Essays on multinational enterprises within host country strategy and structure in an emerging market

MULTINATIONAL ENTERPRISES’ WITHIN-HOST-COUNTRY
STRATEGY AND STRUCTURE IN AN EMERGING MARKET

















XUFEI MA
(B. Eng., Xi’an Jiaotong University; MBA, University of Saskatchewan)

A THESIS SUBMITEED

FOR THE DOCTOR OF PHILOSOPHY

DEPARTMENT OF BUSINESS POLICY

NATIONAL UNIVERSITY OF SINGAPORE

2007


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ACKNOWLEDGEMENTS

I would like to express my deepest appreciation to Professor Andrew Delios for
being my supervisor and for supporting my research endeavors during my tenure as a
PhD student at the National University of Singapore. It is his seasoned guidance, timely
encouragement and valuable feedback that have made this thesis possible. The training
I’ve received with regard to the three aspects of the academic profession – research,
teaching, and reviewing – has been the best possible start I could have had in my
academic career.
I thank the committee members of my thesis proposal: Professors Ishtiaq
Mahmood and Jane Lu. Their valuable comments and suggestions on my thesis proposal
helped me to improve the proposal in many ways. I benefited from Professor Mahmood’s
advice on the importance of critical thinking as a researcher, and his expertise in

international business, business groups research and emerging economies. I also
benefited from the cooperation with Professor Lu in several research projects, whose help
involved both conceptual and applied issues.
I am grateful to all the staff in the Department of Business Policy for their sincere
help at different stages of my thesis writing and during my PhD candidature. They are:
Teo Woo Kim, Wendy Ng, and Jenny See. I thank all the faculty members and colleagues
in the Department for their excellent comments on the earlier versions of my thesis. I am
indebted to my dear wife, Xuebing Zhong, for her tender care and timely comfort. Last
but not least, I am deeply grateful to my parents for their unfailing support and
encouragement in all these past years, which have been the major reason that I am able to
continue to seek my career goal in the academic area.

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TABLE OF CONTENTS
ACKNOWLEDGEMENTS 1
SUMMARY 7
LIST OF TABLES 8
LIST OF FIGURES 9
LIST OF APPENDICES 10
CHAPTER 1: INTRODUCTION 11
1.1 Overview 11
1.2 Research Questions 15
1.3 Contributions 18
1.4 Organization of the Dissertation 21
CHAPTER 2: LITERATURE REVIEW 22
2.1 Introduction 22
2.2 Strategy-structure Model in Strategic Management Literature 23
2.3 Research Streams in MNE Strategy, Structure, and Subsidiary 25
2.3.1 Strategy-structure stream 25
2.3.2 HQ-subsidiary relationship stream 27

2.3.3 MNE process stream 28
2.3.4 Subsidiary role stream 30
2.3.5 Subsidiary evolution stream 32
2.3.6 Subsidiary network stream 34
2.4 A New Classification: Headquarters versus Subsidiary Perspective 37
2.5 Limitations of Prior Studies 39

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2.6 Research Opportunities: Missing Bridges to Theory and Context 40
2.7 Summary 43
CHAPTER 3: ESSAY 1 44
3.1 Introduction 44
3.2 Background and Theoretical Framework 48
3.2.1 A focus on MNEs’ foreign group subsidiary 48
3.2.2 The institutional multiplicity of MNE subsidiaries: 49
Theoretical framework
3.3 Hypotheses Development 53
3.3.1 Individual effects of multiple institutional isomorphic pressures 53
3.3.2 Moderation in the two coercive isomorphic pressures 63
3.3.3 Differentiation and comparison of different mimetic role models 65
3.3.4 The moderating effects of local references 67
3.4 Methods 70
3.4.1 Sample and data sources 69
3.4.2 Dependent variable and analytic model 71
3.4.3 Independent and control variables 73
3.5 Results 76
3.5.1 Descriptive statistics 76
3.5.2 Event history analysis using Cox models 77
3.5.3 Sensitivity Analyses 80
3.6 Discussion and Conclusion 82

