You can divide a Multinational Corporation and its different offices, branches and manufacturing plants into local and global responsibility.
Local responsibility
In each country, the local subsidiary must be responsive to local customers, governments and regulatory agencies for its ongoing institutional legitimacy and economic success. Every single subsidiary must be aware of the local environment, and react to changes.
Global responsibility
There is on the other hand, also a need for a global responsibility, as the main purpose of globalization is acting across borders. There are several reasons as multinational clients, suppliers, competitors and such. These linkages across national boundaries pressure the subsidiaries to coordinate their activities. This task of coordinating activities, is a job for the headquarter of the Multinational corporation.
So there is a local and global responsibility, the first being responsible to changes in the local environment and the second to changes in the larger picture.
Roles are defined and established, next we will look at how the relationship between headquarter and subsidiaries can be managed.
Governance mechanisms
There are three ways of governance; centralization, formalization and normative integration. All three defines different styles of headquarter management, and therefore they are interesting when analyzing the role of the HQ in the past versus today. These governance mechanisms are used when talking about the relationship between headquarters and subsidiaries.
Centralization
When using centralization, the headquarter uses a formal authority and a hierarchical style of management. By doing this, the headquarter are securing that the subsidiaries are controlled in a way that they like. The entire organization is, with this integration, controlled from the top down by a set of strict rules regarding authority and hierarchy.
Formalization
When using formalization, the headquarter are for bureaucratic mechanisms in decision-making situations. This is exemplified by formal systems, established rules and prescribed procedures. As with the centralization, this form for integration is heavily based on headquarter involvement. But opposite of the centralization, the headquarter are involvement due to the large amount of rules creating a bureaucracy with ensures headquarter involvement.
Normative integration
The normative integration is the one of the three governance mechanisms, that is relying in the least amount of direct involvement from the headquarter. Neither do headquarter rely on any impersonal rules, but instead on socialization of managers. This is done, by sharing a set of goals, values and beliefs. These shared elements are to shape managers perspectives and behavior, and by doing this these elements will be throughout the multinational corporation.
The three mentioned governance mechanisms will be used to describe the role of the headquarters, as they are perfect for showing how the headquarter reacts towards subsidiaries (the relationship).
The role in the past
To the examine the role of the headquarter in the past, we will look at the individual elements that are we worked with earlier.
Role
In the past multinational corporations has taken both the local and global responsibility, as they wanted to make sure that they were in control with everything. This was the main thought, that total involvement is the only way to control the multinational corporation. By doing so, having both the local and global responsibility, the headquarter can easily lose focus. It is very hard to have equally focus on the global and local needs, as the headquarter can not be present in every single local market.
Headquarter wanted both the local and global responsibility, and therefore needed a set of governance mechanisms which supports this strategy. These will be looked at in the following.
Governance mechanisms
In the past multinational corporations have relied heavily on centralization and formalization, thus giving the headquarter a major role in the global organization. A strict hierarchy was the norm, with the headquarter at the top of decision making.
By doing this, the corporation more or less neglect local behavior, needs, law and culture. Centralization moves every single important decision to the headquarter, who obviously can not be aware of every single movement in a local market as the local subsidiary is able to. The formalization removes any identity of the local subsidiary and replace it with the identity of the headquarter. This is because of the standardized procedures, which comes from the headquarter, and therefore removes any initiative and impression.
The role now
As when analyzing the role of the headquarter in the past, we will look at the elements to see how the current role is different.
Role
Where the headquarter before wanted both the local and global responsibility, corporations nowadays moves towards the global responsibility and thereby leaves the local responsibility to the local subsidiary. By focusing on the global responsibility only, the headquarter better can react to movements in the global market. Thus letting the local subsidiaries care about movements in the local market. But the corporation does not want to give up power in the decision making, and of course wants the local subsidiaries to act in a way that does not collide with the goals, values and beliefs of the headquarter. Therefore they need a set of governance mechanisms to control that, and that is looked at in the following.
Governance mechanisms
Multinational corporations uses normative integration by ensuring that the values, goals and beliefs of the headquarter is transferred to every single subsidiary. As they only focus on the global responsibility, they leave the local responsibility to their subsidiaries. But still wants these to act in a way to works in favor of the corporation. Therefore they for example socialize their managers, by sharing goals, values and beliefs. By doing this, managers will think and therefore act in accordance to the way of the multinational corporation.
This can be done by for example transferring mangers across national borders, from the headquarter to the subsidiaries.
Headquarter tasks
Not every single task in a multinational corporation can be solved by normative integration. In every single multinational corporation there is still task across national borders that the individual subsidiaries can not handle. The headquarter is the main problem solver in these situations, because there is a need of a part of the organization who can act across national borders and interests. Subsidiaries can not handle this task, as their focus is, and should be, on the local market. If they were to handle these tasks, they would have to change focus, which could harm their effectiveness in the local market. Therefore the headquarter with the overall overview is the right place to handle tasks as the following (examples, not limited to these only).
