2011 - JMS - Reconceptualizing Barlett and Ghoshal's Classification of National Subsidiary Roles

Re-conceptualizing Bartlett and Ghoshal’sClassification of National Subsidiary Rolesin the Multinational Enterprisejoms_969 253..277

Alan Rugman, Alain Verbeke and Wenlong YuanUniversity of Reading; University of Calgary; University of Lethbridge

abstract We re-conceptualize the Bartlett and Ghoshal typology of national subsidiary rolesin the multinational enterprise (MNE), using a resource bundling perspective. Our view is thatnational subsidiary roles can vary dramatically across value chain activities. We focus on thedistinction among innovation, production, sales, and administrative support activities. For each valuechain activity, the subsidiary bundles sets of internal competences with accessible, external location

advantages. We also address the effects of regional integration on national subsidiary roles. Suchschemes may affect substantially the extent to which location advantages of individualcountries can be accessed and bundled with internal competences, thereby typically alteringsome national subsidiaries’ roles in specific value chain activities. However, such substantivechanges in specific value chain activities performed by national subsidiaries do not necessarilylead to any move in conventional subsidiary role typologies, such as the Bartlett and Ghoshalone, since these typologies only acknowledge aggregate subsidiary role changes, supposedlyvalid for the entire value chain.

INTRODUCTION

Many multinational enterprises (MNEs) now function as differentiated networks, ratherthan as hierarchically run organizations with national subsidiaries that all play similarroles (Nohria and Ghoshal, 1994; Rugman and Verbeke, 2003). It has therefore beenargued that an MNE national subsidiary facing a specific external environment withunique challenges, and commanding an idiosyncratic set of competences, should bemanaged differently from other national subsidiaries. Specifically, MNE corporate man-agement should allocate different charters, and therefore also resources, to differentnational subsidiary types (Bartlett and Ghoshal, 1986, 1989). In addition, a number ofresearchers (Birkinshaw, 1997, 2000; Cantwell and Mudambi, 2005; Paterson andBrock, 2002; Rugman and Verbeke, 2001a; Taggart, 1997a, 1997b, 1998) have arguedthat national subsidiary management may sometimes have considerable latitude to

Address for reprints: Alan Rugman, Henley Business School, University of Reading, Greenlands, Henley-on-Thames, Oxfordshire RG9 3AU, UK ([email protected]).

© 2010 The AuthorsJournal of Management Studies © 2010 Blackwell Publishing Ltd and Society for the Advancement of ManagementStudies. Published by Blackwell Publishing, 9600 Garsington Road, Oxford, OX4 2DQ, UK and 350 Main Street,Malden, MA 02148, USA.

Journal of Management Studies 48:2 March 2011doi: 10.1111/j.1467-6486.2010.00969.x

pursue its own initiatives as it sees fit, thereby driving the subsidiary’s charter enhance-ment. MNE national subsidiaries, conventionally viewed as mere operational instru-ments of their parent companies, have thus emerged as a relevant unit of analysis in theirown right in international strategic management studies (e.g. Birkinshaw, 2000; Davisand Meyer, 2004).

Researchers focusing on the study of national subsidiaries have developed severalsubsidiary role typologies, similar to the categorization of MNEs into distinct types,such as ‘global’, ‘international’, ‘multinational’, and ‘transnational’ firms (Bartlett andGhoshal, 1989). Starting with the early work of White and Poynter (1984), more than adozen original papers developing distinct national subsidiary role classifications havebeen published in refereed journals, or equally credible outlets, during the past 25 years(Bartlett and Ghoshal, 1986; Benito et al., 2003; Birkinshaw and Morrison, 1995;Cantwell and Mudambi, 2005; D’Cruz, 1986; Delany, 2000; Enright and Subramanian,2007; Gupta and Govindarajan, 1991; Hogenbirk and Kranenburg, 2006; Homburget al., 1999; Jarillo and Martinez, 1990; Taggart, 1997a, 1997b, 1998; White andPoynter, 1984). The most influential among the above typologies is undoubtedly the onedeveloped by Bartlett and Ghoshal (1986), mainly because of the success of both theauthors’ bestselling book Managing Across Borders: The Transnational Solution (Bartlett andGhoshal, 1989), which has largely defined the new field of international strategic man-agement, and the related, highly popular textbook with cases (Bartlett et al., 2003, 2007).This view of the MNE as a portfolio of differentiated, but interdependent subsidiariesassumes that the firm commands sets of resources that are distributed geographically.Here, each subsidiary controls part of the firm’s overall resources reservoir. However, theuniqueness of the MNE is that each subsidiary is not just defined by the internalresources it commands, but also by the external resources it can access in specificlocations, a perspective consistent with the modern ‘resource bundling’ theory of theMNE (Hennart, 2009; Meyer et al., 2011, this issue). The idiosyncratic bundling ofinternal and external resources ultimately determines each subsidiary’s role.

The Bartlett and Ghoshal (1986) typology is based on two dimensions: the strategicimportance of the local environment (location advantages), and the competences (firm-specific advantages) held by the national organization, whether transferred from insidethe MNE network or developed/acquired autonomously by the subsidiary itself. Thestrategic importance of the local environment depends on its potential significance tooverall MNE strategy and performance. Markets that are large or particularly sophisti-cated (e.g. technologically advanced), are the most likely to have high strategic impor-tance to an MNE (Meyer et al., 2011). As regards national subsidiary competences,Bartlett and Ghoshal (1986, p. 90) acknowledge that these can be in ‘technology,production, marketing, or any other area’. Building upon these two parameters, Bartlettand Ghoshal (1986) define four generic roles of national subsidiaries (see Figure 1):strategic leader (strong location advantages and competences), implementer (weak loca-tion advantages and competences), contributor (weak location advantages, but strongcompetences), and black hole (strong location advantages, but weak competences).

These roles reflect the functioning of the ‘transnational solution’ (Bartlett et al.,2003): national subsidiaries have diverse but interdependent roles within the MNEnetwork depending upon access to country-specific location advantages and internal

A. Rugman et al.254

© 2010 The AuthorsJournal of Management Studies © 2010 Blackwell Publishing Ltd andSociety for the Advancement of Management Studies

competences, that jointly determine their charter and relative autonomy. Rugman andVerbeke (1992) have provided an internalization theory interpretation of the abovetypology: here, the bundling by each subsidiary of internally held resources with acces-sible external ones is critical to performance. In the case of black hole subsidiaries, nosuch bundling can occur, meaning that the mere location of the subsidiary in a particulargeographic space is insufficient for it to access and utilize the valuable external resourcespresent in that space.

Despite the popularity of the Bartlett and Ghoshal typology and its seemingly generalapplicability, the recent international business literature (e.g. Anand and Delios, 1997;Benito et al., 2003; Bouquet and Birkinshaw, 2008; Kedia and Mukherjee, 2009;Mudambi, 2008) has documented some major changes in the international businessenvironment that suggest the need for further conceptual improvement. First, severalfacilitators of internationalization such as advanced information and communicationstechnology (ICT) and supply chain management now allow (a) easier MNE access to –and bundling of internal resources with – the distinct location advantages of a largernumber of host countries, and (b) improved internal coordination among specializedsubsidiaries. Hence, firms can now more easily fine-slice value chain activities, optimizethe location of specific, narrow activity sets and coordinate these across borders, andde-internalize business functions considered less critical or where bundling is moredifficult (Dicken, 2007; Kedia and Mukherjee, 2009; McLaren, 2000; Mudambi, 2008).Many national subsidiaries therefore specialize in rather narrow activity sets in theMNE’s value chain, where bundling of internal competences with external resources isfeasible and effective, and may thus perform different roles in each value chain activity( Jensen and Pedersen, 2011, this issue). This important point is not recognized in theBartlett and Ghoshal typology shown in Figure 1, which only acknowledges aggregate,

Black hole Strategic leader

Implementer Contributor

Strategic importance of local environment

Competence of local organization

Low High

High

Low

Figure 1. The generic roles of foreign subsidiaries in Bartlett and Ghoshal (1986)

Re-conceptualizing Bartlett and Ghoshal 255

© 2010 The AuthorsJournal of Management Studies © 2010 Blackwell Publishing Ltd and

Society for the Advancement of Management Studies

national subsidiary roles. Thus, the typology does not allow for scenarios whereby, forexample, a particular national subsidiary acts as a strategic leader for sales activities, butis little more than an implementer at the R&D side (or even lacks altogether a role in theinnovation area). This new landscape of fine-sliced value chains calls for a better under-standing of the processes of bundling location advantages in host environments withnational subsidiary internal competences, thereby suggesting that the Bartlett andGhoshal (1986) typology, which only acknowledges aggregate subsidiary roles and asingular bundling process spanning the subsidiary’s entire value chain, may need to berefined.

