Effects of Headquarters-Subsidiary Relations on Subsidiary Entrepreneurship and

Initiative: The Role of Trust

A thesis submitted to the University of Manchester for the degree of Doctor of

Business Administration in the Faculty of Humanities

2019

Benjamin Qin

Manchester Business School

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Table of Contents

List of Tables .................................................................................................................. 7

List of Figures ................................................................................................................. 9

Abstract ......................................................................................................................... 10

Declaration .................................................................................................................... 13

Copyright Statement ..................................................................................................... 14

Acknowledgements ...................................................................................................... 15

Chapter 1....................................................................................................................... 16

Introduction .................................................................................................................. 16

1.1 Context of this Thesis ........................................................................................... 22

1.2 Motivation of this Thesis ...................................................................................... 25

1.3 Research Questions ............................................................................................... 28

1.4 Overview and Contributions of this Thesis........................................................... 29

1.4.1 Overview of Article One ................................................................................ 31

1.4.2 Overview of Article Two ............................................................................... 33

1.4.3 Overview of Article Three ............................................................................. 36

1.4.4 Overview of Thesis Contribution ................................................................... 39

1.5 Organization of Thesis .......................................................................................... 43

References .................................................................................................................... 45

Chapter 2....................................................................................................................... 53

A Behavioural Agency Perspective on the HQ-Subsidiary Relationship ..................... 53

2.1 Introduction ........................................................................................................... 54

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2.2 Headquarters-Subsidiary Relations, Subsidiary Entrepreneurial Culture and

Subsidiary Initiative .................................................................................................... 56

2.3 Towards a Behavioural Agency Perspective on the HQ-Subsidiary Relationship62

2.4 Social and Psychological Antecedents of Subsidiary Initiative ............................ 69

2.4.1 Procedural Justice .......................................................................................... 71

2.4.2 Trust ............................................................................................................... 74

2.5 Implications for Theory, Research and Practice ................................................... 84

2.5.1 Key Elements of an Effective HQ-Subsidiary Relationship .......................... 85

2.5.2 Implications for Managing MNEs’ Subsidiaries ........................................... 86

2.6 Concluding Remarks ............................................................................................. 90

References .................................................................................................................... 92

Chapter 3..................................................................................................................... 106

Headquarters-Subsidiary Relationships: The Role of Trust and Justice in the Pursuit of

Subsidiary Entrepreneurship and Initiative ................................................................ 106

3.1 Introduction ......................................................................................................... 108

3.2 Theoretical Background ...................................................................................... 110

3.2.1 Re-Conceptualization of the HQ-Subsidiary Relationship .......................... 112

3.2.2 Social and Contextual Aspects of the HQ-Subsidiary Relationship ............ 113

3.3 Hypotheses .......................................................................................................... 115

3.3.1 Subsidiary Entrepreneurial Culture .............................................................. 115

3.3.2 Procedural Justice ........................................................................................ 116

3.3.3 Trust in the HQ ............................................................................................ 119

3.3.4 Feeling Trusted by the HQ ........................................................................... 121

3.3.5 Subsidiary Initiative ..................................................................................... 124

3.3.6 Local Responsiveness .................................................................................. 125

3.4 Methodology ....................................................................................................... 128

3.4.1 Sample and Data Collection ......................................................................... 128

3.4.2 Measures ...................................................................................................... 134

3.4.3 Common Method Bias ................................................................................. 140

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3.5 Research Findings ............................................................................................... 141

3.5.1 Analytical Approach .................................................................................... 141

3.5.2 Assessing the Measurement Models ............................................................ 143

3.5.3 Assessing the Structural Model.................................................................... 146

3.5.4 Tests of Hypotheses ..................................................................................... 147

3.5.5 Post-Hoc Analysis ........................................................................................ 150

3.6 Discussion ........................................................................................................... 152

3.7 Conclusion and Implications ............................................................................... 159

3.7.1 Implications for Research ............................................................................ 159

3.7.2 Implications for Practice .............................................................................. 160

References .................................................................................................................. 162

APPENDIX 3.1. Survey Items ................................................................................... 183

Chapter 4..................................................................................................................... 187

A Closer Look at the Antecedents and Consequences of Feeling Trusted by the HQ and

Trust in the HQ, and the Impacts on Subsidiary Performance ................................... 187

4.1 Introduction ......................................................................................................... 189

4.2 Theoretical Background ...................................................................................... 197

4.2.1 Organizational Trust .................................................................................... 197

4.2.2 Entrepreneurial Orientation.......................................................................... 199

4.3 Data and Methodology ........................................................................................ 200

4.3.1 Research Design ........................................................................................... 200

4.3.2 Research Setting ........................................................................................... 200

4.3.3 Data Collection ............................................................................................ 205

4.3.4 Participants and Data ................................................................................... 208

4.3.5 Data Analysis ............................................................................................... 210

4.4 Findings ............................................................................................................... 212

4.4.1 Identification of Antecedents and Consequences of Trust in the HQ-

Subsidiary Relationship ........................................................................................ 212

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4.4.2 Identification of Antecedents of Feeling Trusted by the HQ vs. Feeling