Logistic
Logistic tasks across the world, is a task for the headquarter. Multinational corporations might, as stated before, buy supplies, produce products and sell these in three different parts of the world. Each subsidiary might be responsible for each local activity, such as buying, producing or selling, and thereby the logistic regarding these local activities. But the overall logistic-planning is a task for the headquarter. As it has to take a list of very important matters when dealing with multiple national cultures, laws and habits.
International Human Resource
Regarding international HR tasks, the headquarter is responsible for taking care of these. In the past corporations where centralized and formalized, and now they heavily rely on normative integration. For this to succeed they need socialization and this is a HR tasks. The transfer of international managers is examined in the following.
Transfer of international managers
For multinational corporations where normative integration is a major governance mechanism, the transfer of international managers is an important area of strategy.
Transferring of an international manager is important for this type of strategy, because normative integration is all about socialization of the manager. After successful socialization the manager will act in accordance with the goals, values and beliefs of the multinational corporation. This socialization, or training, should happen before the transfer to another market.
The training of the international manager is very important, as studies shows that expatriates are very positive towards training before being transferred to another country.
The task of training international managers belongs to the headquarter. The values, goals and beliefs of the entire organization must come from the headquarter. It is also a unique opportunity to socialize the managers. This means that the managers, when they are transferred to another country, they will make decisions in accordance with Headquarter strategy, goals and values. Thereby making the involvement of the headquarter unnecessary in the same amount as if the manager was not trained and socialized.
It is important that the training is aimed at the specific area of the world, as it is very different landing in Northamerica compared to Asia.
The future strategy for multinational corporations’ headquarters
The most important for multinational corporations is going to be constantly able to react to changes. The centralized and formalized corporation is not going to survive in the fierce competition on the world market. The corporation needs to be able to react to even small changes in local markets, this could be changes in demand, laws and economical. For example in 90’s Brazil the government issued a new economic package practically every other year. Take a multinational corporation that is centralized and strictly formalized, and they would have a hard time on the Brazilian market. On the other, take a corporation who relies on normative integration instead who places the responsibility at the local Brazilian subsidiary. They would have a better chance of reacting and fitting the local profile to the changes issued by the government. This means that corporations are going to be more decentralized, and the headquarter strategy slides towards a global view.
Even though cultural differences has been a hot topic for several years, and the centralized and formalized corporations are aware this, they are unable to react to these differences. This is because of the top-down way of decision-making, it is hard to act in accordance with culture and such when you are sitting in another country and are working with strategy world-wide. These kinds of decisions should be made local.
But the technology is also going to have an impact. Already today instant communication is possible, but further developments will without a doubt increase instant decision-making across geographical borders. This might be a temptation to some leaders, as this gives them the opportunity to be present, virtually, in every part of the world. But this is dangerous, as the decentralization is the right way towards a corporation that is able to react and adapt to changes in the global and local market.
Conclusion
The relationship between headquarter and its subsidiaries can be described by governance mechanisms, centralization, formalization and normative integration. These describe how headquarters acts towards the subsidiary and thereby what role headquarters has in the organization.
Previously multinational corporations was very centralized and formalized, thus giving headquarters a very important role in the corporation. The HQ was at the top in decision making, which had the effect that the corporation was not in a condition where it easily can react to changes in local markets.
Corporations are going towards a more normative integration-approach towards headquarters role in the organization.
The main difference between previously and present is that corporations nowadays are more capable of reaction to changes in local markets. Instead of directly making the decision in headquarters, now international managers are trained and socialized with common goals, values and beliefs. This creates an indirect decision making by the headquarter, as they have trained the managers who now makes decision according to local needs and changes.
Corporation will be even more decentralized, thus giving the subsidiaries more responsibility and the ability to react to local changes. Furthermore technology, specifically communication, will move corporations towards the virtual organization. Here decision making can be coordinated across borders, due to instant communication throughout the organization.
Bibliography
Books
The Oxford Handbook of International Business, Rugman & Brewer, 2001.
International Management, Brooke, 1996.
The future of Multinational Enterprise, Buckley & Casson, 2002.
Best practices in International Business, Czinkota & Ronkainen, 2001.
The challenge of International Business, Segal-Horn, 1994.
International Management, Tayeb, 2003.
The virtual organization, Handy, 1995.
Articles
Organizational forms for Multinational corporations, Ghoshal & Nohria, 1993.
A perspective on regional and global strategies (...), Rugman & Verbeke, 2004.
Czinkota & Ronkainen, 2001.
