Academic journal article Management International Review

How the Parent Headquarters Adds Value to an MNC

Academic journal article Management International Review

How the Parent Headquarters Adds Value to an MNC

Article excerpt

Abstract:

* Recent views of the MNC as some kind of differentiated network raise questions about the value of a parent HQ and hierarchical structure in today's MNCs. This paper attempts to address such questions by identifying and describing three broad tasks where hierarchical structures with a parent HQ should outperform a network structure. The tasks are: developing and implementing tight coupling within MNCs, identifying and defining economies of scale and scope, and identifying and incorporating significant innovation into MNC strategy.

* The paper uses an information processing perspective to conceptualize the important differences between hierarchical and network structures and to evaluate how well each structure fits the specific task situations. It concludes that hierarchical structures with a parent HQ are still required in today's MNCs.

Keywords: Hierarchy * Network structure * Information processing perspective

Introduction

It has become common practice to view MNCs as networks of home country and foreign subsidiary subunits (Ghoshal et al. 1994; Birkinshaw 2000). While this perspective has contributed new insight into the functioning of MNCs, it has tended to ignore both the general role of hierarchy and the more specific role of a parent HQ in MNCs. Identifying and defining these roles is the subject of this paper. In the paper we will view the HQ in terms of its hierarchical relationship with the domestic subunits and foreign subsidiaries of the firm. This relationship emphasizes the vertical specialization and centralization of information processing and decision making within a firm. The key question we want to address is where does parent HQ and its hierarchical relationship to the subunits add value to the coordination of the firm? Where does this organizational design better coordinate the activities of an MNC than the alternative non-hierarchical network structure?

To address this issue, the present study will use an information processing perspective of coordination and organization design (Galbraith 1973; Tushman and Nadler 1978; Egelhoff 1982, 1991). With an information processing perspective, one design is superior to another design when its information processing capacities better fit the information processing requirements of the task situation than the information processing capacities of the other design. Applying this to our research question, we want to identify those situations where the information processing capacities of a hierarchy are superior to the information processing capacities of a network structure. These should be the tasks where a parent HQ adds most value to the coordination of an MNC. The study will use some of the insights from markets and hierarchies theory, which employs a transaction cost economics perspective (Williamson 1975, 1991; Milgrom and Roberts 1992), to initially identify tasks where hierarchies are likely to be superior to network structures in providing the necessary coordination. Our reasoning is that markets and networks share certain similarities in the way they achieve coordination, so situations where hierarchies are believed to be superior to markets may also be situations where they are likely to be superior to network structures.

The next section reviews the literature that deals with the coordination properties of formal hierarchical structures and network structures. This is followed by a section that attempts to conceptualize and contrast their information processing capacities. Then markets and hierarchies theory will be used to identify and understand three situations where hierarchies tend to be superior to markets in providing coordination: (1) Designing and implementing tight synchronization, (2) identifying and defining economies of scale and scope, and (3) identifying and incorporating significant innovation into firm strategy. The information processing requirements of each situation will be carefully evaluated against the contrasting information processing capacities of hierarchies and network structures, to determine if a sound information processing logic can be developed for hierarchies being superior to network structures in providing coordination for these situations. …

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