3.6.1 Findings 82

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3.6.2 Implications for theory 86
3.6.3 Implications for practice 87
3.6.4 Limitations and future research 88
3.6.5 Conclusion 89
CHAPTER 4: ESSAY 2 91
4.1 Introduction 91
4.2 Host Country Environment and MNE’ within-host-country Diversification 95
4.3 Theory and Hypotheses Development 97
4.3.1 Structuration theory and MNE subsidiaries’ political strategy 97
4.3.2 Foreign group subsidiary and MNE’s within-host-country 99
diversification
4.3.3 Market size and industrial restriction as moderators 104
4.4 Methods 107
4.4.1 Sample and data sources 107
4.4.2 Dependent variables 108
4.4.3 Independent and control variables 109
4.4.4 Analytic model 112
4.5 Results 113
4.6 Discussion and Conclusion 115
4.6.1 Findings 115
4.6.2 Implications for theory 118
4.6.3 Implications for practice 120
4.6.4 Limitations and future research 120

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4.6.5 Conclusion 122
CHAPTER 5: ESSAY 3 123

5.1 Introduction 123
5.2 Background 126
5.2.1 FDI location choice 126
5.2.2 FDI subsidiary roles 129
5.3 Theory and Research Context 130
5.3.1 Foreign group subsidiary ad host country HQ 130
5.3.2 Research setting: China’s emerging market 132
5.4 Hypotheses Development 134
5.4.1 Corporate ambassador 135
5.4.2 Subsidiaries administrator 136
5.4.3 Learning center 138
5.5 Methods 140
5.5.1 Sample and data sources 140
5.5.2 Independent and control variables 141
5.5.3 Dependent variable and analytic model 146
5.6 Results 147
5.7 Discussion and Conclusion 150
5.7.1 Findings 150
5.7.2 Implications for theory 152
5.7.3 Implications for practice 154
5.7.4 Limitations and future research 155

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5.7.5 Conclusion 156
CHAPTER 6: CONCLUSION 157
6.1 Major Findings and Implications 157
6.2 Significance of the Study 160
6.3 Directions for Future Research 164
6.4 Conclusion 168
REFERENCES 169

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SUMMARY

The purpose of my dissertation is to study multinational enterprises’ (MNEs) within-host-
country strategy and structure. The research focus is an MNE’s foreign group subsidiary,
a form of host country headquarters (HQ) in an emerging market. This dissertation
extends MNE research by addressing three questions in three essays: (1) Why do some
MNEs form group subsidiaries in a large emerging market? (2) How does the group
subsidiary facilitate an MNE’s within-host-country business expansion? and (3) What
factors influence the location choice of an MNE’s group subsidiary?

This research contributes to the literatures of MNE strategy and structure and subsidiaries
in several ways. First, it contributes to theory building by providing a comprehensive
framework to understand the multiple institutional pressures and conditions faced by
MNEs in an emerging market. Second, it theoretically models and empirically tests the
direct and contingent values of MNEs’ foreign group subsidiaries on their within-host-
country product and geographic diversification strategies in an emerging market. Third, it
formally defines an MNE’s foreign group subsidiary as having three distinct strategic
roles and links MNE subsidiary research with the FDI location literature.

Overall, this study is among the first to shift the research attention toward the totality of
MNEs’ foreign subsidiaries in a host country. This shift is a timely and worthwhile
endeavor because it can help to bridge domestic business group and MNE subsidiary
literatures by tackling the interactions among local governments, incumbent groups, and
foreign multinationals. As such, this dissertation may inspire a new wave of MNE
subsidiary research with a focus on MNE within-host-country strategy and structure.

I examine the adoption, function, and location choice of group subsidiaries by the world’s
largest MNEs in China’s emerging market. I use longitudinal data on the entire

population of the Fortune Global 500 firms during the complete time window of China’s
open door period (1979-2005). The empirical findings will have substantial implications
for policy makers, business managers, and academics alike.

