GLOBAL FIRMS IN INTERNATIONALIZED NETWORKS

Ulf Andersson, Mats Forsgren,Cecilia Pahlberg and Peter Thilenius

AbstractThis paper is part of a research pmject with its main focus on Swedish

multinational ccapanies. The purpose of the pmject is to study the tensionbetween parent cmpanies in Seden and a n&er of subsidiaries. chicfly locatedin Eumpe. Our sims an? ta find what constitutes the strwgth of thesubsidiaries. and what possibilities do they have to influence the corporatestrategy. The presented model outlines the backgro& for an eopirical studywhich Will be conducted during 1991. The "K&l rewgnizes feur groups ofvariables, all of wbich reflect different aspects of a subsidiary‘s relative baseof pcwx.

The pm_iect is partly financed by Tbc Swedish Gwncil for Hanagenent andWork Life Issues

Background

Most literature on international business presents an hierar-chic perspective, where the corporate executive committee controlsthe subsidiaries and makes the main strategic decisions. Theinternationalization of firms is based on the gradual exploitationof a firm-specific asset, controlled by the corporate executivecommittee. Investments are in these theories thought to emanatefrom, and be dependent on, the corporate executive committee, bothtechnologically and in questions about knowledge.

Several studies seek to find the optimal way to structure aninternationalized firm. According to these studies, organizationaland strategic issues in highly internationalized firms always havea pronounced corporate executive committee perspective. Such is-sues cancern questions about the subsidiary's allowed degree ofautonomy and how the total global structure of the firm should bedeveloped.

The underlying assumption in these studies is the corporate ex-ecutive committee's ability to control and integrate a number ofsubsidiaries in other countries. The subsidiaries in this perspec-tive are active mostly at a lotal level. The main influence overthe development of the firm is, according to this picture, in thehands of the corporate executive committee at a strategic manage-

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ment level. Empirital findings during the 70's and 80's indicatehowever that a substantial proportion of foreign investments wereinitiated and accomplished by subsidiaries. The investments werebased on activities in the subsidiaries rather than in the corpo-rate executive committee.

There is, thus, some evidente suggesting that the hierarchicaltop management picture outlined above should be replaced by a morecomplex one, with a number of geographically dispersed, more orless mutually dependent power centres, which beside the corporateexecutive committee exert considerable influence over the develop-ment of the total firm. The former periphery of subsidiaries hasdeveloped into significant centres for investments, activities andinfluence, motivated by the economic power in the industrialstructures to which the subsidiaries belong. This is most impor-tant for firms which are highly internationalized and have a largeshare of their business and staff outside the parent Company.(Forsgren, et al. 1990)

Our basic assumption is, thus, that the fundamental conflictbetween the subsidiaries' need for freedom of action and possibi-lities of lotal adaptation, and at the same time, the need for acollected direction and thereby central control from the corporateexecutive committee's point of view, leads to difficulties in thestrategic management and control of the firm.

Managing international enterprises

Studies about management and control in international companiesare dominated by two questions, (1) the centralization and decen-tralization continuum and (2) the design of the management infor-mation systems, including the evaluation of the subsidiaries' ac-tivities in economic terms. These questions are usually associatedwith the information processing of the corporate executive commit-tee. The economic control systems are assumed to be designed inaccordance with their need for, and access to information neces-sary for the control and integration of the firm and the subsidia-ries.

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One example is the degree of decentralization of some decisionsto the subsidiaries. In this perspective there is a question aboutthe balante between on the one hand, the corporate executivecommittee's need to co-ordinate the firm due to operational linka-ges between different subsidiaries and, on the other, the possibi-lities they have to obtain and process the necessary information.The top management's task is to choose a leve1 of decentralizationwhich is appropriate according to the above-mentioned need for,and access to information and the ability to process the same. Ina similar way, the economic and other report systems are assumedto be designed considering e.g. the subsidiaries' connections tothe rest of the Company and the corporate executive committee'srequirements for information as a basis for decision-making.

Characteristic for these studies is the perspective where thecorporate executive committee designs these control systems, usu-ally within the frame of the established organization structure.In our project, on the other hand, we consider control in an orga-nization from a perspective which is connected rather to power andposition in a network of business relationships. Control has inthis perspective a wider meaning, and is more a question of socialrelations within the formal organization (Astley and Sachdeva,1984). In this perspective, control can emanate from three totallydifferent sources, i.e. hierarchical level, resource-control andnetwork position.