Distrusted by the HQ ............................................................................................ 213

4.4.2.1 Antecedents of Feeling Trusted by the HQ ........................................... 214

4.4.2.2 Antecedents of Feeling Distrusted by the HQ ...................................... 217

4.4.3 Identification of Antecedents of Trusting the HQ vs. Distrusting the HQ .. 220

4.4.3.1 Antecedents of Trusting in the HQ ....................................................... 221

4.4.3.2 Antecedents of Distrusting the HQ ....................................................... 225

4.4.4 Consequences of Feeling Trusted and Distrusted by the HQ ...................... 227

4.4.4.1 Consequences of Feeling Trusted by the HQ: Entrepreneurial Orientation

........................................................................................................................... 229

4.4.4.2 Consequences of Feeling Distrusted by the HQ: Conservative

Orientation ........................................................................................................ 231

4.4.5 Consequences of Trusting the HQ and Distrusting the HQ ......................... 233

4.4.5.1 Consequences of Trusting the HQ ........................................................ 234

4.4.5.2 Consequences of Distrusting the HQ .................................................... 237

4.5 Integrating Consequences of Feeling Trusted/Distrusted by the HQ and

Trusting/Distrusting in the HQ into Four Types of HQ-Subsidiary Relationship .... 239

4.6 The Subsidiary Performance Comparison .......................................................... 242

4.6.1 Performance of Chinese Subsidiaries with Mutually Trusting Relationships:

Beta Company and BU#1 of Alpha Company ...................................................... 244

4.6.2 Performance of Chinese Subsidiaries with Mutually Distrusting

Relationships: BU#2 and BU#6 of Alpha Company ............................................ 248

4.6.3 Performance of Chinese Subsidiaries with Mixed Relationship

(Asymmetrical Distrust + Mutual Trust): BU#5 of Alpha Company ................... 250

4.6.4 Performance of Chinese Subsidiaries with Mixed Relationship

(Asymmetrical Distrust + Mutual Distrust): BU#3 and BU#4 of Alpha Company

............................................................................................................................... 252

4.7 Discussion ........................................................................................................... 255

4.7.1 Implications for Theory and Research ......................................................... 255

4.7.2 Managerial Implications .............................................................................. 257

4.7.3 Limitations ................................................................................................... 258

4.8 Conclusion .......................................................................................................... 259

References .................................................................................................................. 260

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Chapter 5..................................................................................................................... 277

Discussion and Implications ....................................................................................... 277

5.1 Summary of Findings and Contributions of the Research .................................. 278

5.2 Implications for Research ................................................................................... 279

5.2.1 The Role of Trust in the HQ-Subsidiary Relationship ................................. 280

5.2.2 Subsidiary Entrepreneurial Culture, Local Responsiveness and Subsidiary

Initiative ................................................................................................................ 282

5.2.3 Mechanism and Processes of Relational Trust ............................................ 283

5.2.4 The Role of Procedural Justice .................................................................... 285

5.3 Limitations .......................................................................................................... 285

5.4 Implications for Practice ..................................................................................... 286

5.4.1 Implications for subsidiary managers .......................................................... 287

5.4.2 Implications for HQ Executives ................................................................... 291

References .................................................................................................................. 294

Word Count:

67873

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List of Tables

Table 2.1: Examples of Studies on Trust in the Organizational Context ........................ 75

Table 3.1a. Summary of Research on Subsidiary Entrepreneurship ............................. 111

Table 3.1b. Summary of Studies of Trust and Procedural Justice in the HQ-Subsidiary

Relationship .................................................................................................................. 114

Table 3.2. Sample Description ...................................................................................... 134

Table 3.3a. Descriptive Statistics and Correlations at Latent Variable Level ............... 139

Table 3.3b. Descriptive Statistics and Correlations at Indicator Level ......................... 140

Table 3.4. Indicator Loadings ....................................................................................... 145

Table 3.5. Cross-Loadings of Measurement Items ....................................................... 145

Table 3.6. Fornell-Larcker Criterion ............................................................................. 146

Table 3.7. Construct Reliability .................................................................................... 146

Table 3.8. R² Measures of Endogenous Latent Variables ............................................. 146

Table 3.9. Path Coefficients .......................................................................................... 147

Table 3.10. Q² Predictive Relevance ............................................................................. 147

Table 3.11. Summary of PLS Findings for Subsidiaries with World Mandates ........... 152

Table 4.1. Respondent Company Profile ...................................................................... 201

Table 4.2. Respondent MNEs’ Chinese Subsidiary Performance ................................. 202

Table 4.3. Case Studies Published in the International Business Domain (2010–2017)

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....................................................................................................................................... 208

Table 4.4. Profile of Business Units and Interviewees ................................................. 209

Table 4.5. Antecedents of Feeling Trusted and Distrusted by the HQ .......................... 214

Table 4.6. Antecedents of Trusting and Distrusting the HQ ......................................... 220

Table 4.7. Consequences of Feeling Trusted and Distrusted by the HQ ....................... 228

Table 4.8 - Consequences of Trusting and Distrusting the HQ ..................................... 234

Table 4.9. Performance Comparison ............................................................................. 244

