Conclusions
Abstract:
In this chapter, we conclude with a discussion of the stylised growth and development strategy system and behaviour of MNC Chinese subsidiaries, based on the empirical findings.
This study focused on the growth and development strategies of MNC subsidiaries in China. We analysed the roles and strategic choices for overseas subsidiaries of multinational corporations. On this basis, we tested hypotheses on the 15 areas of subsidiary operations. Detailed empirical analyses were carried out to discover the reasons and causes for initiatives adopted by MNC subsidiaries in China and their parent companies.
Growth and development strategies
The growth and development of overseas subsidiaries is influenced and constrained in unique ways by such factors as strategic objective, external environment and resources. There is a need for a systemic analysis of the growth and development modes, and of the issues affecting the growth and development strategies. The strategy in overseas subsidiaries is influenced by both the parent company and the host government. To adapt to the local environment and MNC global business operations, constant strategy adjustments must be made.
The growth and development of the network is realised within the policy framework of the parent company. The parent companies control the overall strategic orientation for growth and development, while providing some degree of strategic autonomy for overseas subsidiaries. This enables a process for growth and development whereby overseas subsidiaries adapt to the environmental changes in the host country. There are two special mechanisms for growth and the development of multinational subsidiaries: (1) the mechanism to determine the initial role of the overseas subsidiaries and the evolution of the strategic role in the MNC network; and (2) selection mechanism for the growth and development strategy of overseas subsidiaries. In their life cycle, overseas subsidiaries play different roles at different stages to accomplish different strategic missions. The choice of strategy for growth and development of overseas subsidiaries should be synchronised with the role of overseas subsidiaries assigned by the parent company for its global network. In the process of growth and development, overseas subsidiaries play a different role and their strategy at different stages changes, with the accumulation of competitive capabilities, changes in value and behaviour of the parent company and changes in the external environment.
The role mechanism and strategy choice mechanism interact with each other to create synergies for growth and development strategy of MNC overseas subsidiaries. This interaction for synergistic effects is a very important part of the theoretical research on the growth and development strategy of multinational subsidiaries. In addition, it is important to consider stages of subsidiaries’ life cycle, and the behaviours and performances in different functional areas. Figure 7.1 is the framework used for this theoretical research for growth and development strategy of MNC subsidiaries.
Growth and development mechanism
The analysis of mechanisms is the basis of theoretical studies on growth and development of multinational subsidiaries. The mechanisms for the growth and development of multinational subsidiaries are divided into the internal network and the external environment (Figure 7.2).
Internal network mechanism
The growth and development of overseas subsidiaries within the internal network involves the allocation of resources and a transformation process. Overseas subsidiaries engage in the interactive resource exchanges of output and input with the parent companies and other overseas subsidiaries in the MNC network. In the process of resources-sharing and competition, the role and the strategies of overseas subsidiaries are constantly adjusted and changed.
Resources inflow and outflow mechanism of the parent company
MNCs establish an overseas subsidiary to sustain growth of the parent company and to acquire resources to meet growth requirements. In order to improve the efficiency of the resources acquisition and allocation, the parent company exports many resources required for the growth and development of overseas subsidiaries. These resources include tangible and intangible resources. Tangible resources include a firm’s infrastructure, funding, equipment, general raw materials and employees. Intangible resources, also known as ownership advantages (Dunning, 1981), include management model of the parent company, brand image, information and product technology. For overseas subsidiaries, the ownership advantages are key resources that determine operational advantages and growth characteristics of overseas subsidiaries.
Overseas subsidiaries use resources from the parent company to build the strategic infrastructure and transform a portion of the host resources to the strategic resources needed by the parent company, which are exported to the parent company. The transformation and output of resources are synergic and supportive of the parent company’s global strategic intentions (Prahalad and Doz, 2001).