Second, Bartlett and Ghoshal’s (1986) study, though recognizing the possibility ofchanges in subsidiary roles, in terms of a subsidiary moving from one type to another intheir framework, did not include an in-depth analysis of the influence of environmentalchanges that foster semi-globalization, meaning the importance of geographic areasdifferent from the national level, but below the global level. For example, regionalintegration, which has become increasingly important during the past three decades, andhas reduced the constraints imposed by national borders on international businesstransactions, was largely neglected in Bartlett and Ghoshal’s framework. Regional inte-gration can be defined in terms of ‘the abolition of discrimination between economicunits belonging to different national states’ (Nye, 1968). It therefore reduces ‘institutionaldistance’ among countries (Ghemawat, 2001; Hutzschenreuter et al., 2011, this issue).This typically leads to a strengthening of the competences of some national subsidiaries.These subsidiaries can now more easily access a broader set of location advantagespresent in the region, bundle their internal resource base with these external resources,and leverage the extant set of location advantages across a broader geographic space(Tallman and Chacar, 2011, this issue). Here, substantive changes in a subsidiary’saccessing, bundling, and leveraging location advantages for specific value chain activitiesdo not necessarily translate into a change in aggregate status in Bartlett and Ghoshal’ssubsidiary typology. Examples of increased semi-globalization, aimed at improvedaccessing, bundling, and leveraging location advantages throughout the region includethe formation of the EU (European Union), NAFTA (North American Free TradeAgreement), and ASEAN (Association of Southeast Asian Nations) (Benito et al., 2003).The question we address in the present paper is whether regional integration affects theusefulness of a national subsidiary role classification at the aggregate level (i.e. acrossvalue chain activities), whereby regional integration typically implies that the locationadvantages of any country in the region can now more easily be accessed, bundled withinternal resources, and leveraged throughout the region by MNE subsidiaries operatingin that region.

The remainder of the paper explores the implications of the two omissions above, andsuggests a substantive extension of Bartlett and Ghoshal’s (1986) subsidiary role typology,in order to increase its relevance to future international business research and managerialpractice. In the next section, we discuss what we view as the missing dimension ofboth location advantages and subsidiary competences, namely the requisite value chaindecomposition to determine actual resource bundling and related subsidiary roles,thereby extending Bartlett and Ghoshal’s (1986) subsidiary typology. In the third section,we describe the potential impacts of regional integration on accessing, bundling, and

A. Rugman et al.256


leveraging national location advantages by specific subsidiaries and the impact on theircompetences within the firm. We demonstrate that simply assessing aggregate nationalsubsidiary roles and changes therein, as suggested by Bartlett and Ghoshal’s (1986)typology, may become a rather futile exercise.

AUGMENTING THE BARTLETT AND GHOSHAL (1986) TYPOLOGY:VALUE CHAIN UNBUNDLING

Rationale for Augmenting the Bartlett and Ghoshal (1986) Typology

Bartlett and Ghoshal (1986) based their subsidiary typology on two dimensions: thestrategic importance of the local environment (location advantages), and the compe-tences (firm-specific advantages) held by the local organization. However, as far as thestrategic importance of the local environment is concerned, this typology does not allowdifferentiating among location advantages, and the potential for bundling thereof withinternal resources, in different parts of the value chain. Porter (1985) represents thebest-known decomposition of value chain activities in the strategy field. He distinguishesamong nine activity sets, which we have reclassified into four main sets, thereby allowingmore parsimonious analysis in the remainder of the paper: (1) innovation (technologydevelopment); (2) production (including procurement, inbound logistics, and operations);(3) sales (including outbound logistics, marketing and sales, and service); and (4) adminis-

trative functions (firm infrastructure – including financial and legal services, etc. – andhuman resources management).

The MNE subsidiary’s role in innovation is largely determined by location advantagesin a variety of input markets providing critical external resources to R&D. In contrast,location advantages at the output market side in terms of high or sophisticated demandfor end products, as well as local market knowledge and transferable general marketknowledge that is accessible through external contracting, will largely determine thesubsidiary’s role in sales. For example, in ‘lead markets’ with sophisticated customers andcompetitors, where new global trends are known to emerge, the MNE may locate a‘listening post’ subsidiary to enhance its company-wide marketing skills (Mudambi andNavarra, 2004; Porter, 1990, 1998), thereby reflecting a subsidiary leadership role in avery narrow subset of the sales activities, with shallow resource bundling.

Production has conventionally been tied closely, in terms of co-location, to eitherinnovation or sales but the recent off-shoring wave suggests that these activities can nowoften be physically entirely separated from both, as with Apple products designed inCalifornia, and sold primarily in highly developed markets, but assembled in Taiwan.Finally, many critical administrative functions were in the past either concentrated in thehome country, as an expression of the MNE’s administrative heritage – closely alignedwith its home country location advantages – or largely decentralized to allow nationalresponsiveness and improved bundling of internal resources with host country locationadvantages.

In the context of fine slicing value chains, the strength of any single country’slocation advantages and the opportunities for bundling these with internal resources,may be very different for each of the above value chain activity sets. It may therefore




be inappropriate to assess the strength of a country’s location advantages, and asubsidiary’s opportunities for bundling these with internal resources, through a single,aggregate assessment that does not recognize differences across value chain activity sets.A similar comment holds when evaluating the subsidiary competences themselves: theseshould not be assessed in aggregate terms only, without differentiating among variousvalue chain components.

Mainstream international business theory has a long tradition of distinguishing amongvarious types of location advantages. For example, the internalization/eclectic paradigmview of the MNE (Buckley and Casson, 1976; Dunning, 1988; Rugman, 1981, 1999)explains how location advantages reflect the relative attractiveness of alternative FDIrecipient countries, and determine where firms will invest. The four major FDI types,namely natural resource seeking, market seeking, efficiency seeking, and strategic assetseeking (Dunning, 1993), are each associated with specific subsidiary types, set up tobundle idiosyncratic internal competences with particular location advantages.

Natural resource seeking FDI leads to developing subsidiaries whose primary purposeis tapping into host country location advantages in the production sphere with a focus onsourcing. In contrast, market-seeking FDI focuses on accessing location advantages at theoutput side, thereby fostering sales. Efficiency seeking FDI, geared towards rationalizingexisting foreign operations and concentrating activities in a smaller number of locations,usually emphasizes one value chain activity. Such rationalizing may therefore takevarious forms – centralizing R&D in the innovation sphere; streamlining componentsupply in production; closing local distribution centres at the sales side; or amalgamatinghead office activities at a higher geographic level for the administrative function – in eachcase improving the efficient bundling of internal competences and external resources.

Finally, the main driver of strategic asset seeking FDI is usually the presence ofsophisticated assets and skills critical to one particular value chain activity set, often in therealm of innovation, though this may include more than conventional R&D. FDI of thistype sometimes takes the form of a merger or acquisition to allow bundling, since thecoveted assets and skills are often tightly held by companies, though generally availablelocation-advantages may have been critical to developing these proprietary assets andskills. One example is the Silicon-Valley-type, generally available dense pool of scientistswith advanced research and engineering knowledge present in local technology clusters(Verbeke, 2009).

Irrespective of specific FDI motivations, most MNE subsidiary operations do performa number of administrative functions such as human resources management. However,some locations such as cosmopolitan cities appear particularly attractive for establishingkey administrative functions – often referred too as ‘head office’ activities (Sassen, 2001).The general point we try to make here is that the strength of location advantages and theopportunities for bundling these with internal competences should be assessed separatelyfor each part of the value chain targeted.[1]

An analysis similar to the one above can be performed starting from the subsidiary

competences. Macro-environmental changes such as advances in physical transport possi-bilities and ICT have reduced the cost of coordinating cross-border activities, therebysometimes decreasing the need for internalization, but mostly allowing a more fine-grained allocation of value chain activities to optimal locations (Kedia and Mukherjee,

A. Rugman et al.258


2009). This spatial disaggregation of the value chain implies the presence of specializedsubsidiary competences in narrow activity sets rather than general competences coveringthe entire value chain. Such specialization and narrowing of subsidiary competences hasdistinct effects on subsidiary roles. For example, Bouquet and Birkinshaw (2008) havesuggested that sales-related competences at the subsidiary level tend to be localized andare often viewed as relatively unimportant by the MNE head office. In contrast, the headoffice mostly does attend to subsidiary initiatives if the relevant subsidiary competencesinvolve innovation activities and related bundling processes with external resources.

The above analysis suggests the relevance of augmenting explicitly the Bartlett andGhoshal (1986) typology by disaggregating subsidiary roles along key value chain activi-ties. One implication is that a subsidiary may face extreme localization and have strongcompetences in one part of the value chain, e.g. in the realm of sales activities, while atthe same time experiencing extreme globalization, and a lack of competences relative toother affiliates, e.g. in the realm of innovation (Mudambi, 2008). In fact, innovation activitiesmay even be absent if opportunities for bundling with external resources are lacking.

In terms of location advantages, an MNE may view North America and Europecritically important as loci for innovation, sales, and administrative functions, even in theabsence of significant advantages as loci for production. This same MNE may be heavilyreliant on Asian countries such as China or India for such production, even if it has onlya limited presence there as regards the other value chain activity sets. The point is thatpositioning subsidiaries on the location advantages (vertical) axis of the Bartlett andGhoshal (1986) matrix may lead to very different outcomes depending upon whetherlocation advantages related to innovation, production, sales, or administrative support areconsidered.

Subsidiary competences can be location-bound or non-location-bound (Rugman andVerbeke, 2001b). Non-location-bound competences can be transferred relatively easilyacross borders and do not need to be adapted to local market specificities, i.e. bundlingoccurs naturally. Production competences are usually less location-bound and moredeployable across geographic space than, for instance, sales competences, and a subsid-iary usually needs substantial time to develop the latter competences in a specific locationand to become an insider through intricate resource bundling processes (e.g. Anand andDelios, 1997; Johanson and Vahlne, 2009; Rugman and Verbeke, 2004). Thus, relativelyeasy transferability of production competences among subsidiaries, and the related bun-dling with external resources, is more likely to lead to intra-firm competition amongsubsidiaries to capture more important charters in the MNE than for the other activitysets (Birkinshaw and Lingblad, 2005; Cerrato, 2006; Fong et al., 2007). However, itshould be recognized that some sales competences may also be non-location bound,such as knowledge on how to perform market research, routines allowing efficientdistribution, etc.

