of micro‐political dynamics emerge as a consequence of the dual agency role that RHQ performs in its relationship with CHQ. Second, and more specifically, we contribute to the literature on micro‐politics within the MNE (Geppert and Dorrenbacher, ; Geppert, Becker‐Ritterspach and Mudambi, ; Morgan and Kristensen, ) by showing how RHQ micro‐political strategies are geared towards influencing the flow and exchange of valuable and relevant knowledge with CHQ.…”

“…We add to an agency perspective of the MNE by illustrating that agency problems are not purely driven by the agent's self‐interest‐seeking behaviour, but more so driven by the principal's self‐interest or indifference (Cavanagh et al ., ). We thus improve the understanding of ‘principal opportunism’ (Hoenen and Kostova, ; Kostova, Nell and Hoenen, ) by showing that principal opportunism from CHQ in the form of withholding resources may be the genesis for opportunistic behaviour from RHQ. The self‐serving behaviour from RHQ is manifest in the form of micro‐political strategies of knowledge creation and sourcing.…”

“…Furthermore, diverging from the traditional zero‐sum agency perspective of self‐interest seeking, we show how self‐interest‐seeking behaviour may have broadly ‘healthy’ effects within the MNE (Kostova, Nell and Hoenen, ). Acting in a self‐interested manner, RHQ may develop new external knowledge links that might have remained unidentified had they relied solely on the resources received from CHQ.…”

“…Despite these insights, empirical evidence on how the external context in which the agent is embedded affects agency relations within the MNE remain limited (Hoenen and Kostova. ; Kostova, Nell and Hoenen, ). Hence, as an agent, RHQ may be politically motivated to pursue its self‐interest, but exploring how and why RHQ does this is pertinent to our study.…”

Beyond Simple Configurations: The Dual Involvement of Divisional and Corporate Headquarters in Subsidiary Innovation Activities in Multibusiness Firms

“…First, we contribute to the literature on parenting in complex structures (e.g. Birkinshaw et al 2006;Foss et al 2012;Galbraith 2009;Kostova et al 2016;Poppo 2003). This literature predicts that dual headquarters involvement is unlikely to occur since it is costly and draws on the scarce resources and attention of headquarters staff Nell et al 2011;Poppo 2003), since it runs counter the traditional M-form logic (Chandler 1991;Verbeke and Kenworthy 2008;Williamson 1975), and because it increases the likelihood of conflicts and coordination problems (Goold and Campbell 2002;Gong et al 2007).…”