Subsidiaries resource-sharing and competition mechanism
Overseas subsidiaries are operating in different countries and have three major characteristics in common: (1) they are linked by a common shared ownership; (2) they share resources, such as brands, information, financial resources and credit; (3) as a whole, they implement a common strategy and have the same goal to obtain maximum profits and reduce risks in MNCs.
MNC overseas subsidiaries have independent resources and capacities to form a highly integrated and cooperative network. They can respond flexibly to the local market demand, while they can share the benefits of the integration of manufacturing and usage of network resources. They can access resources required for growth and development inside the parent company network through internal benchmarking (Birkinshaw and Hood, 1998a) and resources-sharing. During the process of their growth and development, they accumulate local advantages and undergo strategy change because of the evolution in their roles in the MNC network. The role change influences the position and status within the network and internal competition for more allocation of resources.
External environment mechanism
External mechanism refers to the interactive relations between the host and the home country environmental factors that influence the growth of overseas subsidiaries. MNC subsidiaries must adapt to the complex changes in the external environment of the host country. Host government is a major factor influencing MNC overseas subsidiaries and its motives and methods have a critical impact on the growth of overseas subsidiaries.
Interactions between the host government and overseas subsidiaries
Overseas subsidiaries offer a package of resources to the host government. These include direct resources, such as the multinational ownership of assets, as well as indirect resources, such as the host employment expansion opportunities and thus improvement of living standards of local people. To access these resources, the host government has to provide local resources to MNC overseas subsidiaries, including not only appropriate labour and raw materials but also huge market capacity and potentials. The host government provides policy support and favourable incentive procedures to encourage MNC overseas subsidiaries to operate and develop in the host country. During this interactive process of resources inflow and outflow, the goals of overseas subsidiaries differ from those of the host government. The host government seeks to promote development for the local country, while the MNC overseas subsidiaries try to increase their own competitiveness.
If the host government’s objectives are not met, according to the ecological system theory, part of the dissatisfaction in output will be converted to input (Putti and Weihrich, 1999). For instance, the dissatisfaction against overseas subsidiaries from the host government may be converted to the negative interference against MNC subsidiaries. The conflicts caused by interference and resistance have a direct impact on the growth and development of overseas subsidiaries.
The environmental factors in host countries
The complexity and dynamics of the host operating environment also affects the growth and development of overseas subsidiaries. Several host environments have a larger impact on MNC overseas subsidiaries, including the market environment, the political environment, legal environment, social and cultural environment and geographical environment.
The MNC home external environment
The home external environment of MNCs has an indirect impact on the development of overseas subsidiaries. They affect the strategic direction of the parent company, which then transfers those by shaping the strategic mission and strategic objectives for overseas subsidiaries. Take the Asian financial crisis as an example. As the South Korean domestic economy suffered from the crisis, South Korean MNCs withdrew their multinational subsidiaries from China.
MNC subsidiaries’ roles
In this study, we analysed different roles that multinational subsidiaries play in the MNC internal network. We found that the roles of Chinese subsidiaries are mixed, with the subsidiaries performing both the initiative role and the strategic role.
The initial roles of MNC subsidiaries
Because of differences in the host environment, the motives of MNC investment vary. The strategic motives of the parent company determine the strategic direction for overseas subsidiaries in the host country. Building strategic infrastructure and providing strategic resources to the MNC network are the most commonly seen initial roles assigned to the overseas subsidiaries by the parent company. The initial roles of overseas subsidiaries may be divided into six categories:
1 Resource-oriented
The strategic motive for this type of subsidiary is to obtain access to the host country’s tangible resources, especially natural resources. In order to accomplish upstream integration and further control of the natural resources needed for growth, MNCs set up overseas subsidiaries in the host country that have the strategic resources they need. The major role of this type of MNC subsidiary is to become engaged in the acquisition of raw materials. The aim is to reduce transaction costs and raw material costs, and help the parent company accumulate strengths and capabilities.