An Extension of the Bartlett and Ghoshal (1986) Typology

To capture fully the significance of distinguishing between location advantages andsubsidiary competences in the realm of different value chain activity sets, Bartlett andGhoshal’s (1986) typology can be extended, as visualized in Figure 2a. As noted above,




the original typology (Bartlett and Ghoshal, 1986; Rugman and Verbeke, 1992) assumedthat aggregate subsidiary roles can be determined, whereby national subsidiaries wouldcover the entire value chain and would occupy the same role throughout the chain(e.g. strategic leadership of Philip’s UK subsidiary versus implementer status of P&G’ssubsidiaries in Australia, Belgium, the Netherlands, and Spain). Ultimately, Bartlettand Ghoshal applied their framework primarily to the context of sales-related locationadvantages and subsidiary competences at the national level as the critical conditions forsuccess – in spite of some elements in the 1986 article describing the other value chainfunctions.

Value chain

(a)

(b)

activities

Subsidiary roles in Bartlett and Ghoshal (1986)

Innovation

Production

Sales

Administrativesupport

Black hole Implementer Strategic leader Contributor

Value chain activities

Subsidiary roles in Bartlett and Ghoshal (1986)

Innovation

Production

Sales


Black hole Implementer Strategic leader Contributor

SGS-Thomson in China

Levi Strauss in North America

Roche in the US Roche in the US

Blank (no role in production)

HSBC in Britain

Main Japanese auto makers in the US




Blank (no role in administrative support)

Figure 2. (a) Unbundling subsidiary roles by Bartlett and Ghoshal (1986). (b) Unbundling subsidiary roles byBartlett and Ghoshal (1986): five examples

A. Rugman et al.260


In reality, Bartlett and Ghoshal’s subsidiary roles at the sales side are mirroredby equivalent but often completely different subsidiary roles for innovation, production, andadministrative functions, as shown in Figure 2a. On the horizontal axis of Figure 2a wehave positioned the four original subsidiary roles, namely black hole (column 1), imple-

menter (column 2), strategic leader (column 3), and contributor (column 4), respectively. Thefour columns are the equivalent of the four cells in Figure 1. However, the vertical axisof Figure 2a makes a distinction among the value chain activities discussed above,namely innovation, production, sales, and administrative support activities. Figure 2a suggeststhat a single subsidiary might indeed perform the same role across all four value chainactivities, as assumed in Figure 1. For example, a large, home base operation may bea strategic leader for each row of Figure 2a, i.e. for each value chain activity, andtherefore fill the entire third column of this figure. Similarly, a miniature replica set upto overcome trade barriers might be an implementer for each value chain activity,thereby filling the entire second column of the figure. However, the more common casemay well be some divergence in roles. A typical market-seeking subsidiary in a largehost economy may lack any innovation activity, meaning that the innovation row wouldremain blank. This is a typical occurrence for ‘isolated’ subsidiaries, i.e. affiliates thatexperience few, if any, intra-firm knowledge inflows or outflows (Monteiro et al., 2008),and have few internal competences that could be usefully bundled with externalresources. Such subsidiaries would typically also be implementers for production and admin-

istrative activities, but might be strategic leaders in sales. In the extreme case, the subsidiarymay perform only one value added activity (meaning three blank rows), ranging frombeing a centre of excellence (e.g. a strategic leader in innovation in the form of a high techlab embedded in a localized research cluster) to having a mere operational functionin a national market (e.g. an implementer in sales such as operating a distribution centrein a small national market).

Even though Figure 2a represents only a stylized and simplified representation ofreality, the general implication is that a single subsidiary may perform several Bartlettand Ghoshal roles, depending upon the value chain activity considered. The managerialrelevance of Figure 2, is demonstrated by Cantwell and Mudambi’s (2005) insightfultypology of MNE subsidiaries. This typology focused primarily on the development ofinnovation competences. In their framework, competence-creating subsidiaries sourcetechnological knowledge locally and focus primarily on complex resource bundling in thecontext of sticky technologies. They represent strategic leaders for innovation in Figure 2a. Incontrast, competence-exploiting subsidiaries largely source slippery technology from theirparents, and thus represent implementers for innovation with only limited needs to accessexternal resources in Figure 2a. These two types of subsidiaries are thus fundamentallydifferent in the innovation sphere, but may be very similar as far as the other activity typesare concerned.

When assessing the role of a subsidiary, it is thus important to investigate separatelythe strategic importance of its local environment in terms of location advantages for eachvalue chain activity set, as well as the subsidiary’s competences in each activity set. Thecritical point is that the location advantages instrumental to foreign subsidiary creationand development through resource bundling are unlikely to be identical for all four valuechain activity sets in any given country. The same comment holds for subsidiary




competences themselves. As a result, a single subsidiary may perform various rolessimultaneously, depending upon the value chain activity considered.

Even within a single value chain activity, the processes of bundling location advan-tages and subsidiary competences that ultimately determine the subsidiary’s role may besubtle and complex. In Figure 2b we visualize a number of case examples making thispoint. First, the examples of SGS-Thomson and Roche demonstrate that subsidiariescan take on idiosyncratic roles in individual value chain activities. Second, the examplesof Levi Strauss and HSBC illustrate the dynamics of subsidiary roles in a single valuechain activity in a location, with a focus on resulting ‘blank’ cells, a scenario neglectedby Bartlett and Ghoshal (1986). Third, the example of the Japanese automobile manu-facturers in the United States suggests the importance of linkages among value chainactivities.

First, consider the case of a subsidiary with weak production competences, but located ina strategically important market as far as production is concerned, and therefore positionedas a black hole for production in Figure 2b since no resource bundling opportunities exist.Why would this subsidiary be categorized as a black hole for production? One example is thecase of SGS-Thomson in China. When SGS-Thomson opened its Shenzhen factory, itsfirst one in China in 1996, the expectation was that production costs would be very low.Unfortunately, the lower salaries at this plant as compared to the salaries received by thesame workers when they were trained in Malaysia led to a strike, which embarrassed thelocal government. As a result, the local government in China required that the planthouse and feed its 600 workers, and provide increased salaries. Expecting initially tobenefit from lower wages, SGS-Thomson ultimately found ‘the unit cost for chips outof the Shenzhen plant was about 10 per cent higher than the cost at its Malaysiancounterpart’ (The Economist, 1998, p. 60), though it noted that ‘100 km from here (inGuangdong province) the costs are 40% less’ (The Economist, 1998, p. 61). The above isone example of a firm-level failure to benefit from allegedly ‘generally available’ locationadvantages in production in a low-cost country such as China, due to poor managementof local relational networks. In this case, the MNE was unable to access the relevantnational location advantages it needed and to bundle these with its internal resources,because it did not invest sufficiently in location-bound competences, or at least didnot spend wisely in this area, and this prevented the subsequent exploitation andleveraging of company-wide competences. The outcome was a black hole subsidiary forproduction, structurally unable to access and utilize optimally China’s location advantagesin manufacturing.

As another example, but this time in the innovation sphere, in the 1980s the Swisspharmaceutical giant Roche was not ‘very successful in recombinant technology in theUnited States’ (Teece, 1992, p. 91), even with its operating labs in New Jersey because itcould not access the local knowledge embedded in local firms and their privilegedrelational networks, with few biotech scientists prepared to move to ‘big pharma’ so as toallow the requisite resource bundling. This weak technological position of Roche inbiotech in the United States resulted in this MNE purchasing in 1990 a major share inGenentech, the leading US biotech firm, as acquiring US biotech firms was ‘the cheapestway . . . to catch up’ (Teece, 1992, p. 94). Thus, Roche’s US operations in the 1980swere originally a black hole for innovation, characterized by weak innovation competences in

A. Rugman et al.262


this industry’s lead country for technology development, but a focused acquisition movehelped the firm to position at least some American operations as a strategic leader forinnovation (Zeller, 2004).

Second, from a dynamic perspective, subsidiaries in the black hole position for any valuechain activity set may still want to upgrade their competences through learning how toaccess host country location advantages and how to bundle these with their internalresources, so as to bolster their own competitiveness. Although it makes sense to locatesubsidiaries in strategically important markets, prior research suggests that MNEs mayneed to accumulate sufficient experience in the host country to gain full access to thiscountry’s location advantages and to achieve resource bundling. For example, in theinnovation sphere, the subsidiary must assimilate new technologies (e.g. Cantwell andMudambi, 2005; Chetty et al., 2006). In this context, MNEs often appear to prefermergers, acquisitions, or strategic alliances (rather than greenfield investment) to facili-tate the resource bundling process in strategically important markets (Dunning andLundan, 1998).

