Control in Multinational Firms: the Role of Price and Hierarchy

Abstract

How do firms manage to perform their functions efficiently? How do they constrain individual behavior to make it compatible with the overall goals of the firm? These age-old questions take on new significance in the context of the MNC (see, for example, Brooke and Remmers 1970; Doz and Prahalad 1981; Hedlund 1981, 1986; Prahalad and Doz 1981; Baliga and Jaeger 1984; Gates and Egelhoff 1986; Bartlett 1986; Welge 1987; Egelhoff 1988; Bartlett and Ghoshal 1989). In MNCs the problem of control is particularly acute. Geographical and cultural distance increase the cost of establishing control, and make it difficult for MNCs to secure the cooperation of their foreign affiliates. Overcentralization of decisions leads to paralysis, while excessive decentralization results in chaos (Doz and Prahalad 1981).

An earlier version of this paper was presented at the workshop on Organizational Theory and the Multinational Corporation at INSEAD on 1–2 September 1989. I thank Yves Doz, Gunnar Hedlund, John Kimberly, Steve Kobrin, Guido Krickx, Andy Van de Ven, Keith Weigelt, Sidney Winter and especially Kathleen Saul for their helpful comments.