The hierarchical aspect of control deals mainly with questionsabout the formal ways of supervising a firm. Control connected tothe hierarchical levels incorporates the above-mentioned centrali-zation and decentralization continuum, but also the degree offormal evaluation systems used by the corporate executive commit-tee. Control through hierarchical means is ultimately based on thelegitimate right to control, i.e. the traditional organizationallysanctioned right, not on the control over actual resources.

The setond source emanates from the control over actual resour-tes. Control in this sense consists of the influence which anorganizational unit can exercise on other units as a result of itscontrol over resources on which they are dependent. This control

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of resources is usually connected to the ability to obtain criti-ca1 resources from the environment.

The third source from which control can originate is connectedto the differentiation and integration in an organizational sys-tem, like an internationalized firm. The integration creates asystem of activity-based connections between the units, an inter-nal network. If we consider the formal structure within the hie-rarthy as a "prescribed" network, we see the activity-based con-nections as an emergent network (Tiehy et al., 1979). Usually,there is a certain correspondence between the activity-basednetwork and the formal structure, i.e. "the organization providesthe pegs upon which the emergent network hangs" (Tiehy et al.,op.cit.). A unit can have more or less of a central position in aninternal network. The more central the unit, the more importantits role for other units' possibilities of obtaining the resourceswhich, due to the resource-control, are at different places in thenetwork. Centrality can, in this perspective, be considered a so-urce for control above the control that derives from the resourcecontrol.

Fig. 1: Sources of ton tro 1

Hierarchical control is one-sided and based on the, through theorganizational structure, legitimated right to control. The othertwo sources for control are reciprocal, originating in resource-control and network position. The traditional control through thehierarchy can thus be either intensified or abolished by the othertwo sources of control. The corporate executive committee's possi-bilities to manage the subsidiary depend on the corporate execu-

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tive committee's control over resources, important for the subsi-diary, and its centrality in the internal network. Mind, this in-ternal network includes the subsidiary. If, however, the resourcecontrol is in the hands of the subsidiary and the subsidiary has acentral position in the internal network, the corporate executivecommittee's possibilities to control are limited. The control canthen even be more apparent in the opposite direction.

The discussion has so far been concentrated to the internal re-lationships. The concept "environment" has only been used as asummary concept for everything outside the Company. Implicitly,there is also the assumption of correspondence between the formalstructure and the activity-based structure, although this corres-pondence is not complete (Astley, Sachdeva op.cit.). The fundamen-tal components in this analysis are illustrated in Fig. 2 below.

Fig. 2: Intra-organizational control perspective

In this first analysis, the relation between hierarchy,resource-control and position is fairly clear. The control overresources can be dispersed to several units in the internationali-zed firm inasmuch as these have connections with the environment.A correspondence between the hierarchically based control and thecontrol arising from a unit's possibility to import resources fromthe environment is thereby not necessary. However, it can be as-

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sumed that there is a positive correlation between leve1 of cen-trality and hierarchical level. The higher in the hierarchy theunit is, the higher the degree of centrality is assumed to be, dueto the fatt that higher levels have more co-ordinating andintegrating functions than lower levels. B should consequentlyhave a higher degree of centrality than A. In most cases, two outof three control sources should favour the corporate executivecommittee over the subsidiary.

Nevertheless this conclusion is doubtful if the assumptionabout a correlation between the formal structure and an internalnetwork is dropped. Another defect of the analysis is that theenvironment is still "anonymous". The contact with the environmentis totally connected to the resource-control. But if we broadenthe network concept to include also specific relationships toother units outside the Company, the two concepts centrality andresource-control acquire another meaning. The struttural power ofan actor can be assumed to arise from the centrality in thenetwork (Bartlett and Gh.oshal, 1990). A unit can be more or lesscentral in the industrial network of which it is a part, no matterhow much of the network is inside or outside the Company. Fig. 2above should therefore be complemented as in Fig. 3 below.