Pursuing further this dynamic perspective, Figure 2b can accommodate the situationwhereby a subsidiary performs a value chain activity in a location viewed relativelyunimportant to MNE competitiveness, and whereby the subsidiary’s distinct compe-tences in this activity set are also weak, so that little opportunity exists for creativeresource bundling. The long-run outcome may be that such activity will be relocatedinside the MNE network, leading to a ‘blank’ for that activity in Figure 2b, a commonscenario not considered in Bartlett and Ghoshal’s (1989) aggregate assessment. Forexample, in the production sphere the shutdown of all the manufacturing factories in NorthAmerica by Levi Strauss & Co. represented the desire to move these high cost production

activities to other countries, but this did not hold for the other value chain activities suchas sales (Levi, 2003). Viewing ‘ownership and operation of North American and Euro-pean manufacturing plants in an environment of increased outsourcing of manufacturingto lower-cost countries and continuing apparel price deflation’ (Levi, 2004, p. 4) as oneof the major reasons of declining profits, Levi had initiated extensive restructuring of itsproduction activities as early as 1997. Between 1997 and 2004, it ‘closed 42 owned-and-operated manufacturing plants in North America and Europe’. Levi’s managementstated that this approach ‘shifted the vast majority of our production to independentcontract manufacturers to enable us to reduce our cost of goods and maintain a morevariable cost structure’ (Levi, 2004, p. 5). As a result, in 2004, Levi sourced approxi-mately 50.3 per cent of total production from its contractors in South and CentralAmerica, and 32 per cent from Asia, though the North American region (including theUSA, Canada, and Mexico); Europe accounted for 59.6 and 25.6 per cent, respectively,of total sales (Levi, 2005). By late 2005, Levi only operated five manufacturing plants,with two in Europe (Hungary and Poland), two in Asia, and one in South Africa(Levi, 2006). For Levi, production in North America had become a deterrent to its overallcompetitiveness.

Another example, but in the realm of the administrative function, is the transfer oflogistics, technology support, and data centres from Britain to Asia, specifically tomainland China and India by HSBC Banking Group, thereby reducing the overallservice costs and improving overall competitiveness.




In the above Levi and HSBC cases, the United States and the United Kingdom wereno longer viewed as strategically important countries for the production and administrative

functions, respectively, thereby triggering a change in activity location and a ‘blank’ onthese two rows of Figure 2b, given the lack of sufficiently strong, compensating strengthsheld by the local affiliates.

Third, in contrast to the above examples, many foreign MNE activities in NorthAmerica can now be positioned as contributors for production, reflecting a host countryenvironment that does not aid MNE competitiveness at the production side (weak oppor-tunities for creative resource bundling). Here, production related competences held bythe MNE affiliates themselves, such as proprietary manufacturing systems and highlyefficient international sourcing compensate for this deficiency. This situation is illus-trated by the case of the main Japanese automobile manufacturers in the UnitedStates. The United States do not complement these firms’ subsidiary-level competenceswith strong US-based location advantages for innovation, production, and administrative

functions, but US operations have still been able to stay competitive at the production endthrough the (partial) transfer to the United States of Japanese Keiretsu-style manage-ment and modular production methods, as well as the use of transplanted Japanesesuppliers, whereas most innovation and key administrative activities have remained in thehome country (‘blank’ position for those activities in the United States in Figure 2b)(Collinson and Rugman, 2008; Rugman and Collinson, 2004). This case also illustratesthe potential importance of linkages between subsidiary roles for various value chainactivity sets. In Figure 2b, the Japanese subsidiaries in the United States are largelycontributors rather than strategic leaders for production. They benefit from the transfer ofcompetences developed in Japan in this area, and may further develop those, but theyoperate in an environment with relative location disadvantages in the United States(as compared to Japan), providing little opportunity for resource bundling. However,for the sake of sales, it is critically important also to produce automobiles in the UnitedStates, and to be an insider there, rather than an outsider, far from the Americanconsumer, and faced with the danger of rising trade protectionism. Thus, in this casea strategically unimportant market in terms of location advantages for innovation,production, and administrative functions is combined with a strategically important onefor sales, and the Japanese subsidiaries involved hold both strong production and sales

competences. The outcome is that they are strategic leaders for sales, contributors forproduction, and largely absent or performing the role of implementer for innovation andadministrative functions.

It is apparent from introducing the distinction among four value chain activity sets inthe discussion of national subsidiary roles that defining such roles in an aggregate fashionthrough the use of the two Bartlett and Ghoshal (1986) dimensions is problematic. Thereis a need to decompose subsidiary roles for each value chain component. The lack of suchdecomposition may lead to a severe misunderstanding as to the actual roles of nationalsubsidiaries in the MNE’s internal network. This is especially critical in the contextof so-called strategic leader subsidiaries, which, according to Bartlett and Ghoshal (1986),are supposed to embody the MNE’s core assets and capabilities, and are expected tocapitalize on resource bundling opportunities, but may in fact hold that position forparticular value chain activity sets only, and not for the entire value chain.

A. Rugman et al.264


REGIONAL INTEGRATION AS A DETERMINANT OFSUBSIDIARY ROLES

Asymmetrical Impacts of Regional Integration

McCann and Mudambi’s (2005) and Rugman and Verbeke’s (2009) analyses of the neweconomic geography of MNE location behaviour suggest the importance of both thesub-national and regional aspects of location, i.e. geographic levels beyond that of theindividual country. Regional integration in the form of trade and investment liberaliza-tion within a geographic area spanning at least two countries has been found to affectMNE activities at the level of both new investment in the region and the reallocation ofextant value chain activities in the region. For example, Hogenbirk and van Kranenburg(2006) found that 25 per cent of foreign owned subsidiaries in the Dutch electronics andelectrical appliances industry are actually regionally product-mandated hubs andanother 24 per cent act as export platforms (as regards the remainder, 43 per cent aresingle activity satellites and 8 per cent are miniature replicas). The regional product hubsand export platforms were generally established after the Single European Act came intoeffect, suggesting that macro-level regionalization led to altered national subsidiary rolesin production, with some national subsidiaries increasing their geographic scope to theentire European region.

The widely held and most feared prediction regarding regionalization in the form oftrade and investment liberalization – though usually wrong – is that lowering long-established tariffs would lead to the elimination of the production role of national subsid-iaries and the related manufacturing jobs in the smaller countries in the region, e.g.Canada in the NAFTA context. As smaller miniature replica plants (lacking innovation

capability) set up in Canada and performing a variety of production, sales, and administrative

support functions were less efficient at the outset than larger factories in the UnitedStates, benefiting from scale economies and lower labour costs, the expectation is thatMNEs would transfer these activities to lower-cost plants in the United States andabroad. The reality is of course that MNEs do rethink their extant portfolio of valuechain activities within the region as a consequence of regional trade and investmentliberalization, seeking to access the location advantages of the most attractive countriesor areas within the trading and investment bloc, and to bundle these external resourceswith internal competences in order to maximize efficiency. This line of reasoning sug-gests that MNEs would retain but rationalize their operations in the region with theextant roles of many national subsidiaries in production and administrative support functionsbeing affected. In practice, this may mean that subsidiaries would manufacture orassemble final products from core components designed and produced in one or a fewcore locations (Cohen and Zysman, 1987), i.e. maintain only a part of the previously heldproduction and administrative support mandates. In contrast, at the sales end, local subsid-iaries would continue to market and actually sell more products manufactured andimported from abroad (McFetridge, 1989). In this context, Buckley et al. (2003) alsopoint out, in accordance with Rugman (1990), that ‘even if protectionism were the initialimpetus to FDI, MNEs accrue intangible benefits from operating in host markets overtime, which confer advantages on foreign-owned firms, fuelling future competitiveness,and expansion of their operations in the host country’ (Buckley et al., 2003, p. 855).




The extant literature on the impact of regional integration on trade, FDI, and nationalsubsidiary roles – though insightful – has largely neglected the potential asymmetricalimpact on various value chain activities. MNEs are typically assumed to pursue ahomogeneous rationalization strategy across the value chain, but mainly focused onproduction, as their response to macro-level, regional integration. In addition, the main-stream literature on subsidiary role changes has evaluated the effects of corporate roleassignment, subsidiary choice, and external environmental characteristics, with muchattention paid to the first two sets of variables but relatively little to the third, especiallyas regards bundling opportunities of location advantages with internal resources. Evenwhen environmental characteristics have been considered, researchers have tended tolimit themselves to parameters such as local competition at the level of single country(Birkinshaw et al., 1998). Meyer et al. (2009) have called for the study of direct linkagesbetween macro-level institutional environments and firm strategies, but we shouldrecognize that broader environmental factors, especially regional integration schemes –though key external drivers of strategic change in the MNE – have been underempha-sized and occupy only a minor position in traditional conceptual frameworks on MNEstrategy (Rugman, 2000, 2005).

When studying MNE responses to regional integration, it is important to acknowledgeits possible asymmetrical impact on the variety of location advantages accessed andbundled with internal resources in individual countries per value chain activity. This is inline with McCann and Mudambi’s (2004) insight that both changes in supply side(i.e. primarily innovation and production related) and demand side (i.e. sales related) envi-ronmental parameters affect MNE managerial practices, including decisions to havenational subsidiaries play a particular role for specific value chain activities. Here, supplyside forces affect directly the scope and direction of technological knowledge flows – andthe usage thereof – inside the MNE, whereas demand considerations impose a particularlevel of customization at the sales end.

None of these changes is necessarily associated with a formal subsidiary role change inBartlett and Ghoshal’s subsidiary portfolio framework if national location advantagesand subsidiary competences at the sales side (often with some co-located production) remainlargely unaltered. Even with unaltered, aggregate subsidiary roles in the Bartlett andGhoshal matrix (Figure 1), because of these sales activities, the real-world challenge is todetermine exactly which national subsidiaries will see their activity scope increasedversus reduced, in other activities than sales. Such change in activity scope will occur asa result of better access to the location advantages of the most attractive geographicplaces, and better bundling opportunities thereof with internal resources, for the threeother value chain activities in the more integrated regional market.

