Espacios. Espacios. Vol. 31 (4) 2010. Pág. 10

The Relationship between Subsidiaries’ Initiatives and Subsidiaries’ Roles in Emerging Markets

La relación entre Iniciativas Subsidiarias y funciones Subsidiarias en los mercados emergentes

Felipe Mendes Borini y Moacir de Miranda Oliveira Junior


Hypothesis

Traditional Subsidiaries (TS) in Emerging Economies

According to their roles one may consider two types of Traditional Subsidiaries in Emerging Economies: Implementator and Local Creator.

The Implementator has been those that need to control their resources without any access to critical information. It is a subsidiary that practically neither creates nor transfers innovations. It just acts as a great receptor of knowledge (Gupta and Govindarajan, 1991). The responsibilities of these subsidiaries are limited to the national borders, and do have very restrict autonomy. They are the most dependent of the corporative headquarters (D’Cruz, 1986) or of a Global Center.

In Brazil, the Japanese (Toyota and Honda) and French (Peugeot-Citroen and Renault) assemblers are characterized by a larger centralization of the decisions and innovations in the head office or regional centers; actually, the Brazilian branches just do small adaptations for the local market, and there is a relation of strong subordination and dependence of the subsidiaries from headquarters (Consoni and Quadros, 2003).

They are subsidiaries with little credibility, with low autonomy and interchange communication and mostly controlled by the headquarters; and hence resulting in an absence of competences for non-local creation, and a culture that does not stimulate entrepreneurship.

Local Creators is the other category of Traditional Subsidiaries. Generally speaking they are local market leaders and important revenue generators (Birkinshaw, 1996). They stand out by their focus on the needs of local markets, like the case Unilever's powdered soap in India (Bartlett and Ghoshal, 1998). Their role is strongly influenced by industries that show great variations of consumer needs, coming mostly from cultural, economic and social difference between markets (Herbig, 1998). It is an autonomous kind of subsidiary (Jarillo and Martinez, 1990; D’Cruz, 1986), which develops basically all the activities of the value chain relatively independent from other subsidiaries or headquarters, which may subsidize it due to certain credibility in their decisions, and in facts that brings results for the corporation. However, as the innovation is locally created it may hardly be transferred to other units of the corporative network (Gupta and Govindarajan, 1991).

In Brazil, Unilever's Brilliant stone soap is a typical case. This soap is not in use in developed countries. Its demand in Brazil is mostly due to the low purchasing power of the population and because there is a belief, for cultural reasons, that dirt must be manually removed. The soap eventually gained a new consumer-oriented name “brilliant” and a blue color. Another case is Ala powdered soap; this product is oriented to a very low purchasing power population, mostly located in the Northeast of Brazil (Unilever Brazil, 2001).

Implementators and Local Creators subsidiaries are respectively characterized by center-to-global innovation and local-to-local processes, typical of the Traditional Subsidiaries of the Emerging Economies. In terms of competences creation, the role of these subsidiaries is at most restricted to competences for local market. Hence, inside the corporative network, they are the most susceptible to discontinuance of investments by the headquarters (Birkinshaw and Hood, 1998)

The discontinuance of investments by the headquarters occurs when, for determination of the headquarters, the strategic guidelines and the investments in the subsidiary decrease, causing the loss of the responsibility about certain products, technologies or markets and, in this way, taking the subsidiary to a state of gradual atrophy.

In these cases the strategy of the corporative headquarters is to give preference to more active subsidiaries of its business portfolio. The business portfolio logic tends to prevail, in search of the rationalization of the activities and administrative costs. The decision for investments or discontinuance of investments in certain subsidiary may mean costs reduction or focus on other subsidiary where there is a business opportunity that would help to maximize the overall earnings of the corporation.

These subsidiaries are very exposed to internal competition for resources in the corporate network (Birkinshaw and Lingblad, 2001), and hence depend on the strategic responsibilities of the subsidiaries. A discontinuance of investment process will threaten in a smaller scale those foreign subsidiaries dealing with competences at a larger level. Both Implementators and Local Creators do not have practically any competitive advantage, except in terms of, for example, better access to raw materials, cost of labor work, and consumer market; therefore are the most susceptible to lose investments on the corporate internal competition (Dunning, 1993). These considerations suggest that:

H1a: TS are subsidiaries without strategic relevance, so they do not create initiatives, or when they created are strictly for the local market.

H1b: TS are subsidiaries without strategic relevance, therefore with lower performance compared to other subsidiaries.

The Subsidiaries with Limited Relevance (SRL)

We have the Subsidiaries with Limited Relevance (SRL), which in emerging economies may be subdivided into Global Platforms and Specific Creators.