Fig. 3: Broadened perspective

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In this perspective, A may have a higher degree of centralitythan 6 if consideration is taken to the position which A occupiesin the industrial network that also includes B. Thus, the positionin the industrial network must be the starting point, not the po-sition in the network we ca11 the internal network. Centrality asa source for control Will not necessarily coincide with the hie-rarchical level, as is the case if we only perform an analysis inan intra-organizational perspective. If a subsidiary occupies acentral position in an industrial network which is important forother units in the internationalized firm, the subsidiary has abase for influence irrespective of its position in the hierarchy.Consequently, the presence in an industrial network, as a base forthe control of a unit, is decided both from the importante of thenetwork to other parts of the internationalized firm and the sub-sidiary's position in the network in tomparison with other unitsof the internationalized firm. (Larsson 1985, Forsgren 1989)

The concept of industrial network

The concept of industrial network is based on the existence oflasting relationships between actors. The industrial network isfurthermore a product of its history. The actors have memories oftheir interactions and have also developed knowledge about theirnetwork. At each point in time the firm occupies a certain posi-tion. The individual firm is dependent on resources controlled byothers, and gains access to these through the network position.The development of positions takes time and effort and the posi-tion defines future opportunities and constraints for the strate-gic development. (Johanson 1989)

Industrial networks include several actors, linked to eachother through specific relationships. The industrial network modelis based on assumptions about industrial activities. Each activityis dependent on the performance of other activities which mustprecede or are expected to follow. The activities are like links,forming chains, which are more or less extensive and closely lin-ked to each other.

Industrial networks are unbounded and can extend without li-mits. Boundaries suitable for analytical purposes can be drawn, asa result of perspectives, intentions and interpretations. The ac-tors in the industrial networks can be firms, divisions, businessunits or individuals. No actor can perform his activities isolatedfrom the others. An actor is also usually involved in a number ofactivity-chains, which makes the firm dependent, directly or indi-rectly, on activities in several directions. These dependences canbe general or specific. (Johanson 1989)

An important basis for the network approach is found in socialexchange theory. The focus was on dyadic exchange relations, untilEmerson conceptualized dyadic relations as embedded in larger ex-change networks (Cook, (ed) 1987). He showed that exchange proces-ses in dyads are systematically affected by the network in whichthey are embedded, and that the structure of the network is themajor determinant of the exchange processes.

A fundamental assumption in exchange networks is that the indi-vidual actor's behaviour reflects the structure. If two actorshave the same location in a network, they are under the samestruttural constraints and should behave in a similar way. Theyare considered to occupy strutturally equivalent positions. Varia-tions in their behavior do not reflect the struttural property andshould be attributed to individual actors. The logital unit ofanalysis is thus position rather than individual actors. (Cook(ed), 1987)

The development of an industrial network results from exchangesbetween actors and is not designed by an individual actor as aconsequence of a plan or strategic decision-making. The design andcharacter of connections between the exchange relationships dic-tate the structure of the network. However, each actor can initi-ate exchange, which can result in struttural changes. Usually pro-duct exchange is the primary aspect of exchange in business, butinformation and social exchange should also be considered.

An important factor influencing the exchange processes is dis-tance, both geographic and psychic. These two are correlated, butexceptions can easily be found. Psychic distance is defined asfactors preventing and disturbing the information flows, such as

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differentes in culture, language, leve1 of industrial develcrmcn(etc. (Engwall (ed), 1975)

The actors do not have the same amount of power. Their power isbased on direct control over their own activities and indi,~;.control over other activities through relationships with othri ,lc.,

tors (Pfeffer & Salancik 1978). This indirect control derives fromthe network position, the strength of the relationship and -theother actors' relative importante for each other (Yamagishi et al.1988). In every industrial network, there is a power-structure inthe respect that the actors in the network have different power toatt and influence the actions of others. The power is more or lessconcentrated to one or several actors, and this structure can havean influence on other actors as well as on the future developmentof the network.

The power-dependence relationships are based on the exchan:lc olresources. An actor can lessen his dependence and thereby increasehis power by cultivating alternative sources of desired resources.Perrucci and Pilisuk (1970) suggest that an agency, in an effortto obtain scarce resources, can mobilize more power the more itexpands its interorganizational connections. According to Benson(1975) increased co-operation between organizations enhantes theseorganizations' capacity to dominate their environment. Thusorganizations with extensive linkages to the environment are mostlikely to be powerful. (Provan et al. 1980)

A subsidiary has, in principle, the same possibilities as otheractors in the network to initiate exchange and thereby establishnew relationships and change the network. Some of the relations-hips are to units within the same firm, others to units outside.With a resource-dependence perspective, the internal network con-sists of actors who are more or less dependent upon each other.The resources existing within the subsidiary and the internal re-lationships to other firm-units determine the position within theinternationalized firm. The subsidiary's position in relation tothe external actors is a question of the critical resources oxis-ting within the organization hut also the density and character ofthe relationships to these other actors.

