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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.
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INTRODUCTION
Previous international management research provides convincing evidence on
the organizational benets 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 efciency 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 dened as the transfer of subsidiary management
from expatriate to indigenous managers of the host country where the MNCs
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 stafng policies around the world, (b) practices of
the MNCs 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 identied
differences in human resource management practices among the subsidiaries
of MNCs (e.g. Bjorkman & Lu, 2000; Hannon, Huang, & Jaw, 1995;
Rosenzweig & Nohria, 1994). We expect to see differences in subsidiary
stafng 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 specic 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
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and critical resources in the local task environment (Hillman, Withers, &
Collins, 2009; Pfeffer & Salancik, 1978). From the perspective of institutional theory, we emphasize the inuence 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 MNCs chances of survival in uncertain host country
environments. Specically, 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 MNCs local subsidiary.
In the following sections, we rst 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.
376
improve control and acquire knowledge (Edstrom & Galbraith, 1994; Zhang
et al., 2006). Models from a contingency perspective considered the t or
reciprocal interdependence between the subsidiary management and the
strategies of the MNC (Bird & Beechler, 1995; Brewster, 1995; Fey &
Bjorkman, 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 exibility and the
difculties 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 stafng 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 & ODonnell, 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 ABBs
expatriate managers often work with local managers to improve efciency,
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 benets to MNCs, commitment by expatriates wanes as MNCs enter
new countries or manage their portfolio of subsidiaries for a long period of
time (Edstrom & 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
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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
rms in terms of markets, products, or services. Symbiotic interdependence
can arise along the vertical value chain, including interdependencies between
the rm 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 MNCs 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 MNCs subsidiary management.
Indigenization may also help MNCs to improve their subsidiarys 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 difculties
associated with the intra-organizational resource ows, 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
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the costs of doing business over the costs normally faced by local rms.
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 subsidiarys 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 MNCs subsidiary management.
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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 inuenced by
another important organizational context, the international experience of
the MNC. Specically, 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
(Bjorkman & 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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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 MNCs 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
dened 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 identied a fairly consensual list of the
dimensions of the POS in an attempt to clarify this basic denition. The key
dimensions identied 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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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 efciency considerations, our conceptualization outlines the social context of subsidiary
management. We propose that local country environmental factors
inuence subsidiary indigenization. Specically, we suggest that the level
of indigenization in a country is inuenced 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
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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 efciency 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
MNCs 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 MNCs 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 MNCs organizational
efciency, previous international research viewed subsidiary management
stafng as mostly a practical issue for the headquarters of the MNC. The
results of recent studies, however, helped establish the importance of
subsidiary stafng for successful international expansion (e.g. Gong, 2003;
Zhang et al., 2006). Viewing subsidiary stafng from an indigenization
perspective takes this recent research further; it adds the inuence of
different constituents outside the MNC and its headquarters. According to a
social movement perspective, institutional constituents may engage in
collective action over MNC stafng policies based on their political views.
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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. Specically, we suggest that subsidiary
management goes beyond organizational efciency 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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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. 12171218).
392
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