This does not necessarily imply one or a few winners and many losers as an outcomeof regional integration. As long as national subsidiary competences at the sales end arefungible in the sense that they ‘could potentially be applied to a large number ofemerging opportunities’ (Birkinshaw and Lingblad, 2005, p. 682), the subsidiary mayactively search for new output markets, even if losing other value chain activities,relocated to other subsidiaries in the region that can now better access stronger locationadvantages and bundle these with their own resources. Many subsidiary competences atthe sales end are location-bound, and the activities associated with them will still need to

A. Rugman et al.266


be performed locally. For example, sales activities for branded consumer goods usuallyrequire proximity to customers, and therefore the potential for regional integration at thefirm level for sales activities may be limited.

In addition, multinational managers’ cognitive understanding of the significance ofregional integration must be taken into account. The MNE managers’ cognition repre-sents an often-neglected factor when discussing the impact of regionalization on subsid-iary roles. Multinational managers’ perceptions of the significance of regional integrationfor location advantages and subsidiary competences held in different countries maymoderate actual effects on subsidiary role dynamics to the extent that these depend onhead office decisions. A key element in managers’ cognitive understanding is whetherthey perceive macro-level, regional integration primarily as a risk, with a change instrategy likely associated with losses, or rather as an opportunity, whereby a change instrategy might lead to high benefits. In the former case, risk aversion prevails, withexpected losses looming larger than gains, whereas in the latter, risk taking is chosen asthe preferred mode of operation to capitalize on new opportunities; see Chrisman et al.(2011) for an in-depth analysis of the impact of cognitive elements on established firms’strategies. For example, Stopford and Baden-Fuller (1987) investigated the variety ofbehaviours of European appliances producers in their home region. In the production

sphere, the Italian firms engaged in an opportunity-driven, export-based strategy fromcentral production hubs because they believed that the European market was becomingmore integrated. In contrast, most British producers were more risk averse. Theybelieved that turbulence in demand, non-tariff trade barriers, and a focused strategywould protect domestic market niches, and they therefore did not pursue a centralized,export-based strategy, but rather decided to keep production and sales activities co-locatedin various European countries.

Such perceptions of regional integration also affected Japanese manufacturing invest-ment in Europe (Hood and Young, 1987, p. 199). The late Japanese entrants engaged ina risk-taking strategy. They established production and sales operations geared towardsserving the future, single European market, i.e. they consciously avoided a multi-domestic approach, and set up subsidiaries with strong sales competences, mainly in leadmarkets, and anticipating further regional integration at the macro-level. However, theinnovation and key administrative functions conventionally assumed to be part of the role ofstrategic leader in the Bartlett and Ghoshal portfolio matrix, remained entirely absent inthese strategic leader subsidiaries for production and sales in Europe, whereby risk aversion ledto the continued centralization of these activities in Japan.

Finally, the expected effects, in terms of perceived risks versus opportunities, ofdeploying subsidiary competences is also likely to affect changes in subsidiary roles afterregional integration. Here, the corporate head office, subsidiary management, andmanagement in other affiliates assess these competences in terms of expected net con-tribution to resource bundling and subsequent subsidiary performance. If a subsidiary is‘isolated’ (Monteiro et al., 2008), meaning that both the self-rating of its competences andthe rating thereof by others are low – thereby implicitly suggesting that any attempts atnew, creative resource bundling are risky – the subsidiary is more likely to become thevictim of risk averse behaviour. This means it may be shut down or lose activity sets if arationalization effort is undertaken after regional integration.




Regional Integration Schemes and Activity-Specific Changes inSubsidiary Roles

The idiosyncratic impact of regional integration on national location advantages andnational subsidiary competences for each value chain activity and the moderating effectof multinational managers’ cognition of regional integration effects, has led MNEs torespond to regional integration in a variety of ways. We identified six common patternsof changes in national subsidiary roles brought about by regional integration schemesand related changes in access to national location advantages and the bundling thereofwith internal resources. Even though other patterns of change are conceivable, the keyinsight gained is that the value chain activity considered indeed does matter in three ofthe six patterns, and that substantive changes in subsidiary roles cannot be captured bysimple, aggregate moves in the Bartlett and Ghoshal portfolio matrix from one quadrantof the matrix (such as implementer) to another quadrant (such as strategic leader): manyimportant changes in subsidiary activities appear to be unrelated to formal role changesin terms of the Bartlett and Ghoshal typology (see Figure 3).

The main source of substantive shifts in subsidiary roles because of regional inte-gration is changes in national location advantages vis-à-vis other nations in the region(Rugman, 1990). Hence, we assess on the horizontal axis of Figure 3, whether anystrengthening or weakening or a status quo can be observed of location advantages

Weakening Status quo Strengthening

Changes in national subsidiaries’ location

advantages after regional integration

Value chain

activity

Innovation

Production

Sales


I1 I2 I3

P1 P2 P3

S1

A1

S2 S3

A2 A3

Figure 3. Patterns of subsidiary dynamics in an era of regional integration

A. Rugman et al.268


benefiting national subsidiaries inside the region – relative to these subsidiaries’ earlierposition.

The vertical axis suggests that such a change in position must again be assessed foreach activity type performed, whereby we retain our earlier distinction among innovation,production, sales, and administrative activities. Substantive weakening implies the probablerelocation of value chain activities performed by the subsidiary. Substantive strengthen-ing implies new activities are added. In many cases, the status quo may be observed. Thisapproach is consistent with McCann and Mudambi’s (2004, p. 502) observation that‘much of the geographical relocation of activities within MNEs consists of the realloca-tion of activities and resources within an existing spatial configuration of establishments,with little or no discernable external changes . . .’. However, this entails much more thansimply broadening or narrowing manufacturing lines within production, which has beenthe conventional focus of economics driven studies on regional integration impacts(see the previous section).

For example, in order to serve foreign markets, MNEs may historically have engagedin market seeking FDI in each individual host country in a region so as to overcometariffs, with each national subsidiary typically designed as a miniature replica of homecountry operations. As a result, internal company resources transferred to subsidiaries indifferent countries were often very similar in nature, though sometimes leading todifferent subsidiary competences as a result of subsidiary entrepreneurial initiatives andidiosyncratic resource bundling influenced by local environmental forces, especiallyat the sales end of the value chain. Once regional integration occurs, the dispersion ofidentical, company resources in innovation, production, and key administrative activities acrossdifferent countries in the same region becomes unnecessary, and actually reduces thepotential to earn scale and scope economies. As noted above, a full fledged activityrelocation programme could then be implemented, with some national subsidiaries beingclosed down altogether – especially if the sales competences they developed have limitedvalue – and others given extended regional charters, as a recognition for the nationallocation advantages they have accessed and the related resource bundling successes, andtheir observed superior competences within the region for specific value chain activities.However, a more common alternative is often the partial reallocation of subsidiaryactivities within the region, with most of these subsidiaries retaining their aggregate rolein the Bartlett and Ghoshal portfolio matrix, with little external visibility of thesechanges.

Figure 3 allows visualizing, for illustrative purposes, the six discrete patterns insubsidiary role dynamics we identified.

Pattern 1: Subsidiary shutdown or full activity swap. (Cell 1 in Figure 3 for all value chainactivities; in the case of a swap, combination with pattern 3.) This scenario occurs iftwo conditions are fulfilled. First, a substantial reduction in institutional distance amongnational markets in the region leads some countries to experience weakened nationallocation advantages relative to other countries in the region. Second, the focal subsidiary’scompetences across value chain activities for a particular set of products and servicesalso become perceived as weaker as compared to rival subsidiaries inside the region. Thefirm’s head office may then contemplate the new scenario of a full reallocation of all




activities towards other national subsidiaries that represent a more attractive bundling ofat least the same perceived competences in one value chain activity with more desirablelocation advantages in the region. In other words, competing affiliates in the region makethe focal subsidiary redundant. The possibility of this pattern occurring – even if remote– usually causes discomfort in small open economies such as Canada when evaluatingthe possible effects of joining or extending a regional economic integration scheme.Extensive evidence shows that NAFTA did not cause a massive exodus of plants fromCanada (Blank and Haar, 1998; Krajewski, 1992), precisely because of Canada’s locationadvantages for co-located production and sales activities, and the bundling thereof withthe subsidiaries’ valuable competences at the sales side, inter alia in branding and distribu-tion. However, such cases have occasionally occurred. For example, two US head officerespondents in the Blank and Haar (1998) study mentioned that they had closedtheir Canadian operations after NAFTA.

Nevertheless, the rationale for the shutdown of such plants may go well beyond simplerationalization considerations or internal competition (see Benito and Welch, 1997). Therelated reasons may range ‘from poor performance . . . to adverse governmental actionand inability to fulfill the expected benefits of diversification moves, acquisitions, andcooperative ventures’ (Benito and Welch, 1997, p. 21). The key point to be rememberedhere, is that companies ‘do not readily entertain withdrawal’ (Benito and Welch, 1997,p. 21), and there is little evidence that MNEs shut down their operations in a countrysolely based on a free trade and investment agreement. As noted above, a full activityswap might also occur, meaning the loss of a quasi-entire value chain for specificproducts, combined with the replacement thereof by another value chain. Such a swap

allows retaining valuable local resources such as key personnel and organizationalcapabilities, which would otherwise be lost, but can now be bundled in the productionsphere with the ‘new’ location advantages of the country at hand, a situation oftenobserved in the consulting and engineering business, where human capital rather thanphysical capital is critical to success. Such a swap reflects the simultaneous occurrence ofpatterns 1 and 3 (see below).