2 Production bases
These overseas subsidiaries focus on the use of cheap labour and land resources in the production process to reduce the cost of products. In order to increase production efficiency and lower production cost, MNCs set up overseas subsidiaries in regions or countries with low labour costs. The role of overseas subsidiaries for labour-intensive MNCs is cost oriented.
3 Market expansion
When market size and operational scale restrict growth or if there are opportunities for further growth, MNCs seek potential markets with greater capacity.
4 Profits focus
The overriding purpose of these subsidiaries is to achieve the maximum profit and serve as a cash cow for the parent company to compensate for the high risk of its global business and international operations. Since there are different views for profit maximisation, profit objectives of MNC subsidiaries may be classified into two categories: (1) the pursuit of high profits; and (2) the pursuit of a satisfactory profit. The excessive profits pursued by MNC subsidiaries might be realised by product pricing strategy and internal price transfer within the MNC network.
5 Knowledge extraction
In order to acquire advanced technology and experience in the host country as well as information resources that are extremely beneficial to the growth and development of the parent company, MNCs set up overseas subsidiaries to recruit local talent or directly acquire existing firms to get access to technology, information and knowledge (Fang, 2000). These MNCs are willing to give up a certain amount of profit and market share in exchange for knowledge and information from the host country.
6 Risk-diversifying
When threatened by the competition, the parent company may transfer its operations to a country where it has competitive advantages to diversify its business risks, or may directly enter the competitors’ market to reduce the competition risk in the domestic market (Vernon, Wells and Rangan, 2000).
Strategic evolutionary roles of MNC subsidiaries
The accumulated localisation competitive advantages and capabilities of MNC subsidiaries can enhance the strategic position and status of a subsidiary in its MNC network but can also weaken that strategic position. Different competitive advantages and capabilities determine the significance of the subsidiaries in the MNC system and thus their strategic positions vary in the MNC global network. MNC subsidiaries with a stronger position enjoy more strategic autonomy and resource-allocation priority from the parent company.
The strategic evolution of MNC subsidiaries’ roles manifests in the changes in their strategic autonomy, global resource allocation priority, reliance on the parent company and nature of the local value chain system for the MNC network. We found that in the process of growth and development, there are three different types of MNC subsidiaries in China.
1 Totally subordinated
This type of subsidiary follows the instructions of the parent company and its business arrangements are within the boundaries of the parent company’s strategy and policy framework. Most of the Chinese subsidiaries play such a strategic role in the initial stage of entry into China, because at this time they have not yet formed unique competences and competitive advantages. They have relatively limited scope of functions and are highly integrated in the global network.
2 Relatively independent
With the continuous accumulation of localisation capacity and the competitive advantages in the growth and development process, these MNC overseas subsidiaries gain increasing strategic autonomy and enjoy relative independence in strategy crafting and implementation. They have penetrated significant local and regional markets, and have secured the freedom to develop new business in new markets. These subsidiaries have the power to demur or modify the assigned tasks or assignment by the parent company in accordance with local needs.
3 Central leadership
These subsidiaries have leadership position in a regional or global arena of the MNC and have a high degree of strategic autonomy. They have a great impact on the parent company’s global strategy and, therefore, they play a central leadership role in the MNC network. The structural background of MNC overseas subsidiaries is highly globalised integration but highly localised operation.
Mode and stage of subsidiary role evolution
MNCs change their strategic motives to adapt to environmental changes at home and in the host countries. Such a change can directly lead to adjustment or change in the initial role of MNC overseas subsidiaries. This evolution of role change is no longer passive in nature. MNC subsidiaries accumulate competitive advantages and capabilities in localisation and thus enhance their strategic position in the MNC network. They actively change their subordinate role and start to play a more significant role in the MNC network.
In our study, we discovered that in their efforts to enhance their strategic position, Chinese subsidiaries have gone through three stages of role evolution: strategic implementation stage, strategic progressive stage and strategic dominance stage (Figure 7.3).
