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How Subsidiaries Can Gain Power in Multinational Corporations

Business units abroad that focus on technology and R&D exert more influence with the home office than those that focus on sales or marketing.

Bottom LineBusiness units abroad that focus on technology and R&D exert more influence with the home office than those that focus on sales or marketing.

The individual business units of sprawling multinational corporations (MNCs) typically struggle to attain real power in corporate decision making. Subsidiaries, among other things, help large firms exploit distant markets through their regional expertise, and can help allay local residents’ concerns about foreign ownership. But beyond such fundamental duties, how can small fish make waves in a huge pond?

According to a new study, subsidiaries can attain widespread influence within an MNC in two ways: by concentrating on either (1) technological prowess (in R&D or production) or (2) business acumen (distribution, logistics, marketing, purchasing, or sales). The rare subsidiary that achieves prominence in both domains can exert significant control over the parent company’s strategic direction, the authors found. But when a subsidiary can put only one foot forward, focusing on technology rather than business gives it much more sway.

No matter their focus, MNCs need their subsidiaries in order to function effectively. MNCs’ headquarters have difficulty replicating their subsidiaries’ business- and technology-based capabilities. Subsidiaries are in a better place to know what kinds of marketing will appeal to local cultures, for example, or what kind of IT knowledge will be needed to compensate for the technological quirks of certain regions.

But even though a subsidiary’s business-related activities may be valuable to the MNC as a whole, subsidiaries that focused only on activities like sales or marketing generally exerted limited, functional influence along their MNC’s value chain, the authors found. They absorbed responsibilities surrendered by other subsidiaries, but they did not affect the MNC’s strategic course.

In contrast, subsidiaries that advanced their innovative strengths and technological aptitude saw their stature flourish within the MNC. They were able to provide input on vital strategic initiatives—acquisitions, mergers, and the establishment of footholds in new markets.

The authors surveyed senior executives at more than 2,100 subsidiaries, in various businesses. Interestingly, they found that a subsidiary’s record of performing well does not itself lead to increased influence. Instead, the extent to which the MNC depends on a subsidiary to deliver required resources or skill sets determines the size of the uptick in the smaller unit’s status.

Managers seeking to increase their subsidiaries’ sway should maintain a considerable level of internal engagement with the MNC’s other businesses, the authors write, and at the same time look for new knowledge sources. Snubbing the corporate setup to search for new capabilities, information, and processes can slowly erode a subsidiary’s relationships with its sister units and result in less attention from the home office.

Therefore, a subsidiary must strike a balance between looking outward for competencies novel to the MNC and networking internally. +

Source: “How Subsidiaries Gain Power in Multinational Corporations,” by Ram Mudambi (Fox School of Business), Torben Pedersen (Copenhagen Business School), and Ulf Andersson (Mälardalen University), Journal of World Business, Jan. 2014, vol. 49, no. 1

Matt Palmquist

Matt Palmquist is a freelance business journalist based in Oakland, Calif.

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