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LIST OF TABLES

Table Title Page

Table 1. A summary of literature on MNE strategy, structure, and subsidiary 194

Table 2. Descriptive statistics and correlations 195
(Essay 1)

Table 3. Event history analysis (Cox Model): Group subsidiary adoption by 196
Fortune Global 500 firms in China, 1979-2005
(Essay 1)

Table 4. Descriptive statistics and correlations 197
(Essay 2)

Table 5. G2SLS random-effects estimates: Fortune Global 500 firms’ 198
within-host-country product diversification in China, 1979-2005
(Essay 2)

Table 6. G2SLS random-effects estimates: Fortune Global 500 firms’ 199
within-host-country geographic diversification in China, 1979-2005
(Essay 2)

Table 7. G2SLS random-effects estimates: Fortune Global 500 firms’ 200

within-host-country overall diversification in China, 1979-2005
(Essay 2)

Table 8. Economic-geographic variables: Shang versus Beijing (2003) 201
(Essay 3)

Table 9. Descriptive statistics and correlations 202
(Essay 3)

Table 10. Probit models: The location choice for Fortune Global 500 firms’ 203
Chinese group subsidiaries
(Essay 3)

Table 11. Summary of major findings 204

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LIST OF FIGURES

Figure Title Page

Figure 1. Multiple institutional pressures on MNEs in a host country 205
(Essay 1)

Figure 2. Research model 206
(Essay 1)

Figure 3. Interaction between global peer influence and local partner reference 207
(Essay 1)

Figure 4. MNEs’ within-host-country diversification strategies 208

(Essay 2)

Figure 5. Research model 209
(Essay 2)

Figure 6. Interaction between group subsidiary and industrial market size 210
(Essay 2)

Figure 7. Interaction between group subsidiary and FDI restricted industry 211
(Essay 2)


Figure 8. The Inverted U-shape of Beijing-specific Experience and 212
the Likelihood of Choosing Beijing
(Essay 3)

Figure 9. Replication with extension by using different settings 213

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LIST OF APPENDICES

Figure Title Page

Appendix 1. Descriptive Statistics of Fortune Global 500 Firms in China, 214
1979-2005
(Essay 1)

Appendix 2. The List of Global Industries 215
(Essay 1)

Appendix 3. Discrete Logit Analysis: Group Subsidiary Adoptions by 216
Fortune Global 500 Firms in China, 1979-2005
(Essay 1)

Appendix 4. Event History Analysis (Exponential Models): Group Subsidiary 217
Adoptions by Fortune Global 500 Firms in China, 1979-2005
(Essay 1)

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CHAPTER 1: INTRODUCTION

1.1 Overview
How do firms organize their operations in foreign countries? This fundamental
research question falls into the stream of literature concerned with the strategy and
structure of multinational enterprises (MNEs) and their subsidiaries (e.g., Perlmutter,
1969; Stopford & Wells, 1972; Hedlund, 1986; Ghoshal & Bartlett, 1990; Gupta &
Govindarajan, 1991; Birkinshaw & Morrison, 1995; Caves, 1996). According to a recent
and comprehensive survey by Birkinshaw (2001), the national subsidiary no longer exists
in most developed countries because most MNEs have now moved towards some variant
of the global business unit structure in their international operations, as they seek to
exploit the promises of worldwide communications, product standardization and
economies of scale (Quelch & Bloom, 1996). This process has led to a corresponding
dilution in the power and responsibility of the country manager.
In contrast, the situation in emerging markets is quite different (Birkinshaw,
2001). These markets have a rapid pace of economic development with government
policies favoring economic liberalization. Emerging markets are assuming an
increasingly prominent position in the world (Hoskisson, Eden, Lau, & Wright, 2000;
Wright, Filatotchev, Hoskisson, & Peng, 2005). Today, strong country managers have
not only returned, but also been upgraded and promoted to stronger positions in group-
like umbrella holding companies among some MNEs in emerging markets (Quelch &

Bloom, 1996; Peng, 1997).
This umbrella holding company, as a special type of foreign subsidiary, is an