Only in very special circumstances, the overseas subsidiaries’ evolution advances by leaps and bounds, for instance, when the parent company needs to shoulder a greater risk for the enhancement of the overseas subsidiary’s strategic position. Overseas subsidiaries’ strategic position could also decrease or weaken from the parent company’s global strategy adjustment and stability (or degeneration). This decline may not follow any law or pattern. Thereby, strategic role evolution of overseas subsidiaries has been portrayed using a snakes and ladders model (Delaney, 1998). Table 7.1 present the features of MNC subsidiaries’ strategic role evolution in each stage.
In the growth and development process, MNC subsidiaries become more familiar with the host country’s market environment and increase their investment scale. They expand their business areas and market segments and make progress in localisation. This results in the expansion of strategic autonomy and the enhancement of strategic independence; and the integration of all value chain activities from the original single function. They also expand their business scope from basic simple non-core business activities into the MNC’s core business areas; and from host country single markets to multi-regional diversified markets. As they set up a local supply chain network, their procurement rate within the internal MNC network is gradually reduced. Their reliance on the parent company’s products also reduces, as they become a part of the multinational supply hub for the entire network.
MNC subsidiaries’ strategy choice mechanism
MNC overseas subsidiaries function in the host environment and have to deal with the complex and ever-changing challenges of local and international competitors. To accomplish the strategic mission, they must choose the growth strategy that can adapt to the environment and can make the best use of competitive core competences. The choice of appropriate strategy of overseas subsidiaries is established based on the growth and development mechanism controlled by the parent company and constrained by the host environment factors. All of these factors and their interactions affect strategy choice for overseas subsidiaries and constitute a unique strategic selection mechanism of overseas subsidiaries in their growth and development process.
S-SWOT analysis for MNC overseas subsidiaries
When crafting growth strategy, MNC overseas subsidiaries need to analyse the internal and external environments and identify firm strengths, weaknesses, market opportunities and threats. The complicated and unique growth and development mechanism makes the MNC overseas subsidiaries’ strategy choice different from that of other firms and organisations. We called this unique subsidiary situation analysis the S-SWOT analysis framework for MNC overseas subsidiaries (Figure 7.4).
When MNC overseas subsidiaries conduct structure–environment analysis, they need to consider not only environmental factors of the host country but also those of the home country of the parent company. Their strategy has to be consistent with the role assigned by the MNC and help them survive in the host’s general external environment. In conducting internal analysis, MNC subsidiaries not only assess their own internal capacities but also consider the core competences in the MNC internal network for the synergistic effects of the multinational cooperation network. The final selection and implementation of the growth and development strategy of overseas subsidiaries is bound and constrained by the subsidiaries’ role mechanism and the effect of the parenting advantage of MNCs. Consequently, the S-SWOT analysis for MNC subsidiaries is different from the traditional SWOT analysis for other firms (Figure 7.5).
Restriction and constraints on role mechanism
The traditional SWOT analysis is based on a firm’s complete independence and autonomy in strategy choice, while the S-SWOT analysis for MNC overseas subsidiaries is supported by the reality that most MNC subsidiaries are not fully strategically independent because their role mechanism still restricts the choice of strategy. MNC overseas subsidiaries’ strategic selection needs to be subordinate to the parent company’s global strategy. The very fact that the MNC parent company can deny the subsidiaries’ strategy proposition is the best reflection of role constraint mechanism to bind the subsidiaries’ growth and development choice in strategy. On occasions, out of the need for strategic adjustment by the parent company, the interests of overseas subsidiaries are sacrificed for the long-term benefits of the entire MNC system. For these overseas subsidiaries, it is not possible to establish the strategy choice based on traditional strategic thinking.