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List of Figures

Figure 2.1. Four Types of HQ-Subsidiary Relationship ................................................. 67

Figure 2.2. HQ-Subsidiary Relationship Framework ..................................................... 85

Figure 3.1. Four Types of HQ-Subsidiary Relationship ............................................... 112

Figure 3.2. HQ-Subsidiary Relationship Model ........................................................... 128

Figure 3.3. Path Coefficients and R2 for Theoretical Model ......................................... 150

Figure 4.1. Types of HQ-Subsidiary Relationship based on Trust Configurations ....... 196

Figure 4.2. Types of HQ-Subsidiary Relationship and Implications ............................ 213

Figure 4.3. Data Structure (Antecedents of Feeling Trusted/Distrusted by the HQ) .... 219

Figure 4.4. Data Structure (Antecedents of Trusting the HQ) ...................................... 224

Figure 4.5. Data Structure (Antecedents of Distrusting the HQ) .................................. 226

Figure 4.6. Data Structure (Consequences of Feeling Trusted by the HQ) .................. 230

Figure 4.7. Data Structure (Consequences of Feeling Distrusted by the HQ) .............. 233

Figure 4.8. Data Structure (Consequences of Trusting the HQ) ................................... 236

Figure 4.9. Data Structure (Consequences of Distrusting the HQ) ............................... 239

Figure 4.10. Integrating the Four Types of HQ-Subsidiary Relationship ..................... 243

Figure 4.11. Performance Summary ............................................................................. 255

Figure 5.1. Virtuous Cycle of HQ-Subsidiary Relationship ......................................... 290

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The University of Manchester

Benjamin Qin

Doctor of Business Administration (DBA)

Effects of Headquarters-Subsidiary Relations on Subsidiary Entrepreneurship and

Initiative: The Role of Trust

8 June, 2019

Abstract

Multinational enterprises (MNEs) increasingly rely on their foreign subsidiaries

for innovation, learning, and growth. Understanding how the relationship between MNE

headquarters (HQ) and their subsidiaries affects innovation and entrepreneurship within

subsidiaries has become a key issue for researchers and managers. Previous studies of

the HQ-subsidiary relationship have largely neglected the individual subsidiary

manager’s perspective, and it is still unclear what motivates subsidiary managers to

pursue entrepreneurial opportunities. In this thesis, I explore how the HQ-subsidiary

relationship influences subsidiary managers’ attitudes and behaviour, with a specific

focus on the drivers of subsidiary entrepreneurial initiative, innovation and market

responsiveness.

Following a general overview of the scope and aims of the research, the thesis

presents three self-contained papers. The first paper confronts some of the traditional

assumptions of MNE theory and builds on the broadened agency perspective to outline

a behavioural agency framework that identifies three key elements that facilitate an

effective relationship between HQs and the subsidiaries of contemporary MNEs,

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namely trust in the HQ, feeling trusted by the HQ and procedural justice. This

reconceptualization of the HQ-subsidiary relationship has both theoretical and

managerial implications, and provides a foundation for future research on the subject.

The second paper builds on the framework developed in the first paper; it

theorizes and tests the hypothesis that a strong subsidiary entrepreneurial culture, which

is a manifestation of an effective HQ-subsidiary relationship, is a necessary condition

for subsidiary managers to pursue subsidiary initiatives that benefit local responsiveness

and the MNE as a whole. We find support for this hypothesis through a survey study of

110 executives managing foreign subsidiaries in China, operating across ten different

major industries and headquartered in more than ten different countries. The study also

tests three hypotheses concerning the key antecedents of subsidiary entrepreneurial

culture. The results indicate that both procedural justice and feeling trusted by the HQ

are positive predictors of a subsidiary entrepreneurial culture, which is consistent with

the framework developed in the first paper. However, the findings do not support the

proposed predictive relationship between trust in the HQ and entrepreneurial culture.

The paper closes with a discussion of the implications for research and practice.

Building on the quantitative findings in the second paper, the third paper reports

findings from a qualitative study investigating in more detail: (i) the antecedents and

consequences of subsidiary managers’ feeling trusted/distrusted by the HQ and

trust/distrust in the HQ; (ii) the mechanisms through which trust influences subsidiary

entrepreneurial orientation; and (iii) how entrepreneurship influences subsidiary

performance in terms of local responsiveness and subsidiary initiatives that benefit the

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MNE as a whole. This study examines these processes through semi-structured in-depth

interviews with 27 subsidiary executives managing seven business units at the Chinese

subsidiaries of two Western MNEs operating in the industrial products sector, which

permitted comparisons between high- and low-performing subsidiaries. The findings

reveal that feeling trusted by the HQ and trusting in the HQ affect subsidiary managers’

behaviour in different ways. Specifically, subsidiary managers’ perception of being

trusted by the HQ fosters subsidiary entrepreneurial orientation, while their trust in the

HQ facilitates organizational citizenship behaviour. Furthermore, performance

comparisons of subsidiaries with different types of HQ-subsidiary relationship

(categorized based on trust) confirm that subsidiary managers’ perception of being

trusted by the HQ plays a more important role, than their trust in the HQ, in influencing

subsidiary level entrepreneurial orientation and subsidiary level entrepreneurial

orientation is a necessary contextual environment that facilitates local responsiveness

and subsidiary initiatives. The paper discusses research and practical implications.