Pattern 2: Status quo. (Cell 2 in Figure 3 for all value chain activities.) Here, regionalintegration has only a limited impact on subsidiary roles, because the distance amongnational markets in the region remains strong, and critical subsidiary competences arelargely location-bound, typically at the sales end. For example, Cantwell (1987) notedthat British membership of the EC (precursor to the EU) had a weak immediate impacton MNE production networks in pharmaceuticals in Europe. Various trade barriers,including government controls over registration of new products and national pricecontrols continued to exist, thereby de facto dividing the EC into separate nationalmarkets, and preventing cross-border resource bundling. Hood and Young (1987) notedthat limited inter-plant product flows as well as subsidiary perceptions of the weakopportunities resulting from corporate integration in European manufacturing providedlittle evidence of multinational integration. Here, the product scope may be broadenedor narrowed, but no substantive change occurs in the type of value chain activitiesperformed, with especially production and sales activities remaining co-located in thevarious national subsidiaries.

A. Rugman et al.270


Pattern 3: Full regional charter. (This is the strengthening of the national subsidiary’s loca-tion advantages across all value chain activities; Cell 3 in Figure 3 for all value chainactivities.) This may go hand in hand with pattern 1, if subsidiaries performing similarvalue added activities in other countries within the region are closed down. One exampleis the rationalization of 3M in Europe, involving the centralization in one subsidiary ofthe spare parts activities for the whole of Europe, rather than the use of the initial 17depots (Ackenhusen et al., 1996a, 1996b). Another example within the same firm is theinvestment in the London, Ontario plant by 3M Canada for the manufacturing ofmicro-encapsulation products (Birkinshaw, 1995, pp. 295–60), which used to be done atseveral plants. Although the London plant had not developed stronger competences ininnovation, production, and key administrative activities than similar plants in the region, theintention of this relocation of all activities was to allocate the charter to the subsidiarywith the hope of strengthening the subsidiary’s competences and competitive positionin the relevant product domain.

Pattern 4: Partial regional charter. (This reflects the outcome of the strengthening of anational subsidiary’s location advantages in various but not all activities, typically forinnovation, production, and administrative activities, and no change for sales; combination ofCell 3 for innovation, production, and administrative and Cell 2 for sales in Figure 3.) Here, thechosen affiliates will benefit from the relocation of activities previously carried out byother national subsidiaries, but with the sales side remaining largely untouched. Forexample, Nestlé had established non-dairy creamer operations in Thailand (Taucherand Toh, 2003). When the Asia/Oceania division pursued growth opportunities in theASEAN region, the Thai operation was allocated the full charter with the exception ofsales for non-dairy creamer for the entire ASEAN region. In addition to increasing itsproduction capacity, the Nestlé operation in Thailand had to learn how to producenon-dairy creamer to consumers with slightly different tastes in other ASEAN countries,and with national managers remaining in charge of sales.

The rationalization of Honeywell Home’s North American operations is anotherexample. Among the overlapping products made by both the Canadian and US plants,zone valves were moved to Canada, whereas the other products were moved to theUnited States. Thus, each manufacturing site concentrated on specific innovation, produc-

tion, and related administrative activities given its relative location advantages, whichresulted in improved efficiency at all sites (Birkinshaw, 1995). In other words, here again,substantial activity swapping occurred but with sales remaining largely untouched. Withthis pattern there need not necessarily be many or even any losers, namely if othersubsidiaries also receive a partial regional charter allowing them to specialize in different,narrow product lines, i.e. if partial swapping occurs.

Pattern 5: Single activity specialization. (This is the weakening of the national subsidiary’slocation advantages in most activities, typically innovation, production, and administrative

support, combined with the status quo for a single activity, typically sales; combination ofCell 1 for innovation, production, and administrative support in Figure 3 with Cell 2 for sales.)Pattern 5 represents the continued importance of national location advantages of indi-vidual host countries for sales to be bundled with location-bound sales competences held




by the subsidiaries in these locations, even though other value chain activities arerelocated to be concentrated in core locations elsewhere (pattern 5 is therefore the mirrorimage of pattern 4). Subsidiaries described by pattern 5 may seek further growth in thenational markets they serve through increased specialization and related resource bun-dling in the sales activities they are allowed to retain, thereby allowing more nationalresponsiveness and moving towards Cell 3 for sales in Figure 3. Although such cases havenot been well documented, the clear, sustained commitment to the national UK marketof foreign subsidiaries in the food industry, even after European integration (Pearce andPapanastassiou, 1997), reflects this pattern.

Pattern 6: Added, single-activity regional charter. (This is the result of the strengthening ofthe national subsidiary’s location advantages for one value chain activity; combinationof Cell 3 for the relevant activity in Figure 3, with the status quo of Cell 2 for all otheractivities.)

For example, in the context of Japanese manufacturing investment in Europe, Lehrerand Asakawa (1999) observed the adding of large-scale R&D operations to particularsubsidiary activity portfolios in the MNEs’ internal networks, i.e. a significant departurefrom their conventional, ethnocentric approach to centralizing R&D. Here, the extantco-located production and sales activities were complemented with significant innovation asan expression of the increased importance attached to the European region.

Pattern 6 is occasionally observed in the realm of sales (though perhaps restricted to asubset thereof, such as strategic marketing activities), and this can go hand in hand withswapping. The Swiss-based financial services group Credit Suisse established severalcentres of excellence in 1992 to capture the expertise for pricing financial products,further strengthening related competences at these centres while at the same timeremoving these specific sales activities in other subsidiaries. Bleackley and Williamson(1997) found that the resulting pan-European marketing programmes were directed outof several locations, with each location being responsible for the sales activities for aparticular product category. As another example, Proctor and Gamble’s ‘Euro BrandTeams’, introduced in the 1980s, reflected the allocation of the marketing leadership forspecific products in Europe to one national subsidiary (e.g. Germany) that had beenhighly performing for those products in terms of bundling its location advantages withexternal competences.

CONCLUSION

In this paper, we have addressed two key conceptual problems associated with conven-tional subsidiary role classifications, focusing on Bartlett and Ghoshal’s (1986) seminalwork. This particular classification is important because it has been (and still is being)taught to many thousands of MBA students and senior managers in executive pro-grammes, at leading business schools around the world, as the key actionable buildingblock of Bartlett and Ghoshal’s 1989 transnational solution framework, allowing forvariety in national subsidiary role assignments and selectivity in resource allocation tosubsidiaries.

A. Rugman et al.272


First, Bartlett and Ghoshal’s classification assumes that each national subsidiary can begiven an aggregate role, spanning the entire value chain, in terms of how internal andexternal resources are bundled. In many cases, this assumption is invalid. In this context,the Bartlett and Ghoshal typology does not provide a linkage between the major FDI-types, commonly recognized in the mainstream international business strategy literature,and the resulting national subsidiary roles in specific areas of the value chain, eachassociated with specific resource bundling processes. We have augmented Bartlett andGhoshal’s (1986) typology by adding the critical distinction among location advantagesand subsidiary competences for four, distinct value chain activity sets: innovation, produc-

tion, sales, and administrative functions. This decomposition implies that individual subsid-iaries can play very different roles in various value chain activities. If a subsidiary roleclassification system is to describe accurately the spectrum of possible managerial roleassignments, and to provide guidance to MNE management, especially in the context ofresource allocation, the above decomposition is critical. For example, Rugman andVerbeke (2004) have demonstrated that most large MNEs are home-region bound interms of sales, meaning that effective bundling of sales-related internal competences andexternal resources only occurs in the home region (high revenues, a loyal customer base,etc.). However, at the same time many of these firms rely heavily on sourcing andproduction from other regions in the world. Innovation and administrative activities are alsostill largely home-country based or conducted close to the home base, but the proportionof technological activities undertaken by firms in overseas locations (e.g. Kumar, 2001)and the number of relocations of MNE head offices to foreign locations (e.g. Benito et al.,2011, this issue; Birkinshaw et al., 2006) have been rising. This implies that there may bea more difficult accessing of location advantages and the bundling thereof with internalcompetences, as well as a faster ‘decay’ (when ‘distance’ increases) of competences relatedto sales activities than to any other activity set. For example, Verbeke and Yuan (2008)demonstrated that Canadian-based subsidiaries with parent companies from outside theNAFTA area commanded much weaker competences vis-à-vis insiders (with parentcompanies from the United States) in the realm of sales. Such relatively weaker compe-tences were not observed for production. Innovation and administrative functions occupied anintermediate position, meaning that outsider subsidiaries had weaker competences thaninsiders but these relative weaknesses were less pronounced than for sales.

Here, we should note one caveat. Discussions of the ‘specific role’ of national sub-sidiary units for particular value chain activity sets may not be appropriate in all cases.An MNE may operate several businesses in one country, administered according todifferent organizing principles. An example is Nestlé, which has various businessesmanaged under different models, even within a single country: locally managed, region-ally managed, and globally managed businesses. As a result, different businesses withina single national subsidiary may have different roles, even in a single value chain activity.However, it should then still be possible to position usefully each of those businesses inthe classification scheme we have proposed.