The choice of the MNC’s own growth and development also influence the choice of strategy of MNC overseas subsidiaries. Consider a case where the subsidiary is in an advantageous position in the host country and should adopt the growth strategy. However, the parent company needs to reorganise global operations and consider rebuilding competitive advantage and core capacity for the MNC system. The overseas subsidiaries have to adapt to this strategy and may even have to sell or abandon their core business for the sake of the MNC system.
When the strategic position of MNC subsidiaries is lower in the MNC network, the autonomy of these subsidiaries in choosing their own growth and development strategy is smaller. With the enhancement of overseas subsidiaries’ strategic position in global competition, the influencing power over the strategy for the entire MNC system is increasing. The choice of overseas subsidiaries’ growth and development strategy is focusing more on interactions among firms in the internal system and with firms in the global market.
Effect of parenting advantage on overseas subsidiaries’ growth and development strategic choice
Parenting advantage is the internal network advantage of MNCs. MNC subsidiaries can make good use of this internal network leverage to increase their own competitive capabilities and competitive edge. When the subsidiaries assess internal competences for competitive advantage and disadvantage in the host country, they include the parenting advantage in such a comparison with their competitors. This is one of the unique features of S-SWOT analysis for MNC overseas subsidiaries.
When choosing a growth and development strategy, MNC overseas subsidiaries seek the support of parenting advantage from the parent company and other subsidiaries. However, the parent company owns the final decision-making power for internal resource allocation. Whether to infuse parenting advantage or how much to infuse is finally decided by the parent company with global strategy deployment in mind and with the bargaining power of its subsidiaries.
As we analysed before (Figure 7.5), thus, MNC subsidiaries’ SO strategy, ST strategy, WO strategy and WT strategy are heavily influenced by the restraints of role mechanism and the availability of parenting advantage.
Strategic system for MNC subsidiaries
The strategic system of MNC overseas subsidiaries’ growth and development comprises different levels of growth and development activities. Based on the analysis results of S-SWOT, MNC subsidiaries can consider what activities they want to engage in and how these activities can generate consolidated effects. This is the process of strategy-crafting for achieving synergies and integration from the high-level to the low-level activities and corporation. Therefore, the study of MNC subsidiaries’ growth and development strategic system is also an important aspect of the theoretical study of MNC subsidiaries’ growth and development.
Layers and structure of strategic system
Any firm’s growth and development strategic system is formed by coordination, interaction and support of different strategic layers. The same is true for MNC overseas subsidiaries’ growth and development strategic system, which includes three levels: corporate layer, operation layer and function layer. Each layer consists of a number of growth and development activities (Figure 7.6).
Corporate layer strategy of overseas subsidiaries’ growth and development
The corporate function of overseas subsidiaries is the highest-level strategy in the system of overseas subsidiaries’ growth and development. It refers to the game plan to accomplish the mission and strategic goals assigned by the parent company. The core of corporate-level strategy is mission-driven under the role mechanism restriction. The dominant strategy differs for each subsidiary depending on its role. For example, the dominant strategy for resource-oriented overseas subsidiaries is usually to obtain access to the host country’s tangible resources; the dominant strategy for production bases overseas subsidiaries is to secure cheap labour and land resources in the production process to reduce the cost of products; and the dominant strategy for market expansion overseas subsidiaries is to seek potential markets with greater capacity.
Apart from the dominant strategy, MNC overseas subsidiaries have supporting activities to adapt to the growth and development needs in the host country and to achieve the strategic goal assigned by the parent company. Consequently, corporate-level strategy includes the following aspects:
1. Given its internal capabilities, resource status and competitive position in the external market, MNC subsidiaries have three growth and development modes: internal growth mode, external development mode and cooperative development mode. The corresponding strategy includes joint venture, mergers and acquisitions, and strategic alliance. Overseas subsidiaries may pursue vertical, horizontal and hybrid direction growth. The corresponding strategies include market penetration strategy, market development strategy, product exploitation strategy, forward integration strategy, backward integration strategy, vertical integration strategy, related and non-related diversification strategy, consolidation strategy and contraction strategy.