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MNE’s foreign group subsidiary and can be regarded as the MNE’s host country center
or HQ (headquarters). Its purpose is to seek a better integration of the various functions
in the host country for a broad range of products and services within a single but
important emerging market, and to unite the MNE’s existing investments under one
umbrella so as to combine sales, procurement, manufacturing, training, and maintenance
functions within the host country (Luo, 2002a).
Although MNEs have paid significant attention to the integration of their
operations in a single emerging market, MNE’s within-host-country strategy and
structure in general and MNEs’ foreign group subsidiaries in these increasingly important
markets in specific have been surprisingly under-studied in the MNE subsidiary literature.
Prior studies take either an explicit standpoint from MNE corporate headquarters (e.g.,
Bartlett & Ghoshal, 1989; Daniels, Pitts, & Tretter, 1984; Egelhoff, 1982; Hedlund, 1986;
Prahalad & Doz, 1987; Stopford & Wells, 1972) or a clear viewpoint from individual
foreign subsidiaries (e.g., Gupta & Govindarajan, 1991; Ghoshal, 1986; Jarillo &
Martinez, 1990; Roth & Morrison, 1992; Birkinshaw & Hood, 1998). Consequently, what
is missing, I believe, is the intermediate or country-level of analysis to an MNE’s
structure and strategy with a focus on the MNE’s foreign group subsidiary.
The dearth of host-country-level MNE research itself may not be a serious
problem if MNEs conducted their investments only in developed countries. This is so
because most MNEs are actively integrating their activities in Europe or North America,
in a globalization or regionalization process that essentially ignores country boundaries
(Birkinshaw, 2001; Rugman, 2005). The problem comes from the qualitatively different
institutional environment of the emerging markets that MNEs have entered and cannot

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afford to ignore (Delios & Henisz, 2000; Newman, 2000; Peng, 2003; Wan & Hoskisson,

2003). MNEs are often doing the opposite in the developing part of the world by placing
strong country managers in charge of their various foreign subsidiaries in host countries
that are developing countries (Birkinshaw, 2001). As such, a focus on within-host-
country strategy and structure is of vital importance to MNEs that are doing business in
emerging markets. That said, academic research has been slow to catch up to the new,
emerging realities of MNEs’ structure and strategy in emerging markets.
In response, this dissertation seeks to close the notable research gap in the MNE
subsidiary literature by shifting the focus to the totality of an MNE’s foreign subsidiaries
within a single emerging market. Since a fundamental challenge confronting MNEs
entering emerging markets is whether their traditional global strategy can be extended
and adapted with minimal changes to these markets (Hoskisson et al., 2000; Wright et al.,
2005), this research calls for more strategic attention and new business models to be built
on a better understanding of the institutional environment of emerging markets and the
actors embedded in such an environment. Therefore, in this thesis, one of the major
points of departures from existing studies is that by taking an MNE’s entire operations
within an emerging market as a whole, this dissertation can integrate the research on the
strategy and structure of organizations in emerging markets and particularly the literature
on business groups (Chang & Hong, 2000; Guillén, 2000; Khanna & Palepu, 1997; Kock
& Guillén, 2001; Keister, 2000; Mahmood & Mitchell, 2004), with that of the MNE
literature.
The empirical context for this dissertation is Fortune Global 500 corporations’
foreign subsidiaries in China during the twenty-six year period from 1979 through 2005.

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Choosing Fortune Global 500 corporations as the research target is relevant to this
research topic because much of the MNE subsidiary literature has been built on classical
hierarchical viewpoints and modern network perspectives, and is mainly about large
firms (Birkinshaw, 2001; Westney & Zaheer, 2001). In addition to their unquestionably
large firm size and considerable influence in the world economy, these MNEs are from
various countries and operate in different industries, which lends a substantial degree of

