The MNE Headquarters-subsidiary Relationship, Subsidiary Strategy and Performance: An Empirical Examination in China

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Abstract

Since 2010, China has become the second largest economy in the world, providing a more attractive environment for enterprises doing business than most other countries. Many multinational enterprises (MNEs) have set up subsidiaries to seek resources and opportunities in China. Since there are often cultural and institutional differences between home and host countries, MNEs usually face some management problems when doing business in a host country. How to develop corporate strategy to better support subsidiary performance becomes an important question for MNEs entering developing countries like China. Given China̢۪s unique business environment, MNEs face many challenges in adapting to this local marketplace. They need time to develop and apply local capacity, such as relational networks, namely guanxi. They also need to determine the entry mode according to the social system of China. Finally, one of the most important questions for an MNE entering China is how to design its subsidiary strategy. This research seeks to identify the mechanisms that influence the operating performance of MNE subsidiaries in host countries. It addresses the following questions: (1) How does the MNE subsidiary strategy develop and what are the main influencing factors? (2) How is an MNE̢۪s China subsidiary strategy influenced by its international business strategies and vice versa? (3) How is the subsidiary̢۪s performance affected by the subsidiary strategy and why? (4) How does the MNE̢۪s headquarters-subsidiary relationship and headquarters control mediate the process and why? To answer these questions, strategic contingency theory is applied to study the effect of the headquarters-subsidiary relationship on subsidiary strategy and performance. The object of this qualitative research is an international corporation, UST Group of companies. The findings are summarized in the form of a framework which shows that (1) the MNE̢۪s internal and external environments, i.e. the host market conditions, competitors, institutions and uncertainties, tend to directly influence its subsidiary strategy; (2) the MNE̢۪s environment can also influence subsidiary strategy indirectly through the relationship between the headquarters and the subsidiary, which means that the headquarters-subsidiary relationship acts as a mediator between environment and subsidiary strategy; (3) forms of informal control such as flexible control and personal connections significantly affect subsidiary strategy and performance in China; (4) the subsidiary̢۪s strategy, particularly its strategic motives, entry strategy and human resource management, tend to influence its financial and non-financial performance in the host country. The main conclusions are: (1) MNE environment is the principal factor to be considered when entering a host country; (2) subsidiary strategy is determined by the MNE environment and headquarters-subsidiary relationship; (3) the MNE environment influences the subsidiary environment through the headquarters-subsidiary relationship. The managerial implications of this research are that it will help MNEs to do better business in China and to achieve better performance.

Keyword(s)

MNE; control; environment; performance; relationship; subsidiary strategy

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