Typical examples of Global Platforms are the subsidiaries of automobile multinationals companies in Brazil, electro-electronic platforms in Asia and 'maquiladoras’ in Mexico. They are subsidiaries that implement innovations coming from headquarters, but they act mostly integrated with global business, having better possibilities to play a strategic role.

According to Roth and Morrison’s typology (1992), they represent Globally Rationalized Subsidiaries, which are embodied with some international responsibility, but still show dependence regarding decision-making processes. In general, these subsidiaries are responsible for one or more value adding activities of the corporate network, they tend to be highly integrated dependant on the network in terms of material and sales (Jarillo and Martinez, 1990), and are specialized in certain product or process becoming part of the global business of the corporation (D’Cruz, 1986).

Therefore one may observe an initial process of center-to-global, allocating resources and capacities that in the course of time and development of the activities gains larger importance in view of the interdependence relations with other activities of the subsidiaries; this moves the corporation as a whole to become dependent of that activity, rather than the opposite to be true.

As an example at Brazil, one may consider the case of an automobile assembler to decide which of the subsidiaries to install a platform for Completely Knocked Down Production and main components that will be exported for many countries (Consoni and Quadros, 2003). All manufacturing process was developed in the head office, or in some other subsidiary that acts as regional center, and the decision of installing the productive park in the subsidiary X or Y results from factors associated to the competitive context, as well as from the credibility of the subsidiary.

Therefore, Global Platforms result from an attribution of strategic responsibility for the subsidiary conceded by the corporate headquarters. The subsidiary may have some competences, but not enough to guarantee strategic relevance. These competences may be transferred to the subsidiary, if the corporate headquarters finds that the subsidiary is the one that may better shelter these competences. This will, in turn, increase the competences of the subsidiaries, in a process always totally directed and coordinated by the corporative headquarters. Although the subsidiary may have some influence in the process, mostly in reason of its high performance, the development of the competences only initiates after some delegation of strategic relevance made by the corporate headquarters (Birkinshaw and Hood, 1998). The subsidiaries have credibility to gain competences, but not to create them.

The other subgroup of SRL to be considered is the Specific Creators. Typical cases are subsidiaries that accomplish innovations for the local market, which, may be used by other subsidiaries after the product is ready. It is a typical local-to-global process, but with some limitations.

One of the possible problems is the lack of integration, which may lead to duplicate efforts along the network in terms of developing processes for the same purpose, causing needless resources outlay, even though they may be trying to attend demands against the external competition. One of the central issues in this case is that their innovations can only be taken advantage as final products. They are typical cases of subsidiaries’ specific competences (Rugman and Verbeke, 2001; Moore, 2001). Innovations are developed in the subsidiaries, which then could be taken advantage globally, but there is a problem when implementing elsewhere because of lack in the socialization and communication processes. Thus the innovation is only transferred as a final product

Holm and Perdersen (2002) report the case of a director in the R&D area of a French Multinational subsidiary in Denmark, showing how the competences developed in the subsidiaries may be managed to be transferred. Many times a subsidiary has solutions for the problems faced by other subsidiaries and then is called to supply such a solution. Although the problem can be solved, the subsidiary checks only for the immediate resolution of the problem. In the case other problems arise there or elsewhere, they will need this support again. This happens because instead of transferring the competence to solve the problems, the subsidiary transfers only the solution. One of the reasons may be due to the corporate characteristics and the competitive context where the competence was developed (Denmark).

Innovation process of the subsidiaries is developed exclusively by efforts built in the subsidiary. It not necessarily involves the best practices transfer or external benchmarking. For example, it may just consist in an improvement in terms of costs and quality of the internal capacities. Important to notice that, although there is not direct involvement of the head office, the process of reinforcing the competence of the subsidiary allows a better performance with consequent improvement of their results, raising the credibility and visibility of the subsidiary naturally, to the point of preserving the recognition of the head office concerning its strategic relevance.

Usually, the results of these processes are local innovations that reinforce other innovations created in the subsidiaries that have global scope (Moore, 2001; Rugman and Verbeke, 2001). However, it may happen that the whole effort in the developing competences and seeking advantage of new opportunities does not achieve success or helps strategic relevance, which may happen for example if the innovations are not considered as value creators by the corporative head office, or if they are not strategically aligned with the business of the corporation.

Hence, next propositions follow from that:

H2a: SRL are subsidiaries with some strategic relevance that create specific initiatives that guarantee a global competitiveness, but that only may be taken advantage as final products.

H2b: SRL are subsidiaries with some strategic relevance, therefore with performance inferior to SRS, but superior to ST.

Strategically Relevant Subsidiaries (SRS)

Finally, we have the Strategically Relevant Subsidiaries (SRS). The innovation processes for these subsidiaries may be local-to-global or global-to-global. These subsidiaries have a high degree of strategic competences and acts in strategic markets (Bartlett and Ghoshal, 1992). They may have global or regional responsibility for a product line, business area or all the business of determined geographical area, and they are responsible for the management of their own activities independently of the head office (Birkinshaw and Morrinson, 1995).