The subsidiary’s relative power base - a model

This part of the paper presents the outlines of a model whichis intended to assess a subsidiary' relative power base. In i.11 11.is the relationship between a divisional management, situatedwithin the parent Company in Sweden, and a subsidiary abroad.'(See Fig. 4)

The divisional management has a global responsibility and itsprimary function cancerns strategic issues. The subsidiary hasstrategic as well as operative responsibilities.

Fig. 4: Fota 7 leve75

nternationolized firm

paate executke committee

Divisional manogement

Subsidiary

In order to determine the relative power base, it is necessaryto survey the network. As it is impossible to cover all rela-tionships, we shall concentrate on the most important actors, wit-hin as well as outside the firm.

The model recognizes four independent variables, where threereflect different aspects of the actual structures while the

1. In a nunber of subsidiaries, there is a divisional structure. In those cases, the rela-tionship between the subsidiary management and the lotal divisional management is also ofinterest. and Will be studied.

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fourth is related to a certain unit's degree of knowledge aboutthese struttural aspects.

Model 1: Subsidiary's power base

Subsidiary's relative power base1

A A A

The first variable in the model connects to the hierarchy as asource for control. The formal hierarchical positions of the sub-sidiary and the divisional management constitute legitimate basesfor power. To estimate the relative power in the formal structureit is important to see the relative hierarchical distance betweenthe actors.

The setond variable is connected to the resource-dependenceperspective. Our approach is to determine the relative economicimportante of the fotal industrial network of which the subsidiaryis a part. The main questions here cancern the extent to which thesubsidiary directly contributes to the firm's total profit butalso the indirect contributions generated through the internalnetwork.

The third variable emerges from the positions which the subsi-diary and the divisional management occupy in the fotal industrialnetwork. These positions play important roles as determinants ofthe subsidiary's relative power base.

The fourth variable differs from the others inasmuch as it isrelated to knowledge about the structures. Knowledge cannot be

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absolute, i.e. no single actor can have a total perception of andknowledge about the structures. The main question is therefore toestimate an actor's relative degree of knowledge. One of thecrucial questions here is the divisional management's knowledge ofimportant actors in the fotal industrial network.

The presented model is useful in both a dynamit and a staticperspective. In a static perspective the model primarily gives astruttural outline of the conditions in the fotal industrialnetwork, and thereby the subsidiary's momentary power base. Itmight be more appropriate to adapt a dynamit perspective, as it ismore likely that the model contains a time-lag effect, i.e. thefour independent variables are interlinked and connected over aperiod. The variables Will be further developed below.

(1). Formal positions

The usual assumption about hierarchical power is that the hig-her a unit's position, and thereby formal authority, the greaterits base for power, all other variables excluded. This derivesfrom the assumption that a higher formal position in the hierarchygives a better possibility to survey the environment and upcomingsituations. The higher leve1 units have, in this perspective, afunction as a beach-head between units involved in different in-dustrial branthes. The beach-head aspect is significant in the re-spett that it identifies an important position in the formalstructure. A unit occupying a beach-head position has in an intra-organizational perspective an important power base as it handles alarge amount of uncertainty. (Hickson, et al., 1971)

Normally, in this aspect the divisional management has arelative advantage (compared to the subsidiary) through thecontacts they have with other divisional managements and the topmanagement in the firm. This leads to the assumption that a unit'sexclusive right to connections with other units within the firmgives a greater power base.

It is necessary as operative implications of the model to sug-gest some possible indicators of a subsidiary's relative formalposition in an intra-organizational perspective. One possible

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indicator is the number of formal levels between the subsidiaryand the divisional management, which hints at how close they arein the hierarchical system. Another indicator can be the number offormal levels between the divisional management and the corporateexecutive committee. This indicator reflects the divisionalmanagement's possibility to survey the part of the total firmstructure that includes the subsidiary. Closely related to thehierarchical leveis is the span of control. This indicator re-flects the corporate executive committee's number of subordinatedunits, including the subsidiary. In a stritt formal perspective, awider span of control may indicate a somewhat larger power basefor the subsidiary as the corporate executive committee to a grea-ter extent has to decentralize.