generalizability to the empirical findings of this dissertation.
Amongst all possible choices for emerging economy settings, China is an ideal
setting for this dissertation for several compelling reasons. First, among all the emerging
economies, China is the largest, the fastest growing, and the most heavily engaged in
international trade and investment (Child & Tse, 2001). By the end of 2004, China had
attracted a total of 562.1 billion US dollars of inward FDI and approved the establishment
of more than 500,000 foreign-funded enterprises (MOFCOM, 2005). It even passed the
U.S. to become the largest recipient of FDI across the world in 2002 (UNCTAD, 2004).
By 2004 over 400 Fortune Global 500 corporations had conducted their FDIs in China
(MOFCOM, 2005). Given the lack of prior research in this area, a focus on China
appears to be a sensible step towards understanding the more general issue of MNEs’
within-host-country strategy and structure in a single emerging market.
Second, China is an emerging market in which the government preserves an
active involvement in business affairs (Peng, 2000), in which there exists significant
economic fragmentation across different sectors and regions (Huang, 2003), and in which
one of the striking features of the competitive landscape is the ubiquity of local
incumbent business groups (Keister, 2000; Nolan, 2001). Since FDI does not happen in a

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vacuum, these institutional characteristics heighten the importance of a theoretical
consideration of the influence of the political, social, and economic underlay of China’s
emerging economy on MNEs’ strategy and structure (Child & Tse, 2001; Henisz, 2000;
Scott, 1995).
Third, by following a gradualist and protectionist logic, China started its
economic and institutional transition in late 1978, formally reopening its domestic market
to foreign direct investments in 1979 (Child, 1994). The transition in China is also
typical of many emerging markets in terms of scale and substance (Peng, 2003).
Accordingly, the year 1979 serves as a clear starting point for examining MNEs’ within-
China strategy and structure during this transition period. Empirically, in addition to the
sheer scale and diversity of China’s emerging market, one advantage of this research

design of choosing China as the empirical context is that it allows for a longitudinal study
to capture a full history of the FDIs conducted by these world’s largest MNEs in China.
1.2 Research Questions
To explore MNE within-host-country strategy and structure, this dissertation
focuses on MNE’s foreign group subsidiary in the setting of China’s emerging market.
Foreign group subsidiary, as a new type of foreign subsidiary and as an important form of
MNE’s country headquarters, has never been theoretically modeled and empirically in the
literature. Therefore, Essay 1 of this dissertation starts with the underlying reasons that
may account for the adoption of this organizational structure among MNEs in a host
country. The outcome of establishing such a foreign group subsidiary, in terms of an
MNE’s within-host-country diversification strategies, is then addressed in Essay 2. The
strategic roles of the foreign group subsidiary are further elaborated in Essay 3 to link the

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location choice of this subsidiary, a strategic choice faced by multinational firms. The
three research questions are as follows:
1. Why do some MNEs form foreign group subsidiaries?
2. How does the foreign group subsidiary facilitate an MNE’s within-host-country
diversification?
3. What determines the location choice of an MNE’s foreign group subsidiary?
Drawing on institutional theory (DiMaggio & Powell, 1983; Scott, 1995) and
learning theory (Cyert & March, 1963; Huber, 1991), in Essay 1, I argue that the
adoption of an organizational practice such as the establishment of a foreign group
subsidiary is not only a function of the inherent transactional efficiency, but also the
conformity of multiple legitimacy pressures in the institutional context. In particular, I
develop a new framework to present the multiple legitimacy pressures that MNE
subsidiaries are facing in emerging markets by differentiating the isomorphic
mechanisms and discriminating isomorphic origins. I argue that the adoption of a foreign
group subsidiary among MNEs in an emerging market is influenced by the coercive
isomorphism pressures of the MNE’s home country HQ (global parent) as well as host

country policy inducements (local government), and by the mimetic isomorphism
pressures of counterparts in the same industry or coming from the same home country
(global peers) as well as local business group partners (local references). In addition,
this essay classifies the vicarious learning effects of different mimetic models into two
types: strong (local references) versus weak (global peers) role models. With a focus on
an MNE’s local business group partners, this essay highlights the direct and moderating
effect of these strong mimetic role models.

