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Does country of origin affect the climate for innovation in foreign subsidiaries, ask Ruby Ranjan, Russell Worthy, Ron Edwards and James Sarros?
Different management approaches to the parent-subsidiary relationship contribute to the climate for innovation among local multinational corporations (MNC) of different national origins. The resources allocated to the subsidiary, its role in creating knowledge and the mindset of managers influences innovation and how a subsidiary behaves in the local setting.
Part of the changing business environment has been the growth of MNCs. These companies are often presented as stateless players in the globalisation of business. How accurate is this picture? Are these global companies still influenced by their country of origin culture and how does this affect innovation in their subsidiaries?
The Australian Business Leadership Survey No. 3, a joint venture between the Australian Institute of Management (AIM) and the Department of Management, Monash University, uncovered some interesting relationships between the country of origin of an MNC and how innovative local firms could be. There are two major determinants of innovative activity in any company – organisational structure and management processes. Other important variables include: an organisation’s flexibility; the existence of internal, informal communication processes; and internal and external collaboration agreements (networks).
Innovation ranges from the first introduction of a new product or service through to a commercially successful introduction of a new or improved product or service. The climate within a firm for encouraging that introduction is critical.
Despite globalisation, national economies remain distinctive because economic activity is deeply rooted in nationally institutional arrangements – such as the role of government in the home economy, the nature of products, labour and capital markets, corporate governance systems, the pattern of skills and employment relations in firms. The role assigned to a subsidiary depends on its perceived capabilities and the strategic importance of the local market. Foreign subsidiaries are no longer seen as “merely distant tools of corporate management reacting as ganglia to impulses sent downward through the bureaucratic nervous system” but rather as important strategic parts of the MNC which systematically contribute to the strength of the firm.
Three key factors influence the ability of a subsidiary to make a significant contribution to the MNC: the effect of the local environment on subsidiary innovation; the degree of autonomy assigned by headquarters; and the strategic behaviour of subsidiary management. The flow of knowledge between parent and subsidiary is a key element in how subsidiaries act in the local setting.
In general, parent organisations control major financial decisions, international marketing and product development, while the subsidiary looks after minor project finances and domestic operational matters.
Where an MNC subsidiary operates outside its local setting, it is critical for managers to have a global mindset coupled with the ability to understand foreign cultures, work with people from various cultures at the same time and interact with foreign colleagues as equals.
A company’s culture (or cultures) plays an important role in setting the location of knowledge development and the direction of knowledge exchanges. A subsidiary’s innovative activities are significantly influenced by its home country’s national system of innovation which includes the quality of basic research, workforce skills, systems of corporate governance, the degree of competitive rivalry, and local inducement mechanisms.
Since the 1980s, research has identified a link between the nationality of a subsidiary and the style adopted by its management. Where firms are successful at home, they tend to export their culture and work practices. For example, Japanese and Swiss banks are more highly formalised than average and rely more on expatriates than British, French or Dutch banks.
Control can be exercised in different ways: for example, expatriates were more likely to be sent for control and co-ordination purposes to Japanese MNC subsidiaries compared with American and British firms. US firms tend to use formalised and standardised control mechanisms such as budget-setting and monitoring systems. UK firms tend to follow similar controls but through the project management process as well as by reward programs.
In a study of MNCs in the UK, US acquisitions had more senior management positions held by people from the parent company. All the distinctive features of US management practice were evident in the subsidiaries. By contrast, few distinctive features of French and German management was found in their subsidiaries in the UK, nor was there a common practice of filling senior positions with home-country nationals. Japanese companies tended to assert control by working within the subsidiary, teaching through example and encouragement.
Even among MNCs from particular regions, diversity exists in relation to the degree of centralisation of decision-making. Plants in the UK and Taiwan were monitored more closely than were their Australian and Malaysian counterparts.
The US management approach is grounded in mutual co-operation between employer and employees and a belief in teamwork and shared common objectives. Management’s right to manage is accepted because there is no “them and us”. Conflict and trade unionism are regarded as unnecessary and destructive. The parent firm has a high level of influence over its subsidiaries compared with European or Japanese firms.