Second, after augmenting the Bartlett and Ghoshal (1986) subsidiary typology, asoutlined above, we analysed changes in subsidiary roles triggered by regional integrationprogrammes, as one expression of the tendency towards semi-globalization, and thereduction of institutional distance between countries. It is sometimes argued that in




regional economic systems such as the EU, the ‘national subsidiary manager is dead’, butthis is a mistaken perspective because all MNE activities are still performed, and manydecisions made, within the confines of national borders. What does change is obviouslywhat national subsidiaries actually do as compared to the situation before regionalintegration. At the subsidiary level, we distinguished in conceptual terms among sixpatterns of subsidiary role changes. Here, the distinction among value chain activity setswas of critical importance in three of the six patterns identified. There appears to bemuch more to actual subsidiary role changes than can reasonably be captured by formalchanges in position in Bartlett and Ghoshal’s (1986) typology. The question then ariseswhether the analysis of subsidiary roles, using a resource bundling perspective per valuechain activity, has any implications for broader typologies at the overall, MNE level.There actually is one key implication, which has been explored elsewhere (see Verbeke,2009): if MNE value chains are indeed ‘fine-sliced’ across borders to the extent describedin the present paper, this implies that most MNEs simply cannot fit Bartlett andGhoshal’s archetypes (‘global’, ‘international’, and ‘multinational’), but rather are pri-marily ‘international coordinators’, whose main competence is to organize effectively theidiosyncratic sets of value added activities distributed among national subsidiaries.

NOTE

[1] We obviously simplify the analysis by distinguishing only among innovation, production, sales, and adminis-trative support activities, rather than studying the entire spectrum of possible location advantages andvalue chain components. Further extensions could disaggregate further the location advantage dimen-sion and the subsidiary competences dimension (e.g. Enright, 2005; Mudambi, 2008). We are gratefulto the JMS Special Issue editors and the reviewers for pointing out this possibility. From the perspectiveof parsimony, however, our view is that the distinction we made among the above four value chainactivity sets is sufficient to capture the essence of MNE functioning, and to add important insight to themainstream view of subsidiary role dynamics, insight that is presently not provided by the Bartlett andGhoshal (1986) typology. The point is that subsidiary activities can usually be decomposed into the fourabove activity sets, each associated with distinct location advantages and subsidiary competences.In each case, the process of bundling internally held competences with externally accessible resourcesis expected to be substantively different.

REFERENCES

Ackenhusen, M., Muzyka, D. F. and Churchill, N. C. (1996a). ‘Restructuring 3M for an integrated Europe.Part one: initiating the change’. European Management Journal, 14, 21–36.

Ackenhusen, M., Muzyka, D. F. and Churchill, N. C. (1996b). ‘Restructuring 3M for an integrated Europe.Part two: implementing the change’. European Management Journal, 14, 151–9.

Anand, J. and Delios, A. (1997). ‘Location specificity and the transferability of downstream assets to foreignsubsidiaries’. Journal of International Business Studies, 28, 579–603.

Bartlett, C. A. and Ghoshal, S. (1986). ‘Tap your subsidiaries for global reach’. Harvard Business Review,64, 87–94.

Bartlett, C. A. and Ghoshal, S. (1989). Managing Across Borders: The Transnational Solution, 1st edition. Boston,MA: Harvard Business School Press.

Bartlett, C. A., Ghoshal, S. and Birkinshaw, J. (2003). Transnational Management: Text and Cases, 4th edition.Boston, MA: Irwin/McGraw Hill.

Bartlett, C. A., Ghoshal, S. and Beamish, P. (2007). Transnational Management: Text, Cases and Readings inCross-Border Management, 5th edition. Boston, MA: Irwin/McGraw Hill.

Benito, G. R. G. and Welch, L. S. (1997). ‘De-internationalization’. Management International Review, 37, 7–25.Benito, G. R. G., Grogaard, B. and Narula, R. (2003). ‘Environmental influences on MNE subsidiary roles:

economic integration and the Nordic countries’. Journal of International Business Studies, 34, 443–56.

A. Rugman et al.274


Benito, G., Lunnan, R. and Tomassen, S. (2011). ‘Distant encounters of the third kind: multina-tional companies locating divisional headquarters abroad’. Journal of Management Studies, 48, 373–94.

Birkinshaw, J. (1995). Entrepreneurship in Multinational Corporations: The Initiative Process in Foreign Subsidiaries.London, Ontario: University of Western Ontario.

Birkinshaw, J. (1997). ‘Entrepreneurship in multinational corporations: the characteristics of subsidiaryinitiatives’. Strategic Management Journal, 18, 207–29.

Birkinshaw, J. (2000). Entrepreneurship in Global Firms. London: Sage.Birkinshaw, J. and Lingblad, M. (2005). ‘Intrafirm competition and charter evolution in the multibusiness

firm’. Organization Science, 6, 674–86.Birkinshaw, J. and Morrison, A. J. (1995). ‘Configurations of strategy and structure in subsidiaries of

multinational corporations’. Journal of International Business Studies, 26, 729–54.Birkinshaw, J., Hood, N. and Jonsson, S. (1998). ‘Building firm-specific advantages in multinational

corporations: the role of subsidiary initiative’. Strategic Management Journal, 19, 221–41.Birkinshaw, J., Braunerhjelm, P., Holm, U. and Terjesen, S. (2006). ‘Why do some multinational corpora-

tions relocate their headquarters overseas?’. Strategic Management Journal, 27, 681–700.Blank, S. and Haar, J. (1998). Making NAFTA Work: U.S. Firms and the New North American Business Environment.

Coral Gables, FL: The North-South Center Press at the University of Miami.Bleackley, M. and Williamson, P. (1997). ‘The nature and extent of corporate restructuring within Europe’s

single market: cutting through the hype’. European Management Journal, 15, 484–97.Bouquet, C. and Birkinshaw, J. (2008). ‘Weight versus voice: how foreign subsidiaries gain attention from

corporate headquarters’. Academy of Management Journal, 51, 577–601.Buckley, P. J. and Casson, M. (1976). The Future of the Multinational Enterprise. London: Macmillan.Buckley, P. J., Clegg, J., Forsans, N. and Reilly, K. T. (2003). ‘Evolution of FDI in the United States in the

context of trade liberalization and regionalization’. Journal of Business Research, 56, 853–57.Cantwell, J. (1987). ‘The reorganization of European industries after integration: selected evidence of the

role of multinational enterprise activities’. Journal of Common Market Studies, 26, 127–51.Cantwell, J. and Mudambi, R. (2005). ‘MNE competence-creating subsidiary mandates’. Strategic Management

Journal, 26, 1109–28.Cerrato, D. (2006). ‘The multinational enterprise as an internal market system’. International Business Review,

15, 253–77.Chetty, S., Eriksson, K. and Lindbergh, J. (2006). ‘The effect of specificity of experience on a firm’s perceived

importance of institutional knowledge in an ongoing business’. Journal of International Business Studies, 37,699–712.

Chrisman, J. J., Verbeke, A. and Chang, E. P. C. (2011). ‘The risky prospects of entrepreneurial initiatives:bias duality and bias reversal in established firms’. In Kellermanns, F. W. and Mazzola, P. (Eds),Handbook of Research on Strategic Process. Cheltenham: Edward Elgar, in press.

Cohen, S. and Zysman, J. (1987). Manufacturing Matters: The Myth of the Post-Industrial Society. New York:Basic Books.

Collinson, S. and Rugman, A. M. (2008). ‘The regional nature of Japanese multinational business’. Journalof International Business Studies, 39, 215–30.

Davis, L. N. and Meyer, K. E. (2004). ‘Subsidiary research and development, and the local environment’.International Business Review, 13, 359–82.

D’Cruz, J. R. (1986). ‘Strategic management of subsidiaries’. In Etemad, H. and Dulude, L. (Eds), Managingthe Multinational Subsidiary. New York: St. Martin’s Press, 75–89.

Delany, E. (2000). ‘Strategic development of the multinational subsidiary through subsidiary initiative-taking’. Long Range Planning, 33, 220–44.

Dicken, P. (2007). Global Shift: Mapping the Changing Contours of the World Economy, 5th edition. London:Sage.

Dunning, J. H. (1988). ‘The eclectic paradigm of international production: a restatement and some possibleextensions’. Journal of International Business Studies, 19, 1–31.

Dunning, J. H. (1993). Multinational Enterprises and the Global Economy. Wokingham: Addison-Wesley.Dunning, J. H. and Lundan, S. M. (1998). ‘The geographical sources of competitiveness of multinational

enterprises: an econometric analysis’. International Business Review, 7, 115–33.Enright, M. J. (2005). ‘Regional management centers in the Asia-Pacific’. Management International Review, 45,

Special Issue 1, 59–82.Enright, M. J. and Subramanian, V. (2007). ‘An organizing framework for MNC subsidiary typologies’.

Management International Review, 6, 895–924.




Fong, C.-M., Ho, H.-L., Weng, L.-C. and Yang, K.-P. (2007). ‘The intersubsidiary competition in an MNE:evidence from the Greater China region’. Canadian Journal of Administrative Sciences, 24, 45–57.

Ghemawat, P. (2001). ‘Distance still matters: the hard reality of global expansion’. Harvard Business Review,79, 137–47.