2. MNC subsidiaries need to have the right moves to cultivate localisation and core competences to gain competitive advantages in the host country with the leverage of technology transfer and management transfer from the parent company.
3. To gain access to parenting advantages, MNC subsidiaries can adopt the coordinated strategy to work with the parent company and other subsidiaries.
4. The generic strategy required is one that can fit in the host country environment and can deal with competition from local and other MNC firms. Depending on its dominant position in the host country market and the parent company’s expectations, the MNC overseas subsidiary can adopt an overall offensive strategy, selective offensive strategy, active defence strategy, survival strategy, and competitive harassment strategy in order to sustain its leadership position or advantage position, or to maintain the status quo or disadvantaged status position as needed.
Business strategy of MNC overseas subsidiaries
Each business unit of MNC subsidiaries needs to shape its business strategy so that it can be suitable for its industry environment, life cycle and competitive conditions. The business-level strategy of MNC subsidiaries is also controlled by the company in resource allocation.
Functional strategy of MNC overseas subsidiaries
The functional strategy of overseas subsidiaries is the plan of functional activities for different departments, such as R&D strategy, human resource management strategy, financial strategy, production strategy and marketing strategy to implement business strategy and win competitive advantages in the host country.
Function-level strategy will change along with the evolution of overseas subsidiaries’ roles and the adjustment or alteration of overseas subsidiaries’ business units. A strategic business unit needs multiple functional strategies to generate the desired results. The selection mechanism differs depending on the parent company’s overall strategic intent.
Synergistic and strategic coordination of overseas subsidiaries’ growth and development strategic system
Strategic autonomy for each subsidiary differs depending on its strategic role in the system. Meanwhile, for every MNC overseas subsidiary, coordination and flexibility are critical tools for the growth and development strategic system required to respond in a timely manner to the environment changes and the competitors’ strategic adjustment.
While selecting the growth and development business strategies, both the parent company and the overseas subsidiaries must pay special attention to systematic coordination among all the strategic units in the MNC network. The goal of strategic coordination is to identify, create and maintain a long-term competitive advantage. The ultimate goal is the synergistic effect, to maximise the multiplying efficiency for consolidating results. In the process of growth and development, MNC overseas subsidiaries need to endure pressures from the economic situation at home and in the host country, competition from market forces, and global integration and strategic adjustment of the parent company. The strategic coordination of overseas subsidiaries functions at three levels.
Coordination in MNC global strategy
This is the coordination between the parent company and all the MNC subsidiaries in the MNC network. Global perspective is created, nurtured and infused in the blood of every strategic business unit in the MNC network. Knowing why and how to institutionalise global perspective is critical for the MNC’s success in achieving interaction or synergistic effects from all the activities among all the strategic business units. If overseas subsidiaries seek self-interest at the expense of other units or, worse, at the expense of global coordination, the MNC will lose its very foundation.
Strategic direction and corresponding responsibilities must be clear to each overseas subsidiary for implementation and measurement in each field of the MNC. Global integration can be achieved through close communication between overseas subsidiaries and headquarters staff, but local responsive strategy requires overseas subsidiaries to have relatively high independence or autonomy. Therefore, the key is to maintain an appropriate balance or trade-off between the subsidiaries’ autonomy and centralised parental control (Prahalad and Doz, 2001).
Coordination between overseas subsidiaries
At this level, both the headquarters and all the subsidiaries ensure a good coordination system to link all the subsidiaries together and achieve consolidated working efficiency for the MNC as a whole.
From the resource perspective, overseas subsidiaries share resources. They work together to coordinate their activities in R&D, production equipment, sales and marketing to achieve the economy of scale and the supply of materials at different links of production for cost leadership.
Another way to achieve synergy effects is sharing of knowledge and professional skills or proprietary mutual transfers to build better internal core competences in manufacturing, marketing and other fields.