The concluding chapter integrates insights from across the three papers to

outline a framework for managing HQ-subsidiary relationships more effectively. It also

outlines directions for future research.

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Declaration

I, Benjamin Qin, declare that no portion of the work referred to in the thesis has been

submitted in support of an application for another degree or qualification of this or any

other university or other institute of learning.

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Copyright Statement

i. The author of this thesis (including any appendices and/or schedules to this thesis) owns

certain copyright or related rights in it (the “Copyright”) and he has given the

University of Manchester certain rights to use such Copyright, including for

administrative purposes.

ii. Copies of this thesis, either in full or in extracts and whether in hard or electronic copy,

may be made only in accordance with the Copyright, Designs and Patents Act 1988 (as

amended) and regulations issued under it or, where appropriate, in accordance with

licensing agreements which the University has from time to time. This page must form

part of any such copies made.

iii. The ownership of certain Copyright, patents, designs, trademarks and other intellectual

property (the “Intellectual Property”) and any reproductions of copyright works in the

thesis, for example graphs and tables (“Reproductions”) which may be described in this

thesis, may not be owned by the author and may be owned by third parties. Such

Intellectual Property and Reproductions cannot and must not be made available for use

without the prior written permission of the owner(s) of the relevant Intellectual Property

and/or Reproductions.

iv. For further information on the conditions under which disclosure, publication and

commercialization of this thesis, the Copyright and any Intellectual Property University

IP Policy, see http://documents.manchester.ac.uk/display.aspx?DocID=24420). For any

relevant Thesis restriction declarations deposited in the University Library, see he

University Library’s regulations (http://www.library.manchester.ac.uk/about/

regulations/) and the University’s policy on Presentation of Theses.

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Acknowledgements

I would like to send my greatest appreciation and thanks to my main supervisor,

Dr Mark Healey, my co-supervisor, Dr Jiang Yuan, and the chairperson of my annual

reviews, Professor Silvia Massini, for their fruitful discussions, guidance and support

throughout my doctoral studies at Manchester Business School. Without their help, this

work would never have been a possibility. I also would like to thank Elaine Gao of

Shanghai Jiaotong University, whose dedicated support has been invaluable to the DBA

programme. Finally, I would like to thank my family for taking an interest in my work

and supporting me in many ways, and I would like to dedicate this thesis to my two

boys, Benson and Todor, who have been my aspiration to accomplish my doctoral

study.

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Chapter 1

Introduction

The following fictional scene serves as the opening of the introduction chapter

to demonstrate the practical relevance of this DBA thesis.

*****

George Freeman, CEO of X Enterprise (an US based multinational enterprise),

walked out of the board room looking depressed. He was just informed by his executive

team that his company had lost another two percent share of the US market to a Chinese

competitor (H company) this quarter. He turned on the computer in his office and the

tumbling stock price of his company jumped out in front of him. A few quick clicks

later, H company’s website turned up and its sky rocketing share price looked like a

hockey stick. Looking at the sharp contrast of the two companies’ stock performance

for the last two years, George felt like he’d been slapped in the face.

It was five years ago, as George remembered, that Jack, the general manager of

X Enterprise’s Chinese subsidiary, first told him about H company. Jack raised his

concern about H company’s potential threat to X Enterprise’s business with George and

other headquarter executives. He also proposed that some new product development

initiatives should be put in place to respond to H company’s low-cost offerings in the

marketplace. However, George and his senior leadership concluded, back then, that H

company’s technology was far behind that of X Enterprise, their competitive advantage

was not sustainable, and they could only serve low-end customers, which is not a

profitable market segment for X Enterprise.

17

Unfortunately, things did not unfold as George predicted. Two years later, H

company had gained significant market share and started to compete directly with H

enterprise for the same customers in China. George and his corporate executives

realized that the market dynamic was changing quickly, and the competitive advantage

X Enterprise possessed for so many years seemed to disappear overnight. George felt a

sense of urgency and provided Jack with a clear direction to work on breakthrough

initiatives to fend off H company and reclaim market share in China. In the meantime,

George requested his corporate executives to conduct more frequent business reviews

with their Chinese subsidiary and monitor the progress closely. But after three years, H

company not only continued its high growth trajectory in China but also became a

global challenger who had been taking market share in US.

George is puzzled and very concerned about the situation. Even though he

rejected Jack’s proposal when H company first surfaced as a threat, he did change his

decision three years ago and gave explicit direction to Jack, asking him to develop and

execute a local strategy that can effectively compete with H company in China. What

breakthrough initiatives had Jack and his team pursued in the last three years and why

were they not effective? Had the Chinese subsidiary been managed properly? What

competitive advantage did H company possess that helped them gain market share in

the US? As George was thinking about these questions, he took a peak at his computer

screen. Sure enough, another one percent drop on X Enterprise’s stock price. George

decided to give Jack a call even though it already passed midnight in China.