Relevance may be the result of a local innovation; these are the so called Innovative Subsidiaries. The Brazilian subsidiary of the British multinational FOSECO is a typical example of local to global innovation. FOSECO, whose business is the foundry of ferrous and not ferrous material, have more than 20 subsidiaries around the world. The Brazilian subsidiary developed a foundry process with higher quality and smaller cost, initially aimed to overcome the local competition. However, the excellence of the innovation overcame the expectations of a local innovation, becoming global in the sense of starting on the corporate network elsewhere. Today, the Brazilian subsidiary is one of the four centers of excellence of the corporation, the other centers located in the USA, Germany and Japan (Oliveira Jr et. al, 2008).

The Innovative Subsidiaries attain their roles in a process that demands building up the competences along the time (Hakansson, Waluszewski, 2002). The process demands initiative and entrepreneurship orientation by the subsidiary (Birkinshaw, 1997), and is the result of a continuous effort of the subsidiary in seeking new business opportunities to gain recognition and credibility by the head office, regarding the importance of the competences and business been developed (Birkinshaw, 1997; Birkinshaw and Hood, 1998). This process involves three steps or stages running through the subsidiaries. First, the execution of an initiative developed by the subsidiary in search of new opportunities, in the local or global market, or even inside the multinational corporation (Birkinshaw, 1997). Second, building up and sustaining the necessary significant competences. And finally, the third step is to introduce to the corporative headquarters the competence developed by means of the business opportunity (Birkinshaw, Hood and Jonsson, 1998). Corporate headquarters needs then to agree in leaving the strategic responsibility for the subsidiary, in case that the competence created really provides the sustained value creation for the corporation and guarantees global competitiveness.

Another important group within the SRS is the Integrated Globally, in other words, those that inside the multinational corporation act like the global center for some area of the corporation in the manufacture, R&D, marketing or sales of some products. It does not mean that certain activity needs to be performed only at the subsidiary. The manufacturing activity, for example, may be developed in several subsidiaries, but the strategic decision-making, global responsibility and coordination belongs only to those that are SRS (D’Cruz, 1986). However, differently from an isolated initiative and property of the subsidiary, it’s an integrated, typical initiative of a process of global-to-global innovation.

The subsidiary may develop integrated initiatives that guarantee a larger strategic importance. Such initiatives result not only by having an entrepreneurial orientation by the subsidiaries (Birkinshaw, 1997), but mostly because of the organizational competences development (Fleury and Fleury, 2000). In the case of the automobile industry mentioned before, the recent projects of the GM´s Celtic, and VW´s Fox (project Tupi), both in Brazil, have been developed by means of competences of several subsidiaries having the coordination of the headquarters in the project (Consoni and Quadros, 2003). In the case of the HP, Singapore’s subsidiary was initially responsible for the coordination of subcontracting the equipment production for low cost regions, like China and Southeast Asia, it become globally responsible for the development, production and commercialization of all the products for portable HP such as calculators and palmtops (Frost, Birkinshaw, Ensign, 2002).

Finally, it may happen that an SRS Innovative and Integrated Globally with high strategic relevance, may loose its role because of lack of essential effort to keep up its strategic relevance. In this case, the subsidiary starts losing its competitive capacities progressively (Birkinshaw and Hood, 1998). Many times the process happens without the proper perception of the company. For example: a certain contract that guarantees for earnings of the subsidiary for leading a productive process for a certain number of years leads to conditions where the subsidiary doesn’t need to make an effort to increase that productive process in terms of innovation, quality, costs. Consequently, the competences of the subsidiary tend to become obsolete due to the external competition (other competitive companies) or even internal (subsidiary with the same functions, but better enabled).

This last condition, of internal competition, deserves some highlight. It is crucial that the subsidiary is alert regarding the maintenance of its competences, not only in view of the menace of the competitors, but mostly of the other subsidiaries The atrophy of the strategic relevance may happen even though the subsidiary has accomplished increments in her competitive capacities, but that did not go so significantly to the point of standing in a better position regarding competences of other subsidiaries. This internal competition among subsidiaries is an essential characteristic of multinational organizations that helps strengthen the subsidiary in the local arena. Actually, the subsidiaries of the multinationals manage to build superior competitive advantages in the market, even though the competitors do not demand such effort, since each one needs to develop sustainable competences continuously to keep on its strategic relevance. This discussion leads to the following propositions:

H3a: SRS are the subsidiaries with larger strategic relevance in the corporative network, therefore are subsidiary’s initiatives creators that aggregate value to the corporation.

H3b: SRS are the subsidiaries with larger strategic relevance in the corporative net, with superior performance in relation to most of the others subsidiaries.

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