IBUS90003 Chap.10 Headquarters-Subsidiary Relationships and Control
Headquarters-Subsidiary Relationships and Control
Week 7 argues that the relationship between headquarters and subsidiaries is a critical factor in whether an MNE succeeds or fails abroad. An MNE can be read as a vertical network that internalises stages of the value chain, a horizontal network that internalises several geographic markets, or both, with headquarters orchestrating and subsidiaries contributing their own entrepreneurship and advantages.
Dependence can run mostly one way or both ways, from absorption, where the subsidiary conforms, to reverse dependency, where it sets the terms, with integration combining the strengths of both. Subsidiaries live with two kinds of embeddedness at once: internal ties to the MNE network and external ties to host institutions.
The seminar names three root causes of conflict: pressure to cut costs against pressure to respond locally, home institutional norms against host norms, and ethnocentric headquarters against subsidiaries that need autonomy to iterate. IKEA's adaptation in Saudi Arabia and Google's experience in China illustrate these tensions, the latter showing how a headquarters can override subsidiary knowledge about local users.
Firms often send home-country staff to manage subsidiaries because they know the company and its systems. Control comes through direct and indirect means and four systems, personal, bureaucratic, output and cultural, backed by incentives that can have unintended effects. Performance ambiguity rises with interdependence, from low under localisation to highest under a transnational strategy, raising the cost of control.
The Huawei Canada wildcard asks how much autonomy a subsidiary should have when legitimacy in the host is at stake.
What this chapter covers
- 01
Vertical and horizontal networks inside the MNE
- 02
Absorption, preservation, transformation and integration
- 03
Internal and external embeddedness
- 04
Cost pressure against local responsiveness
- 05
Ethnocentric headquarters and subsidiary autonomy
- 06
Personal, bureaucratic, output and cultural control
- 07
Performance ambiguity and the cost of control
Worked example · free
Resolve a dispute over a subsidiary's product change
- 2Name the tension: this is cost reduction and standardisation at headquarters against the subsidiary's need for local responsiveness and autonomy.
- 3Diagnose the risk: an ethnocentric refusal that ignores local evidence repeats the Google China pattern and can cost the subsidiary its market.
- 3Recommend: allow a time-limited local trial with agreed output measures such as orders and margins, so headquarters keeps control while the subsidiary tests its knowledge.
Key terms
- Internal Embeddedness
- The ties that bind a subsidiary to the rest of the MNE network, its rules, systems and other units.
- External Embeddedness
- The ties that bind a subsidiary to its host country's institutions, customers and business environment.
- Output Control
- Steering a subunit through objective targets for profit, growth, productivity, quality and market share.
- Cultural Control
- Control achieved when employees adopt the firm's norms and values and regulate their own behaviour.
- Reverse Dependency
- The unusual relationship in which a subsidiary depends little on headquarters while headquarters depends heavily on the subsidiary.
Headquarters-Subsidiary Relationships and Control FAQ
Why do headquarters send expatriate managers to subsidiaries?
They may lack knowledge of competent local managers or distrust those available, and staff from the parent already know the systems, reporting lines and corporate culture, which cuts training cost and miscommunication.
What caused Google's difficulties in China according to the seminar?
Beyond institutional constraints, headquarters refused a local product change suggested by Google China's president, despite evidence that Chinese users searched differently, putting global branding ahead of local knowledge.
When does output control work best?
Output control works best when performance ambiguity is low, which happens when subunits are fairly independent, as under a localisation strategy, so results can be traced to each unit.
Should Huawei grant its Canadian subsidiary more autonomy?
The wildcard has no single answer. Greater autonomy could build local legitimacy against negative country-of-origin views, but it risks weaker strategic control, inconsistency and less knowledge flowing across the group.
Exam move
Begin with the network view and the dependence matrix, drawing it from memory and writing one sentence for each position. Then learn the three sources of conflict as pairs of opposing pressures and attach a seminar example to each: cost against responsiveness, home against host norms, and ethnocentric headquarters against autonomy, with Google China as the anchor case.
Memorise the four control systems and practise matching them to the four operating strategies from Chapter 8 through the idea of performance ambiguity, since that link is a likely exam question. Rehearse an answer to the Huawei Canada wildcard that argues both sides and ends with a conditional recommendation, because the same structure works for any autonomy dispute in the exam case.
When you read the case, look for disagreements between headquarters and local managers; the seminar's concluding message is that failures often come from misalignment rather than location alone, and naming that cause is usually what separates a strong answer from a descriptive one.
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