18

Jack got off the phone with George and lit up a cigarette. The conversation was

not pleasant. Reading between the lines, Jack clearly felt that George was blaming him

for H company’s success in the US market because the Chinese subsidiary did not

effectively compete with H company and contain them in China. Jack certainly would

not take that blame and feel responsible for the current situation. In retrospective, Jack

did raise his concern with George and his executive team when he first saw the threat of

H company. Unfortunately, no one from headquarters trusted his judgement and took

him seriously. Instead, they shot down his proposed new product development

initiatives. Only when things got worse (H company grew very fast in two years), did

George allow the Chinese subsidiary to pursue innovative initiatives to defend its

market share in China. Jack and his team were excited at first. They conducted

workshops to analyse market dynamics, gathered competitive intelligence, and

developed long-term strategy and short-term tactics to defend market share. To their

disappointment, however, when they presented their plan to George and his senior

leadership team, the original excitement quickly vaporized. The corporate executives

questioned the integrity of their data and requested more supporting documents that

didn’t exist. They also challenged the proposed go-to-market approach simply because

it was not aligned with X Enterprise’s approach and might be risky. In addition, they

reduced the proposed investment amount because it did not meet the return on

investment (ROI) criteria set for all business units of X Enterprise.

From Jack’s perspective, headquarters’ interfering behaviour discouraged the

Chinese subsidiary from conducting entrepreneurial initiatives. It was paradoxical, Jack

19

thought. On one hand, the CEO had specifically asked the Chinese subsidiary to pursue

innovative initiatives, which by definition, should be different from the status quo that

everyone was comfortable with. On the other hand, headquarter executives were trying

to manage these proposed initiatives as if they were routine activities-everything had to

be aligned with existing global practice without trusting the Chinese team to conduct

new initiatives. Jack’s focus quickly shifted from developing strategy based on market

intelligence to preparing reports based on overwhelming requests from corporate

executives, which significantly slowed down the progress of developing and executing

breakthrough initiatives.

Jack put out the cigarette, turned on the laptop, and started to write his

resignation……

At the other end of the world, George was staring at the depressing stock chart

and lost in thought. The conversation with Jack did not clear things up for him. Instead,

he felt even more puzzled than before. From George’s perspective, as a CEO, he had

done the right things. Three years ago, after he realized the threat from H company was

serious in the Chinese market, he immediately authorized Jack to pursue initiatives at

the Chinese subsidiary level to prevent H company from making further inroads. He

even requested his senior leadership team to support Jack through frequent reviews of

the progress to ensure that new initiatives were on the right track. But three years later,

H company was not strangled in the cradle of China as George wished. Worse, it

became a serious threat in the US market by winning market share there. What really

bothered George was that Jack did not seem to feel responsible for toady’s situation. To

20

his surprise, during the conversation, Jack implied that there was too much interference

from corporate, which caused the failure of the mission. This was really mind boggling,

George thought. Jack joined the company ten years ago and helped the company to

grow in the Chinese market in the first five years. He proved himself as a capable

manager through handling some difficult situations with creativity before. What

happened this time? Why did he think we were interfering instead of helping him?

*****

The fictional scene described above captures the epitome of the interactions

between headquarters (HQs) and subsidiaries in today’s multinational enterprises

(MNEs). These interactions illustrate the dynamics of HQ-subsidiary relationship.

Specifically, how trust (or lack of it) and perception gaps between HQs and subsidiaries

impact the effectiveness of HQ-subsidiary relationship, which is a crucial element to

facilitate entrepreneurial initiatives in subsidiaries.

MNEs are vital to the development of the global economy. An MNE comprises

a group of geographically dispersed organizations with disparate goals that includes a

headquarters and different national subsidiaries (Ghoshal and Bartlett 1990). MNEs

have evolved in terms of their geographic scope and foreign subsidiaries’ roles over the

past fifty years (Birkinshaw and Hood 2001), which has increased the complexity of

managing the headquarters-subsidiary (HQs-subsidiary) relationship (Pahl and Roth

1993).

How can MNEs build new competitive advantages in increasingly globalized

international markets? How do MNEs cope with the new market dynamics as large

21

emerging economies (e.g., India and China) play more important roles in global

economy? What assumptions need to be changed in managing HQ-subsidiary

relationship to account for these new market dynamics? Addressing these questions is

of critical interest to practitioners and scholars of international business who are

concerned with understanding the performance of contemporary MNEs.

Management practitioners and researchers have paid considerable attention to

modern MNEs’ ability to benefit from their foreign subsidiaries’ entrepreneurial

activities (Ambos et al. 2010; Bartlett and Ghosha 1989; Birkinshaw 2014; Rugman and

Li 2007; Rugman and Verbeke 2001). For example, GE Healthcare’s Chinese

subsidiary was encouraged to develop new products that respond to low budget

constraints of second-tier city hospitals in China and the new ultrasound equipment

developed by GE’s Chinese subsidiary not only helped GE to gain local market share in

China but also disrupted North American and European markets (Govindarajan and

Trimble 2013; Immelt et al. 2009). Another example is that Honeywell’s corporate

executives have been encouraging their subsidiary managers in high growth regions

(e.g., China and India) to develop east-to-east (serving local markets) and east-to-rest

(serving global markets) capabilities through local R&D, local manufacturing, and local

distribution models (Tedjarati 2016). The encouragement of subsidiary level

entrepreneurial activities from these two examples illustrated that MNE headquarters

have been allocating some level of autonomy to foreign subsidiaries. Some recent

research studied this phenomenon and viewed subsidiary autonomy as being ‘given’

(Sengul and Gimeno 2013) or ‘granted’ (Chiao and Ying 2013; Gammelgaard et al.