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Essay 2 answers the second research question. Drawing on the insights from
business group research and an institution-based view of diversification (Khanna &
Palepu, 1997; Peng, Lee, & Wang, 2005), I argue that the host country environments of
large emerging markets may well lead to MNEs’ within-host-country diversification,
which, however, will be impeded by regional protectionism and governmental
intervention. Using structuration theory (Giddens, 1983, 1984, 1995) as the conceptual
foundation, I propose that the establishment of an MNE’s foreign group subsidiary can be
conceptualized as its political strategy (Hillman & Wan, 2005), through which the MNE
could improve its cooperative relationships with host governments This political strategy
can further facilitate (i) an MNE’s within-host-country geographic diversification to
overcome regional protectionism; (ii) its product diversity to mitigate governmental
intervention; and (iii) its overall within-host-country diversification to achieve a
transformation from a foreign entrant to a strategic insider. Further, I explore two
moderators (market size and FDI industrial restriction) to highlight the contingent value
of an MNE’s foreign group subsidiary on its within-host-country diversification.
I address the third research question in Essay 3. Drawing on the insights from the
FDI location literature (Zhou, Delios, & Yang, 2002) and MNE subsidiary research
(Birkinshaw, Braunerhjelm, Holm, & Terjesen, 2006), I define an MNE’s foreign group
subsidiary, the MNE’s host country HQ (Chandler, 1991), as having three strategic roles:
corporate ambassador, subsidiaries administrator, and learning center in the host country.
I argue that the location choice of this special subsidiary in an emerging market is

qualitatively different from that of other types of foreign subsidiaries in this host country
– it is a strategic location choice. Focusing on these strategic roles of an MNE’s foreign

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group subsidiary, I examine how this strategic location choice is influenced by the host
country’s FDI industrial restriction, the geographic distance between the locations of the
MNE’s entire within-host-country subsidiaries and the potential location for its group
subsidiary, and the location-specific experience of the potential location. The empirical
setting is the MNEs’ location choices for their group subsidiaries in Beijing and Shanghai,
China’s two most important and metropolitan central cities.
1.3 Contributions
This dissertation makes several important theoretical and empirical contributions.
First, the shift of research attention towards the totality of an MNE’s host country
subsidiaries and the focus on the MNE’s foreign group subsidiary represent a significant
departure from the tradition in this area of research. This is a worthwhile endeavor as
this dissertation is among the first to explore how MNEs organize their foreign activities
within a single emerging market. As such, it extends the MNE subsidiary literature and
serves as an important step toward a better understanding of what determines the
international success or failure of firms, one of the top four fundamental issues in strategy
research (Rumelt, Schendel, & Teece, 1994) and an equally important research question
in international business literature (Peng, 2004).
Second, this dissertation highlights a major opportunity for advancing theories of
corporate strategy in emerging markets. To the best of my knowledge, it is among the
first to link MNE subsidiary research and the domestic business group literature by
tackling the interactions among host country governments, local incumbent groups, and
foreign multinationals. Drawing from the business group literature's strong theoretical
roots in institutional economics and political science, this dissertation sheds light on an

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MNE’s within-host-country strategy and structure in emerging markets. By doing so, this

dissertation elevates the existing MNE subsidiary literature to a more general framework
that deals with various institutional environments and the actors that are embedded in
these contexts (Henisz, 2000; Peng, 2004; Seo & Creed, 2002; Wan & Hoskisson, 2003).
Third, this dissertation is a timely effort as international strategic management
researchers follow MNEs to understand how and why they enter large emerging markets
such as China and India. This shift in research attention and the focus on a single large
emerging market can provide a new analytical framework, from which international
business researchers may be able to revisit and shed new light on many of the classic
issues that have been studied for decades, such as market entry, expatriate management,
organization structures, subsidiary relations, and location choice (Birkinshaw, 2001).
Fourth, one of the major empirical contributions is the data collection and analysis
in this dissertation. The data include the entire population of the Fortune Global 500
firms as well as all of their foreign direct investments across China, as spanning 26 years.
Such a data collection effort also avoids problems of left-censoring which would be
encountered if studying MNE subsidiaries in other national settings. There is no left-
censoring in the data because China did not re-open its doors to foreign investment until
1979 (Pearson, 1991). This richness of the data means I have an extensive geographic and
industrial distribution of foreign investments in China, with almost all provinces and
more than 100 cities having been sites for these FDIs.
In addition to the overall contribution of this dissertation, each of the three essays
makes its own contributions as follows.
In Essay 1, I use institutional theory as the conceptual foundation for the essay,