Coordination for functional strategies amongst MNC subsidiaries
This is the lowest level of coordination, but the most complicated one since it is a combination and composite of all the activities in the MNC network. Only when coordination of functional activities is well in place can the synergistic interactions of the network be achieved.
The strategic role determines the allocation and supply of resources, which in turn determines the growth and development of MNC overseas subsidiaries. Hence, good coordination is needed for the growth and development of the strategic system and strategic role mechanism of the overseas subsidiaries.
The coordination of activities at different levels of strategic system is ongoing under the influence and constraints of MNC strategic mission and strategic objectives. As delineated in Figure 7.6, the strategic mission and strategic objectives are not components of three layers of overseas subsidiary strategies, but they are the core of the subsidiaries’ growth and development strategic system. The corporate integration strategy, business interactive strategy and function implementation strategy all move along this axis for the effectiveness and efficiency of the MNC network.
Strategic posture of MNC overseas subsidiaries
The integration and coordination of overseas subsidiaries’ growth and development strategic system is greatly influenced and restrained by the host country environment and role mechanism. Subsidiaries show different strategic postures and orientations in their growth and development strategies in reaction to environment and role changes.
In the process of development in the host country, MNC overseas subsidiaries may decide to take an active approach or a passive approach for their growth to match their core competences and capabilities with environmental changes in both the host country and home country of the parent company. There are three strategic postures for MNC overseas subsidiaries: developmental posture, stability posture and retreat posture. Each is a strategic response to the strategic challenges.
Developmental strategic posture
Developmental strategic posture is a dynamic strategic trend in which MNC subsidiaries have gained a dominant position in competing with other firms. This posture occurs at the entry and growth phases of the life cycle. MNC overseas subsidiaries make the best use of the MNC parenting advantages and localisation advantages to rapidly expand their business and increase their market size and operation scale in the host country. Developmental strategic posture is often created by diversification, M&A, and market penetration and product development strategies.
Stability strategic posture
Stability strategic posture is a strategic move, with which the overseas subsidiaries dealt with a disadvantageous or weak competitive position in the host country. Many overseas subsidiaries in the maturity stage adopt such a strategic posture, which can be further divided into negative posture and positive posture.
Negative stability posture is an effort to maintain the status quo. We often see that after an MNC global strategy adjustment, the strategic position of Chinese subsidiaries declines because these subsidiaries are no longer in the centre of the spotlight for the MNC network and are neglected in the global resource allocation system. These firms, restricted by their role mechanism, have to do their best to hold their position in the host country.
Positive stability posture is a form of transition from maintenance situation to the developmental stage. MNC subsidiaries proactively seek new growth opportunities from parenting advantages or from the host country to complete another strategic change or organisational change in the subsidiary, while maintaining their current competitive position. Besides, MNC overseas subsidiaries can use the host country as leverage for business or organisation restructuring and market integration. Internally, they can adopt an austerity strategy to enhance the firm’s core capabilities and competitive advantages.
Retreat strategic posture
Three major events put MNC subsidiaries in a very vulnerable situation: 1) industry maturity or saturation can put subsidiaries into the wane stage; 2) the wrong strategic choice and/or strategy implementation errors seriously impact the performance of the overseas subsidiaries; 3) overseas subsidiaries’ lack of readiness under the pressure of the parent company’s global strategic adjustment can totally destroy their normal operations. Bankruptcy, liquidation or disinvestments may result from the strategic retreat posture for MNC subsidiaries.
Strategic postures are the comprehensive responses of overseas subsidiaries to changes in the internal and external situation. Subsidiaries differ in their choice of postures depending on their strategic intent and leadership determination. The life cycle and competitive conditions vary in different industries and thus MNC strategic business units select a corresponding strategic posture with the help of S-SWOT analysis.
Implications for practice and further research
The findings of this research are helpful for managers to understand the problems encountered by MNC subsidiaries and to find alternatives for dealing with the challenges.