The Japanese management approach focuses on lifetime employment, seniority-based pay and promotion, enterprise or house unions and consensual decision-making. Consensual decision-making suggests the parent firm would allow more subsidiary autonomy, however, Japanese MNCs tend to be more ethnocentric in their approach, as evidenced by the high use of expatriate managers in foreign affiliates and the transfer of the parent’s work culture.
The UK management approach appears to have no distinctive style, adopting practices from various sources. For example, UK firms sometimes adopted a Japanese approach to teamwork and training and some American best practices, such as broader flexibility in HRM activities, including adopting more teamwork and flexible job descriptions.
Given that MNC subsidiaries of different national origins vary in their relationships with their parents with some having greater autonomy than others, does this affect innovation?
In 2004 the Australian Bureau of Statistics (ABS) found the foreign countries most heavily represented as MNCs in Australia were the US, the UK and Japan. A review of Australia’s international investment position confirmed these three countries as the largest suppliers of foreign investment.
Subsidiaries can be: The Global Innovators (the subsidiary is the leader in some forms of information creation for other units); The Integrated Player (the subsidiary needs support from the rest of the firm in some aspects of information creation); The Implementor (the subsidiary creates little knowledge and relies heavily on the parent); or The Local Innovator (the subsidiary has almost complete responsibility for its own knowledge development which is of little use to other units).
The Australian Business Leadership Survey No. 3 – a joint venture between the Australian Institute of Management (AIM) and the Department of Management, Monash University – identified leadership styles of managers in Australia, their perceptions of the organisational cultures in their firms and their response to current issues related to leadership performance. The study examined relationships between leadership, culture and innovation within firms. It sought to find out whether transformational leadership and organisational culture were positively related and whether climate for innovation was related to industry type, location and size. It also looked at whether transactional leadership and organisational culture were negatively associated with climate for innovation and if organisational culture mediated the relationship between leadership and innovation.
Countries such as Australia which attract significant amounts of foreign direct investment are potentially importing approaches to management. The research considered the climate for innovation in MNC subsidiaries in Australia originating from the US and the UK. Based on previous studies, it was expected that subsidiaries of US MNCs would give their subsidiaries less autonomy and resources to innovate than local Australian firms.
While there was some evidence that Australian firms allocated more resources to support innovation compared with UK and US firms overall, the study could not find enough evidence to strongly support the idea that there were differences in the climate for innovation between subsidiaries of different national origins and from firms of Australian ownership.
When comparing the UK, US and Australia there were indications at an item level, however, of differences between firms of different origin.
UK and Australian firms were more likely to: be more creative than US subsidiaries; and disagree that the main function of staff was to follow orders from above (UK and Australian firms were more autonomous with Australian firms the more autonomous of the two).
While there were no significant differences between Australian and UK firms on the following items, Australian firms were more likely to: provide assistance in developing new ideas than US firms; believe that there were adequate resources devoted to innovation; consider the reward system encouraged innovation; not support the view held by US firms that the reward system benefits those who don’t rock the boat.
Domestic Australian firms and UK subsidiaries were judged to be more creative than US subsidiaries. Australian firms provided more resources and incentives for innovation than US subsidiaries. Taking these results collectively, there is a trend for US headquarters to control their subsidiaries more and give less freedom to innovate at the subsidiary level.
In an effort to increase productivity and provide a competitive edge, industry is being encouraged to be more innovative, especially if firms are globally focused. Management approaches in MNCs can affect the climate for innovation within that organisation and different management approaches to the parent-subsidiary relationship contribute to the climate for innovation among local multinational corporations of different national origin.
The academic version of this paper was presented at the QIK Conference in Delhi, India in February 2007.
MBR subscribers: to view full academic paper mail mbr@buseco.monash.edu.au
Public access: www.mbr.monash.edu/full-papers.php (six months embargo applies)
Ruby Ranjan is a PhD student of the Department of Management, Monash University.
Russell Worthy is a Research Assistant of the Department of Management, Monash University.
Ron Edwards is a Professor (Malaysia) of the Department of Management, Monash University.
James Sarros is a Professor and Deputy Head of the Department of Management, Monash University.
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URL: http://www.austlii.edu.au/au/journals/MonashBusRw/2007/25.html