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from which I extend the oversimplified notion of institutional duality (Kostova & Roth,
2002; Hillman & Wan, 2005; Lu & Xu, 2006) by exploring the multiple sources of
institutional pressures faced by MNEs. Moreover, by differentiating, comparing, and
identifying different vicarious learning effects, this essay can contribute to a better
understanding of interorganizational imitation mechanisms and point to the importance of
exploring the various contingencies that facilitate or impede such interorganizational

imitation processes (Haunschild & Miner, 1997; Miner & Haunschild, 1995). This essay
reports research that is among the first to directly explore MNEs’ reaction to local
business groups in emerging economies. This study serves as an important step toward
completing a picture of the nature of interactions between multinational firms and
business groups (Guillén, 2000; Kock & Guillén, 2001). In this sense, the study also
contributes to business group research, although it does so in an indirect way.
Essay 2 contributes to a cross-disciplinary approach to the study of MNE political
strategy given that the international analysis of political strategy has proceeded hesitantly
(Boddewyn, 1988; Henisz & Delios, 2002; Hillman & Keim, 1995). Building on the
richness of structuration theory in sociology research (Giddens, 1983, 1984, 1995), I
theoretically model the establishment of an MNE’s group subsidiary in an emerging
market as an important part of its political strategy to smooth government relationships
and overcome economic fragmentation. Moreover, this essay makes use of the theoretical
insights from business group studies to inform MNE subsidiary research and hence
contributes to both literatures. It also sheds new light on the MNE-host country
government relationships literature (Dunning, 1993; Luo, 2001).
Essay 3 contributes to the literature on FDI location choice as well as to the MNE

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subsidiary literature. This study provides additional insight on the determinants of FDI
location and complements an important line of research, which calls for the simultaneous
consideration of both macro-level factors such as economic, geographic and institutional
concerns, and micro-level factors such as strategic goals (Dunning, 1993, 1998; Makino,
Lau, & Yeh, 2002), firm heterogeneity (Chung & Alcacer, 2002; Shaver & Flyer, 2000),
and local experience (Henisz & Delios, 2001). This study explicitly proposes an
important and uninvestigated dimension – subsidiary role – in the FDI location criteria
and hence sheds new lights on the FDI location literature. The contribution to MNE
subsidiary literature is from theoretically modeling the strategic roles of an MNE’s
foreign group subsidiary in an emerging market and from bridging MNE subsidiary
studies with the FDI location research.

1.4 Organization of this Dissertation
This chapter provides an overview of the three research questions of this thesis
and it states the major contributions of this dissertation to the MNE subsidiary literature
and to the theoretical development of strategic management, international business, and
organizational research. My literature review of the MNE strategy and structure
literature and MNE subsidiary research is presented in Chapter 2. The three essays
addressing the three research questions are presented respectively in Chapters 3, 4, and 5.
Each of the three essays is presented as a complete empirical and conceptual study, which
could potentially function as a stand alone piece of research. Chapter 6 serves as the final
chapter in which I summarize the findings and present the conclusions of this dissertation.