Still another indicator of a subsidiary's power base is the ex-istence of a matrix structure within the firm. The actual questionin this case is whether the subsidiary has formal channels toother subsidiaries, divisional managements and/or corporate execu-tive committee management. The number and character of these for-mal channels are important for the subsjdiary's formal positionrelative to other firm units.

A plausible assumption is that the formal position not only in-fluences the subsidiary's power base directly, but also has an ef-fett on network position and knowledge about the network.

(2). Economic importante of the network

In a resource-dependence perspective an organization has a gre-ater power base if it controls resources valuable to other organi-zations. Applied to our model, the subsidiary's and division'ssignificance can be estimated by their economic importante. In thefirst place, the subsidiary itself can be of extensive economicimportante for the division, which in turn can be important to thefirm. Setondly, the indirect contributions from the subsidiary'sinternal and external counterparts have to be considered, as theircontributions can be partly dependent on the subsidiary's perfor-mance.

The economic importante of the subsidiary's network shows the

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degree of value the subsidiary has for the division and the wholefirm. The purpose of this variable is to highlight the subsidi-ary's relative economic strength or importante in the division andin the firm. Naturally, the subsidiary's contribution to the divi-sion's total profit and turnover are possible indicators of econo-mic importante, but we also see others such as e.g. future possi-bilities for the subsidiary's products as judged by the divisionalmanagement.

It is in most cases adequate to consider the economic impor-tance of the subsidiary as an indispensable prerequisite for itsability to influence. Even if the subsidiary has a strong positionin the industrial environment, this position can only be used as apower base when the subsidiary and its internal and external coun-terparts per se have a sufficient economic importante.

(3). Network positions

While the economic importante of a subsidiary reflects the va-lue added to the division, the network position demonstrates thesubsidiary's ability to control this value. The network positionis closely related to the concept of centrality, as this is usedin the intra- and inter-organizational perspectives.

Above all three aspects of centrality are of interest; (1) towhat extent a unit serves as a gatekeeper or beach-head betweentwo networks or different parts of the same network (Krackhardt1990, p. 35), (2) the number and the intensity of the connectionsthe unit has, and (3) what would be the consequences for thenetwork if the unit was removed.

These three aspects lead to some possible indicators of thesubsidiary's network position. The first is the extent to whichthe fotal subsidiary is the divisions' only or principal contactwith the external network. Another indicator is how many connec-tions the subsidiary has and how intense they are economically,technologically and socially. The question is who is dependentupon whom in the most important connections, either external orinternal. The third indicator is based on the proportionalreduction in total flows. This is a somewhat different approach

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outlined by Yamagishi (Cook (ed), 1987). It incorporates the remo-val of a unit in an interlinked system. In an intra-organizationalperspective the aim is to estimate the consequences of an imagi-nary removal of the subsidiary. This intellectual experiment Willshow the hypothetical reduction in internal flows within the firm,as if the subsidiary had ceased to exist. With an industrialnetwork perspective, the main questions are whether the removedsubsidiary is replaceable, and what the medium-range effects, upto five years, would be in the network.

Although the divisional management is seen mainly as anadministrative rather than an operative unit, with the primepurpose to manage the total activities, we cannot ignore the fattthat the divisional management sometimes has an operative rolewhich is comparable with the role of the subsidiary in thenetwork. It is therefore possible, and necessary, to determine thenetwork position for the divisional management by using similarindicators as for the subsidiary.

Again the beach-head aspect becomes important, but in the oppo-site perspective, i.e. to what extent is the divisional managementthe subsidiary's only contact with the network, both the internaland/or the external. The number and intensity of the divisionalmanagement's contacts with other actors in the network is also im-portant. Moreover it is interesting to consider the proportionalreduction in flows for the subsidiary, if the divisionalmanagement were removed, i.e. what the medium-range consequenceswould be for the network if the divisional management ceased toexist.