22

2012) by head offices. In contrast, other researchers had shown that subsidiaries may

also engage in autonomous activities that fall beyond the extent of its formally assigned

level of authority (Birkinshaw and Hood 1998; Forsgren et al. 1999; Sargent and

Matthews 2006). Therefore, as Cavanagh (2017) suggests, subsidiary autonomy might

be assigned by corporate headquarters and/or developed further by foreign subsidiaries.

In addition, previous studies have shown that subsidiaries undertaking autonomous

actions beyond their authority might be penalized by their head offices (Delany 2000)

or rewarded instead (Birkinshaw and Fry 1998; Sanvik 2010; Balogun et al. 2011).

However, previous research has not explained these mixed consequences and left the

motivation of subsidiaries’ pursuing entrepreneurial activities beyond their assigned

authority unanswered. Furthermore, previous studies have not shown if and how

assigned subsidiary autonomy translates into entrepreneurial initiatives Gammelgaard et

al. (2012). Hence, we cannot simply assume subsidiaries automatically pursue

entrepreneurial activities when given a certain level of autonomy. In other words, the

motivation of subsidiary initiative under assigned autonomy should also be investigated.

Therefore, this thesis tries to identify the key motivational elements and mechanisms

that facilitate subsidiary entrepreneurial initiatives.

1.1 Context of this Thesis

How do MNEs manage their subsidiaries and develop competitive advantages to

achieve sustainable and profitable growth in world markets? The widespread practice

used by MNEs involves various interactions between corporate executives and foreign

subsidiary business managers (e.g., email communication, formal business reviews,

23

informal conversations, etc.). The discussion between HQs and subsidiaries focuses on

three topics: (i) financial performance of the subsidiary; (ii) developments of core

businesses and routine activities; (iii) new subsidiary initiatives that improve

competitive advantages.

The most challenging, but critical to MNEs’ growth, of these topics is (iii), and

that is the focus of this thesis: what is the current approach to managing HQ-subsidiary

relationship that facilitates subsidiary initiative; what are the deficiencies in this

approach; and what can be done to improve the effectiveness of the relationship? The

underlying premise of this thesis is that a better approach to managing HQ-subsidiary

relationship that influences (iii) will help MNEs to build new competitive advantages.

Birkinshaw et al. (2000) stated that HQ-subsidiary relationship is a particular

case of the generic dyad relationship between superiors and subordinates. Following

this definition, I define an effective HQ-subsidiary relationship in a modern MNE as a

productive working relationship between individual subsidiary managers and their

immediate superiors at HQ that motivates the subsidiary managers to pursue

entrepreneurial initiatives at subsidiary level.

For this thesis, I use subsidiary initiative and subsidiary entrepreneurial

initiatives interchangeably. The non-entrepreneurial routine activities of the subsidiaries

are not the focus of the current study. In other words, activities related to subsidiaries’

daily operations which are clearly defined and specified in HQ’s mandates are not

considered as subsidiary initiatives. Following Ghoshal (1987) and Birkinshaw (1997), I

define subsidiary initiative as an entrepreneurial process that subsidiary managers

24

identify and commit resources to an opportunity. This study focuses on initiatives that

subsidiary managers take to pursue local or global market opportunities. These

subsidiary initiatives include local for local or local for global innovations (Ghoshal

1987).

All empirical data collected for this thesis are from Chinese subsidiaries of

Western MNEs, which may raise the concern of generalizability of the study. While

recognizing this potential limitation, I argue that the theoretical foundation and the

propositions developed in article 1 are based on a behavioural agency framework that

highlights the social structural nature of the HQ-subsidiary relationship. This

framework seeks to combine agency theory with psychological theory (Westphal and

Zajac 2013) and affords a central role to social cognitive factors (e.g., actors’ motives,

feelings, perceptions and beliefs) which are not specific to Chinese culture. Therefore,

theoretical foundations of this study are applicable to other countries than just China. In

addition, article 2 develops hypothesis based on the non-country specific framework

established in article 1 and the constructs measured in article 2 were adapted from

previous empirical studies with data collected from western countries. Hence, the

quantitative empirical study of this thesis is not designed for a China study either.

However, since data collected for this study all came from Chinese subsidiaries, it is

suggested that future studies to replicate the study with data from other countries. In

contrast, the propositions developed in article 3 were based on qualitative data collected

from Chinese subsidiary managers. Some may then argue that article 3 is a ‘China-

bound’ study even though the overarching concepts derived from the data analysis do

25

not just apply to China (e.g., Entrepreneurial Orientation, Organizational Citizenship

Behaviour). Lam et al. (1999) provided empirical evidence that employees across

different cultures treated certain OCB categories similarly and the identification of the

measure of OCB can be used across different nations (e.g., United States, Australia,

Japan, and Hong Kong).