MNC subsidiaries in China are facing two challenges: (1) focus on network efficiency in integration for the parenting advantages and strategic role expectations; (2) to cope with high demand of the host country environment and do a good job in localisation. They are striving to build a capable organisation with distinctive competencies for internal strategic position and for competing with other MNC subsidiaries.
Global competition creates a dilemma between changing product/market scope and changing distinctive competences. MNC subsidiaries in most industries are inflexible in changing the product/market scope because business diversification demands huge capital investment. To survive, MNC subsidiaries must invest a considerable amount of energy and effort in improving distinctive competences and in upgrading their technology so that they can have stronger strategic status in the MNC system.
This study modelled the challenge–response behaviour of MNC subsidiaries in China involved in global integration and host localisations. The conceptual framework focused on the flow of challenge, perception and response of MNCs and their overseas subsidiaries facing multiple strategic challenges. By capturing the dynamic aspects of the challenge–response behaviours, the model helped guide research on MNC Chinese subsidiaries in a fast-changing environment.
Implications for policy-makers
The results will also help policy-makers in government and strategic managers in business to better understand the behaviour of MNC subsidiaries in China, in the face of strong global competition and social, economic and industrial changes.
Our findings suggest that the primary role mandate given by MNCs to their subsidiaries in China is to be low-cost production centres for their global operations. In the case of Japanese and Korean MNCs, the production from China is primarily exported back to the home nations, with a potential to support value-added production destined for international markets. In case of US and European MNCs, the production from China is being used to develop and penetrate the Chinese domestic market and to similarly support value-added production in the home bases and other regional bases of the MNCs. A greater degree of strategic autonomy in a greater range of functional areas, and within each functional area, is evident in situations where the MNC subsidiaries in China are focused more on the domestic market. Conversely, in situations where the MNC subsidiaries are focused more on playing the role of a global factory, they have to work with greater levels of parental control and lower levels of localisation.
Historically, the policy of the Chinese government has put priorities on exports and on promoting China as a cost-effective base for global production and market needs. The findings of our study suggest that the export-oriented policy may be at odds with another important policy goal of the Chinese government: to seek an upgrade of the technological capabilities of the China-based operations of MNCs. As long as MNCs see Chinese subsidiaries primarily as a low-cost base and as a global factory, they will like to maintain their strategic control over their subsidiaries. Thus, as the findings of the study show, most Chinese subsidiaries remain dependent for knowledge and technology and other critical resources primarily on the parent company. The flow of knowledge is predominantly one way – from the parent company to the Chinese subsidiaries. Conversely, when MNCs see Chinese subsidiaries as strategic options to develop and penetrate the Chinese market too, they are more willing to support the development of autonomous competitive capabilities of these subsidiaries. Such Chinese subsidiaries also become more capable of reciprocation with original knowledge development and sharing of that knowledge with the parent company and with other subsidiaries in the MNC network.
Until recently, the policy of the Chinese government has been to offer access to the Chinese market as a carrot in order to induce MNCs to share more sophisticated know-how with their Chinese subsidiaries. Foreign MNCs continue to face significant barriers in accessing the Chinese market. The general policy perception is that if foreign MNCs are offered a freer access to the Chinese market, they will destroy or acquire the local enterprises and will not support the technological growth of China. The findings of the present research suggest a need to revisit these policy assumptions. Freer access to the Chinese market might actually enable Chinese subsidiaries to develop new knowledge bases, based on the unique cultural and historical endowments of China, in order for them to compete effectively in the local market. In order to benefit from these new knowledge bases, MNCs are likely to provide greater strategic autonomy to Chinese subsidiaries and, over time, also be willing to more openly share know-how with them as part of a bilateral or even multilateral system of knowledge exchange throughout the MNC network. All of this should significantly expand the imports of knowledge endowments into China and help complement its national trade surplus in physical goods.