Gupta, A. K. and Govindarajan, V. (1991). ‘Knowledge flows and the structure of control within multina-tional corporations’. Academy of Management Review, 16, 768–92.

Hennart, J. F. (2009). ‘Down with MNE-centric theories! Market entry and expansion as the bundling ofMNE and local assets’. Journal of International Business Studies, 40, 1432–52.

Hogenbirk, A. E. and van Kranenburg, H. L. (2006). ‘Roles of foreign owned subsidiaries in a smalleconomy’. International Business Review, 15, 53–67.

Homburg, C., Krohmer, H., Pl, J. and Workman, J. (1999). ‘Strategic consensus and performance: the roleof strategy type and market-related dynamism’. Strategic Management Journal, 20, 339–57.

Hood, N. and Young, S. (1987). ‘Inward investment and the EC: UK evidence on corporate integrationstrategies’. Journal of Common Market Studies, 26, 193–206.

Hutzschenreuter, T., Voll, J. C. and Verbeke, A. (2011). ‘The impact of added cultural distance and culturaldiversity on international expansion patterns: a Penrosean perspective’. Journal of Management Studies, 48,305–29.

Jarillo, J. C. and Martinez, J. I. (1990). ‘Different roles for subsidiaries: the case of multinational corporationsin Spain’. Strategic Management Journal, 11, 501–12.

Jensen, P. and Pedersen, T. (2011). ‘The economic geography of offshoring: the fit between activities andlocal context’. Journal of Management Studies, 48, 352–72.

Johanson, J. and Vahlne, J. E. (2009). ‘The Uppsala internationalization process model revisited – fromliability of foreignness to liability of outsidership’. Journal of International Business Studies, 40, AnniversaryIssue, 1411–31.

Kedia, B. L. and Mukherjee, D. (2009). ‘Understanding offshoring: a research framework based on disin-tegration, location and externalization advantages’. Journal of World Business, 44, 250–61.

Krajewski, S. (1992). Multinational Firms Across the Canada–U.S. Border: An Investigation of Intrafirm Trade and OtherActivities. Ottawa: The Conference Board.

Kumar, N. (2001). ‘Determinants of location of overseas R&D activity of multinational enterprises: the caseof US and Japanese corporations’. Research Policy, 30, 159–74.

Lehrer, M. and Asakawa, A. (1999). ‘Unbundling European operations: regional management and corpo-rate flexibility in American and Japanese MNCS’. Journal of World Business, 34, 267–86.

Levi (2003). Levi Strauss & Co. to close its North American manufacturing & finishing plants. Available at:http://www.levistrauss.com/news (accessed 23 May 2010).

Levi (2004). ‘Form 10-K’, filed on 1 March 2004. Available at: http://ir.10kwizard.com/files.php?source=224 (accessed 21 October 2009).

Levi (2005). ‘Form 10-K’, filed on 17 February 2005. Available at: http://ir.10kwizard.com/files.php?source=224 (accessed 21 October 2009).

Levi (2006). ‘Form 10-K’, filed on 14 February 2006. Available at: http://ir.10kwizard.com/files.php?source=224 (accessed 21 October 2009).

McCann, P. and Mudambi, R. (2004). ‘The location behavior of the multinational enterprise: someanalytical issues’. Growth and Change, 34, 491–524.

McCann, P. and Mudambi, R. (2005). ‘Analytical differences in the economics of geography: the case of themultinational firm’. Environment and Planning A, 37, 1857–76.

McFetridge, D. G. (1989). Trade Liberalization and the Multinationals. Ottawa: Economic Council of Canada.McLaren, J. (2000). ‘Globalization and vertical structure’. American Economic Review, 90, 1239–54.Meyer, K. E., Estrin, S., Bhaumik, S. K. and Peng, M. W. (2009). ‘Institutions, resources, and entry

strategies in emerging economies’. Strategic Management Journal, 30, 61–80.Meyer, K. E., Mudambi, R. and Narula, R. (2011). ‘Multinational enterprises and local contexts:

the opportunities and challenges of multiple embeddedness’. Journal of Management Studies, 48, 235–52.

Monteiro, L., Arvidsson, N. and Birkinshaw, J. (2008). ‘Knowledge flows within multinational corpora-tions: explaining subsidiary isolation and its performance implications’. Organization Science, 19,90–107.

Mudambi, R. (2008). ‘Location, control and innovation in knowledge-intensive industries’. Journal of EconomicGeography, 8, 699–725.

Mudambi, R. and Navarra, P. (2004). ‘Is knowledge power? Knowledge flows, subsidiary power andrent-seeking within MNCs’. Journal of International Business Studies, 35, 385–406.

A. Rugman et al.276


Nohria, N. and Ghoshal, S. (1994). ‘Differentiated fit and shared values: alternatives for managingheadquarters-subsidiary relations’. Strategic Management Journal, 15, 491–502.

Nye, J. S. (1968). ‘Comparative regional integration: concept and measurement’. International Organization,22, 855–80.

Paterson, S. L. and Brock, D. M. (2002). ‘The development of subsidiary-management research: review andtheoretical analysis’. International Business Review, 11, 139–63.

Pearce, R. and Papanastassiou, M. (1997). ‘European markets and the strategic roles of multinationalenterprise subsidiaries in the UK’. Journal of Common Market Studies, 35, 243–66.

Porter, M. E. (1985). Competitive Advantage: Creating and Sustaining Superior Performance. New York: Free Press.Porter, M. E. (1990). The Competitive Advantage of Nations. New York: Free Press.Porter, M. E. (1998). On Competition. Boston, MA: Harvard Business School Press.Rugman, A. (1981). Inside the Multinationals: The Economics of the Multinational Enterprise. New York: Columbia

University Press.Rugman, A. (1990). Multinationals and Canada–United States Free Trade. Columbia, SC: University of

South Carolina Press.Rugman, A. (1999). ‘Forty years of the theory of the transnational corporation’. Transnational Corporations,

8, 51–70.Rugman, A. (2000). The End of Globalization. London: Random House.Rugman, A. (2005). The Regional Multinationals: MNEs and ‘Global’ Strategic Management. Cambridge: Cambridge

University Press.Rugman, A. and Collinson, S. (2004). ‘The regional nature of the world’s automotive sector’. European

Management Journal, 22, 471–82.Rugman, A. and Verbeke, A. (1992). ‘A note on the transnational solution and the transaction cost theory

of multinational strategic management’. Journal of International Business Studies, 23, 761–71.Rugman, A. and Verbeke, A. (2001a). ‘Location, competitiveness, and the multinational enterprise’. In

Rugman, A. M. and Brewer, T. L. (Eds), The Oxford Handbook of International Business. Oxford: OxfordUniversity Press, 146–80.

Rugman, A. and Verbeke, A. (2001b). ‘Subsidiary-specific advantages in multinational enterprises’. StrategicManagement Journal, 22, 237–50.

Rugman, A. and Verbeke, A. (2003). ‘Extending the theory of the multinational enterprise: internalizationand strategic management perspectives’. Journal of International Business Studies, 34, 125–37.

Rugman, A. and Verbeke, A. (2004). ‘A perspective on regional and global strategies of multinationalenterprises’. Journal of International Business Studies, 35, 3–18.

Rugman, A. and Verbeke, A. (2009). ‘Location, competitiveness, and the multinational enterprise’.In Rugman, A. M. (Ed.), The Oxford Handbook of International Business, 2nd edition. Oxford: OxfordUniversity Press, 146–82.

Sassen, S. (2001). The Global City: New York, London, Tokyo. Princeton, NJ: Princeton University Press.Stopford, J. M. and Baden-Fuller, C. (1987). ‘Regional-level competition in a mature industry: the case of

European domestic appliances’. Journal of Common Market Studies, 26, 173–92.Taggart, J. H. (1997a). ‘Autonomy and procedural justice: a framework for evaluating subsidiary strategy’.

Journal of International Business Studies, 28, 51–76.Taggart, J. H. (1997b). ‘An evaluation of the integration-responsiveness framework: MNC manufacturing

subsidiaries in the UK’. Management International Review, 37, 295–318.Taggart, J. H. (1998). ‘Strategy shifts in MNC subsidiaries’. Strategic Management Journal, 19, 663–81.Tallman, S. and Chacar, A. S. (2011). ‘Knowledge accumulation and dissemination in MNEs: a practice-

based framework’. Journal of Management Studies, 48, 278–304.Taucher, G. and Toh, T. S. (2003). ‘Nestlé in ASEAN’. IMD-3-0610 (GM 610), v.01.09.2003.Teece, D. J. (1992). ‘Foreign investment and technological development in the Silicon Valley’. California

Management Review, 34, 88–106.The Economist (1998). ‘Chinese torture’. 23 May, No. 8069, 347, 59–63.Verbeke, A. (2009). International Business Strategy: Rethinking the Foundations of Global Corporate Success. Cambridge:

Cambridge University Press.Verbeke, A. and Yuan, W. (2008). ‘Subsidiary capabilities in an era of regionalization’. Mimeo, University

of Calgary.White, R. E. and Poynter, T. A. (1984). ‘Strategies for foreign-owned subsidiaries in Canada’. Business

Quarterly, 49, 2, 59–69.Zeller, C. (2004). ‘North Atlantic innovative relations of Swiss pharmaceuticals and the proximities with

regional biotech arenas’. Economic Geography, 80, 83–111.




Documents

2011 - JMS - Reconceptualizing Barlett and Ghoshal's Classification of National Subsidiary Roles