(4). Knowledge about the network

The fourth variable differs from the other three, being con-nected to knowledge rather than to the actual structures. Know-ledge, in our model is not general but specific in the respectthat it refers only to the different management leveis' knowledgeabout the network in which they att. Knowledge is in our perspec-tive a rather tangible subjett, because it considers actual rela-tionships between actors in a business system. The variable,

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knowledge about the network, can be viewed as a source of power.According to Krackhardt (1990) power in a network does not onlyaccrue to those who occupy central positions but also to those whohave an accurate perception of the network. In an industrialnetwork perspective, the greater the knowledge an actor has aboutthe actual structures, actors and relationships, the easier it isto exercise control. Knowledge has thus an indirect influence onthe relative power base. In a sense this variable counteracts withthe other three in determining the subsidiary's relative powerbase. For example, the subsidiary's relative power base may be ex-pected to diminish if the divisional management has a clear know-ledge about, and contacts with, the subsidiary's most importantcustomers, suppliers etc.

Some possible indicators of knowledge about the network are towhat extent the divisional management knows to which central sup-pliers, customers and other important actors the subsidiary hasrelationships. A setond indicator is to what extent the divisionalmanagement has contacts with or relationships to actors in thenetwork. A third indicator is the psychic distance between the di-visional management and the subsidiary.

The subsidiary's relative power base

There are numerous definitions of power. From a general pointof view, power can be defined as a capacity to bring about conse-quences or to affect the outcome of an issue. According to Larsson(1985) power is both relative and relational and can be exercisedby both parties in a relationship.

In most definitions, power need not be exercised to exist.Wrong (1968) emphasized that although power is defined as the ca-pscity to control others, there is a differente between the ca-pscity to control and the actual performance of control. The for-mer is talled potential power, the latter enacted power. This con-ceptualization is adopted by Provan et al. (1980). Figure 5 belowillustrates the interrelation between the two power concepts anddifferent measurement approaches.

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Fig. 5: The interrelation of conceptual and measorement approachesto power.

Paten&! Concept"<rlizOtion EnocttAP<lWcrI

Pora

!

SubjoctNs Pa-C.i"kd PCWCI

Type ofuaosLaement

Source: Provan et al. (1980) p. 208.

The figure shows that there is a differente between objectiveand subjective measurement approaches. Objective measurement met-hods aim to estimate the two basic concepts of power. Subjectivemethods do not give the same clear-tut distinction between theconcepts, but rather an integrated picture of power which Provantalls perceived power. Perceived power thus gives possible biasesin the measures. To obtain a complete picture, our aim is to useboth measurement approaches in studying power relationships.Objective measurements give us the unbiased power conditions,whilst the subjective methods add the experienced power to formthe power bases in the system.

Possible indicators are for example the divisional management'sand the subsidiary's opinion of each unit's power, i.e. which unitis considered to have most influence in the firm. Another possibleindicator is third partyls opinion of where the greatest influenceon the network development is.

Other relevant indicators are the influence on critical events,e.g. (1) the subsidiary's part of total investments in the divi-sion during the last five years, (2) the subsidiary's influence onthe division's most important investments during the last one, two

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and five years, and (3) the divisional managementis influence onthe subsidiary's most important investments during the last one,two and five years.

In our opinion, the subsidiary's participation in thedivisional management, together with the divisional managementrepresentation in the corporate executive committee is also anindicator of the power base. The time which the divisionalmanagement devotes to developing relationships to actors in thesubsidiary's network should also be investigated as well as thetime the divisional management uses to visit the subsidiary. Themain problem with these indicators is to assign them to thedifferent concepts of power. As the measurement is based on bothobjective and subjective methods we anticipate some difficultiesin the analysis of power bases. However, in a theoreticalperspective the distinction is useful.

Empirital notions and concluding remarks

The model presented above constitutes the theoretical frameworkof an empirital study which Will be conducted mainly during 1991.The study Will include six of the largest Swedish multinationalfirms. In each firm a number of subsidiaries Will be studied. Thefocus will be on subsidiaries located mainly in Europe. To coverthe influence from both geographic and psychic distance, some ad-ditional studies Will be made outside Europe.

As mentioned before, the firms often have structures which dif-fer from the one outlined in our model. A subsidiary may, for in-stance, tonsist of several divisions. In those cases, our aim isto study as many divisions as possible in order to obtain as com-plete a picture as possible of the tension between the parent com-pany and the subsidiary.

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