1.2 Motivation of this Thesis

The fundamental research question motivating this thesis is:

How can the HQ-subsidiary relationship be effectively managed to

encourage subsidiary initiatives?

Practitioners and scholars of international business have long sought to

understand how MNEs can build competitive advantages and how they can be

effectively managed in increasingly globalized international markets. One critical

feature that is central to this endeavour is the relationship between the headquarters of

MNEs and their subsidiary businesses. However, as MNEs evolve, the complexity of

managing HQ-subsidiary relationship increases. The past fifty years have witnessed

profound change in how this relationship is conceived and managed (Kostova et al.

2016). Scholars initially emphasized the formal design and control of Western MNEs

for exploiting foreign subsidiaries (Joseph 1970). With increasing globalization of

business and the growing complexity of MNEs, the emphasis shifted toward HQs’

informal control and subsidiaries’ dual role of global integration and local adaptation

(Prahalad and Doz 1987).

26

In contrast, contemporary writings on the HQ-subsidiary relationship tend to

focus on the importance of entrepreneurial initiative among subsidiaries as a source of

potential advantage for MNEs seeking to exploit local innovation through their wider

activities (Birkinshaw 2014). As Verbeke and Asmussen (2016) recently argued, a

central question for international strategic management scholars has become that of how

MNEs respond to local market opportunities through their foreign subsidiaries and

achieve sustainable and profitable growth.

This thesis follows this evolution of the literature and concurs with Birkinshaw

et al. (1998), that subsidiary initiative plays a significant role in building firm-specific

advantages in MNEs, which can in turn benefit both subsidiaries’ responsiveness to the

local markets and MNEs’ global markets as a whole (Birkinshaw 2014). This view of

MNEs and their subsidiaries not only highlights the importance of subsidiary initiative,

but also raises questions concerning the factors that facilitate such initiatives. Schmid et

al.’s (2014) review of the literature on subsidiary initiative research concluded that there

is no major perspective dominating this line of enquiry, reflecting the early stage of this

field. This provides an opportunity for further investigation in this domain. After

reviewing the extant literature, I agree with Schmid et al. (2014) that previous studies

have largely neglected individual subsidiary managers as the unit of analysis. Hence, it

is still unclear what motivates subsidiary managers to pursue entrepreneurial

opportunities at the subsidiary level.

In addition, previous examples of subsidiary initiative focus on MNEs from

smaller countries like Switzerland, Belgium and the Netherlands, or comparatively

27

small subsidiaries from US corporations (Schmid et al. 2014). Yet the rise of emerging

mega-markets like China and India in the twenty-first century warrants investigation of

entrepreneurial initiative from Chinese or Indian subsidiaries of large US or European

MNEs. Hence, I believe that research on entrepreneurial activities from MNEs’

emerging market subsidiaries is not only practically important but can also significantly

contribute to international management theories.

One of Birkinshaw’s (1999) most important findings from his empirical study of

the determinants of subsidiary initiative is that subsidiary managers counter HQ

managers’ resistance of subsidiary initiatives by building personal relationships and

developing credibility. This implies that, from a subsidiary manager’s perspective, trust

in the HQ-subsidiary relationship facilitates subsidiary initiative. My initial interviews

with the top managers of Chinese subsidiaries of large Western MNEs during a

preliminary pilot study confirmed that, from the subsidiary manager’s perspective, the

HQ-subsidiary relationship is an important factor that promotes or suppresses their

willingness to pursue entrepreneurial opportunities at subsidiary level. Surprisingly,

however, there has been little if any research following Birkinshaw’s (1999) empirical

findings to try to understand further how the HQ-subsidiary relationship influences

subsidiary initiative, which in turn helps subsidiaries respond to the local market

environment as well as improving the overall competitiveness of the MNEs in global

markets. Therefore, investigating how the HQ-subsidiary relationship influences

subsidiary managers’ decisions on pursuing entrepreneurial initiatives that benefit local

responsiveness and the MNE as a whole might be fruitful.

28

1.3 Research Questions

Based on the above developments, I was motivated to pursue the following

research questions:

1. What types of HQ-subsidiary relationship facilitate the pursuit of

entrepreneurial initiatives by subsidiary managers?

2. What are the antecedents and consequences of an HQ-subsidiary relationship

that facilitates subsidiary entrepreneurial initiative, from subsidiary

managers’ perspective?

3. How does the HQ-subsidiary relationship influence local responsiveness and

subsidiary initiative that benefit MNEs’ global activities?

The first research question tries to address different types of HQ-subsidiary

relationship based on two dimensions. The first dimension is the level of HQ managers’

encouragement of subsidiary initiatives; the second is the level of subsidiary managers’

willingness to pursue entrepreneurial initiatives. These types of HQ-subsidiary

relationship represent the evolution of the MNEs (Kostova et al. 2016). After

conceptually identifying which types of HQ-subsidiary relationship facilitate subsidiary

entrepreneurial initiative, the second research question addresses, from subsidiary

managers’ perspective, what key elements form these types of relationship and what

results are generated from these relationships. Previous studies partially answered this

question (Bartlett and Ghoshal 1989; Birkinshaw et al. 1995), but this thesis provides

empirical evidence that challenges some of the previous assumptions. After empirically

identifying the antecedents and consequences of an HQ-subsidiary relationship that

29

facilitates subsidiary initiative, the third research question tries to explore the

mechanism of which HQ-subsidiary relationship influences local responsiveness and

subsidiary initiative that benefits the MNE as a whole.

