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MNC subsidiary channel relationships as extended links: Implications of global strategies

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Abstract

Foreign subsidiaries of multinational corporations (MNCs) rely on external partners, such as channel partners, to achieve global objectives. We conceptualize the subsidiary’s channel partner as an extended link of the MNC’s internal network: thus, the subsidiary’s adaptation and execution of the MNC’s global strategies should influence the subsidiary’s channel relationship and performance. Building on the strategy–environment alignment framework, we study the influence of MNC global strategies (global efficiency, multinational flexibility, and worldwide learning) on a subsidiary’s channel commitment and the moderating influence of the host-country environment. Survey data from German and Japanese MNCs in the United States indicate the importance of global strategies to a channel relationship. For example, we find that an emphasis on multinational flexibility is detrimental, but worldwide learning benefits the subsidiary’s channel commitment. We also find that the host-country environment plays a contingent role: for example, a global efficiency strategy is beneficial for channel commitment in a stable environment, but detrimental in a dynamic environment. Our research offers key implications for MNCs; we suggest that when MNCs decide to lay emphases on global strategies the MNCs should consider not just their internal subsidiary network, but also their extended channel partner links that function in foreign markets.

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Notes

  1. The subsidiary can sell in the host country through its own sales force (internal channel) or through external channel partners. External channel relationships typically take three forms: joint venture, commission agents, and merchant distributors. When the subsidiary creates a joint venture with its channel partner, they distribute and sell products cooperatively in the host country; Komatsu’s manufacturing subsidiary in Thailand distributes its products through Bangkok Komatsu Sales Co. Ltd, a joint venture formed with Bangkok Motor Works Ltd (Komatsu, 2009). When the subsidiary uses commission agents, they act as intermediaries and sell products on behalf of the subsidiary, while the subsidiary holds the inventory. Finally, when the subsidiary uses distributors, the independent dealer takes title to the products and sells them in the host country.

  2. Owing to this splitting of residual profits, extant research (e.g., Anderson & Narus, 1990; Klein & Roth, 1990) inform us that a firm’s (in our case an MNC subsidiary’s) treatment of external channels is driven by similar factors. One such factor is idiosyncratic investments – such as the time and effort required to train and disseminate firm-specific know-how – in external channel partners for activities such as marketing, selling and managing customers (often called ex post relationship-specific investments; Benito, Pedersen, & Petersen, 2005). Although each channel type has different levels of idiosyncratic investments required while the relationship is being established (such as setup costs, which would typically be highest for a joint venture, next for a distributor, and the least for an agent), the relationship-specific investments are independent of the channel type. A second key factor is that the relationship between a subsidiary and its external channel partner is put in place by the contract between them, and environmental uncertainty necessitates that all contracts be incomplete. The influence of environmental uncertainty on a subsidiary’s marketing and residual profit-sharing activities is applicable to all external channels. And third, all external channel relationships have the potential for agency problems (Anderson & Coughlan, 1987), which influences the subsidiary’s desire to have its own sales function (Petersen, Benito, & Pedersen, 2000), affecting channel commitment. Therefore, we treat all external channels similarly.

  3. Thus, Kim and Frazier (1996) emphasize that the extent of value-added is specific to a channel partner, and can vary within the different types of external channel partners (such as joint ventures, distributors, and commission agents). For example, Benito et al. (2005: 163) highlight the case of agents who “incur added expenses, over and above those needed to develop the market” to strengthen customer bonds, increasing value-added to the channel relationship.

  4. We expect that, in an MNC subsidiary context, channel commitment offers a reliable indicator of channel performance with regard to the MNC’s objectives in the foreign market. Extant research has confirmed a positive effect of commitment on performance (e.g., Skarmeas et al., 2002), so we do not formally hypothesize on this effect, but rather show empirically that it holds in our data.

  5. The notion of adaptation implies that subsidiaries exercise their limited autonomy to adapt the MNC’s global strategies. By taking the subsidiary’s perspective, we can capture the range of autonomy that subsidiaries gain. However, even adapted global strategies are probably not perfectly aligned with the host-country environment (cf. domestic firms, for which the strategy–environment alignment principle emphasizes that the firm’s strategy is formed to fit the external environment; Bourgeois III, 1980).

  6. To develop competitive advantages, MNCs might emphasize all three global strategies. In Bartlett and Ghoshal’s (1995) typology, such MNCs are called “transnational.” However, empirical research indicates that few MNCs are truly transnational (e.g., Harzing, 2000; Leong & Tan, 1993); instead, they tend to focus on one or two global strategies (e.g., Rugman, 2008). Therefore, we do not empirically classify MNCs into different types, but rather focus on their relative emphasis on each global strategy (e.g., Grewal et al., 2008; Kim & Mauborgne, 1993).

  7. An MNC’s global strategy is likely to be established with the MNC managers’ perception of the global environment. As there should be differences between the global environment and a specific host-country environment, the notion of the “fit” between the global strategy and the host-country environment becomes pertinent for a subsidiary. There could be differences in the level of fit between global strategies and the subsidiary’s host-country environment, affecting the subsidiary’s channel relationship.

  8. As a robustness test, we included MNC–subsidiary cultural distance as a moderating variable (instead of psychic distance). Using Hofstede’s (1980) classification of countries, Kogut and Singh (1988) developed a composite measure of cultural distance (see Shenkar, 2001), which we used to calculate the cultural distances of Germany–USA and Japan–USA. Cultural distance did not contribute significantly to our model (the likelihood ratio test supports our hypothesized model), probably because the control variable for the home-country effects already accounted for the variance due to cultural distance. To estimate a model with the cultural distance variable, we would need to remove this control variable, because it was perfectly collinear with cultural distance.

  9. The Wald tests indicated the effect of the global strategy at low or high levels of the environmental variable, such as the effect of global efficiency on commitment in a low munificence environment, which would be equal to βGE+βGEMun × (low munificence) where the low value is the mean−1.96 × SD and the high value is the mean+1.96 × SD. The reported p-values are for one-tailed tests, as we are testing whether only one direction (low/high) is significantly different from zero. See Table 4 for the results of these Wald tests.

  10. We found statistically similar results when we treated the three performance subconstructs (strategic performance, economic performance, and sales performance) as three distinct dependent variables.

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Acknowledgements

The authors acknowledge feedback from David Griffith, Alok Kumar, Gary L. Lilien, Lilach Nachum, Paul Patterson, and Qiong Wang.

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Authors and Affiliations

  1. Aaronson Marketing and International Business Department, Zicklin School of Business, Baruch College, City University of New York, New York, USA

    Mahima Hada

  2. Smeal College of Business, The Pennsylvania State University, University Park, USA

    Rajdeep Grewal

  3. Sauder School of Business, University of British Columbia, Vancouver, Canada

    Murali Chandrashekaran

Authors
  1. Mahima Hada
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  2. Rajdeep Grewal
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  3. Murali Chandrashekaran
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Corresponding author

Correspondence to Mahima Hada.

Additional information

Accepted by Ulf Andersson, Area Editor, 11 June 2013. This paper has been with the authors for three revisions.

APPENDIX

APPENDIX

Table A1

Table A1 Scale items used
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Hada, M., Grewal, R. & Chandrashekaran, M. MNC subsidiary channel relationships as extended links: Implications of global strategies. J Int Bus Stud 44, 787–812 (2013). https://doi.org/10.1057/jibs.2013.34

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