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CHAPTER 2: LITERATURE REVIEW

2.1 Introduction
Multinational enterprises (MNEs), defined as those corporations that engage in
foreign direct investment (FDI), and own, control or manage value-adding activities in at
least two countries, have become perhaps the most important actors in the world
economy (Dunning, 1993; Caves, 1996). An MNE’s foreign direct investment results in
the creation of an organizational entity, commonly called a foreign subsidiary, in a host
country (the recipient country of the FDI), that is fully or partially controlled by this
multinational enterprise. The study of organizations in international business has focused
almost exclusively on MNEs, and research has paid a growing attention to the strategy
and structure of MNEs and the management of their subsidiaries (e.g., Stopford & Wells,
1972; Hedlund, 1986; Ghoshal & Bartlett, 1990; Gupta & Govindarajan, 1991;
Birkinshaw & Hood, 1998; Caves, 1996).
I start this chapter with a review of the strategy-structure model in the strategic
management literature, to identify the trends in the six major research streams in the
literature on MNE strategy and structure and the MNE subsidiary. I then propose a new
classification drawing from the perspectives that prior research has taken: headquarters

versus subsidiaries. With this attempt to link the broad theoretical perspectives with the
specific phenomenological issues by addressing the core issue, ‘What determines the
international success or failure of firms?’, I further identify the research limitations in
prior studies, including the absence of an intermediate-level perspective (i.e., the totality
of an MNE’s subsidiaries within a single host country), and the missing links to theory
(i.e., FDI theory and institutional perspective) and context (emerging economies).

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2.2 Strategy-Structure Model in Strategic Management Literature
According to the classic strategic management formulation (Chandler, 1962),
strategy and structure are defined in relation to the nature of the threats and opportunities
in the environment. Based on historical studies of large American corporations such as
DuPont, General Motors and Standard Oil of New Jersey (now called Exxon), Chandler
in his classic work, Strategy and Structure, first articulates how firms’ strategic choices
influence the development of their structures and concludes that changes in organization
structure are driven by changes in strategy. Chandler (1962) argues that an effective
product-market diversification strategy requires a decentralized structure, in particular, a
divisionalized structure – the multidivisional (M-form) structure.
The M-form structure has been widely regarded as an innovative response to
coordination and control problems derived from diversification and expansion within
large American corporations in the 1920s (Chandler, 1962). Coordination involves the
flow of information to facilitate subunit decisions that are consistent with each other and
with organizational objectives, while control involves the location of decision-making
rights and rule-making authority within the hierarchy. By focusing on administrative
efficiency, Chandler points out that expansion activities produce new administrative
needs and that the technological, financial, and personnel economies of growth and size
could not be exploited if a new structure is not yet developed to meet these new needs
(Chandler, 1962: 16).
Williamson’s (1975) transaction cost approach is the predominant theory to
explain the rise of the M-form structure in terms of its efficiency characteristics.

Williamson (1975) constructs a general transaction cost theory of the multidivisional

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structure, and extends Chandler's centralized-decentralized approach to structure by
placing additional emphasis on two distinguishing structural characteristics of the M-
form (Williamson, 1975): (1) the responsibility for all operating decisions is assigned to
divisions, and (2) a general office staff is primarily concerned with monitoring division
performance, allocating resources among divisions, and making strategic plans.
Clearly, the Chandler-Williamson framework suggests that the optimal
organizational structure for a firm depends on the circumstances it faces. As such,
contingency theory has risen to be a guiding premise to these issues (Thompson, 1967;
Lawrence & Lorsch, 1967; Galbarith, 1973). A contingency approach advocates the
point that there is no uniformly best structure for all firms in all circumstances. Prior
research has identified three factors that may affect the relative efficiency of different
structures: technology and task interdependence (Thompson, 1967), information
processing and flows (Galbraith, 1973), and the tension between differentiation and
integration (Lawrence & Lorsch, 1967). Having strong theoretical roots in transaction
cost economics and contingency theory as well as its managerial implications, the
strategy-structure model has been popular among many researchers (Dyas & Thanheiser,
1976; Rumelt, 1974).
However, the strategy-structure model has been challenged by recent work in
organizational theory and strategic management (Amburgey & Dacin, 1994; Bartlett &
Ghoshal, 1993). In particular, the causal strategy-structure relationship may be reciprocal
because the Chandler-Williamson framework assumes away the agency problem (Fama,
1980), institutional pressures and transitions (Fligstein, 1985; Fligstein & Dauber, 1989;
Amburgey & Dacin, 1994), and managerial cognition, skills, and competencies