I took a behavioural perspective to answer these three research questions.

Behavioural perspective highlights the important roles of cognition (perceptual

differences) and affect (feeling trusted) play in the HQ-subsidiary relationship. Extant

research on HQ-subsidiary relationship has mainly focused on topics like organizational

design, cultural differences, regional structure/networks, knowledge transfer, and

human resource issues (Kostova et al. 2016). However, to better understand why

subsidiary managers sometimes do and sometimes do not pursue entrepreneurial

initiative, we need to investigate the thoughts and feelings (cognitive and affective

processes) that influence their behaviour. Following Hoenen and Kostova (2015), who

argued that we need to understand the cognitive and affective foundations of the

relationship to broaden the rather static and bilateral view of agency relationships

between the two parties, I argue that behavioural perspective helps to explain the social

and relational aspects of the dynamics in the HQ-subsidiary relationship. Although there

is a growing body of research taking a behavioural perspective, the cognitive and

affective factors underpinning entrepreneurial initiative remain relatively

underexplored.

1.4 Overview and Contributions of this Thesis

This thesis consists of three self-contained articles that aim to answer the above

three research questions. The first research question is answered in the first article by

30

reconceptualizing the HQ-subsidiary relationship. Research on HQ-subsidiary

relationship has shifted its focus from HQ’s formal control (Joseph 1970) to

subsidiaries’ dual role of local responsiveness and global integration (Prahalad and Doz

1987), and then to subsidiary initiative in modern MNEs (Birkinshaw 2014). However,

little consideration was given to behavioural aspects of subsidiary managers. For

example, when HQ encourages subsidiary to conduct entrepreneurial initiatives, why

some subsidiary managers do and the other do not? In other words, what kind of

interactive relationship between HQ and subsidiary managers truly motivates subsidiary

managers to conduct entrepreneurial initiatives remains unclear. The four types of HQ-

subsidiary relationship identified in the first article conceptually challenge some of the

traditional assumptions, extending the extant literature through arguing that HQs’

encouragement of subsidiary initiative is necessary but not sufficient to facilitate

subsidiary managers to pursue entrepreneurial initiatives that benefit local

responsiveness and MNEs’ global markets. The second article answers the second

research question by empirically examining procedural justice, feeling trusted by the

HQ and trusting in the HQ as antecedents of the HQ-subsidiary relationship, and local

responsiveness and subsidiary initiative as the consequences. Empirical evidence

supporting a direct relationship between entrepreneurship and subsidiary initiative has

been lacking. For example, in their empirical study, Birkinshaw and Hood (1998) only

found moderate support of a direct relationship between subsidiary entrepreneurial

culture and subsidiary initiative. Scott et al. (2010) also failed to find empirical

evidence that supports this relationship. In addition, Kim and Mauborgne (1996)

31

attempted but failed to empirically link procedural justice to subsidiary managers’

extra-role behaviour, which includes innovative actions, spontaneous cooperation and

creative behaviour. The quantitative methods used in the second article offer extended

capabilities for causal modelling, particularly in behavioural research, which is

appropriate to answer the second research question. The third research question is

answered in the third article by using multiple case studies and focusing on the role of

trust. Previous research provided ample empirical evidence supporting the positive

outcomes of trust in international business and HQ-subsidiary relations in general

(Brower et al. 2008; Dirks 1999; Harvey et al. 2005; Hewett and O’Bearden 2001).

However, the mechanism through which trust and the perception of being trusted

influencing behaviour and attitude remain under explored. The in-depth elite interview

method used in the third article helps to generate deep insights that further explore the

mechanism through which the HQ-subsidiary relationship facilitates local

responsiveness and subsidiary initiative. I summarize the three articles in the subsequent

section.

1.4.1 Overview of Article One

The first article establishes theoretical foundations to answer the research

questions by building on the broadened agency perspective (Hoenen and Kostova 2015)

to outline a behavioural agency framework for understanding the HQ-subsidiary

relationship. Behavioural agency models seek to combine agency theory with

psychological theory (Westphal and Zajac 2013; Wiseman and Gomez-Mejia 1998). A

behavioural agency framework highlights the social structural nature of the HQ-

32

subsidiary relationship and affords a central role to actors’ motives and social cognitive

capabilities.

In particular, the behavioural agency framework draws attention to the complex

and multifaceted nature of trust in the HQ-subsidiary relationships. Previous research

has examined HQs’ resistance to subsidiary initiatives and assumed that subsidiary

managers have an unconditional intention to explore entrepreneurial opportunities

(Birkinshaw 1998). This article departs from this assumption and argues that the tables

have turned in many of today’s MNEs. HQ executives are now encouraging subsidiary

initiatives. Not only this, but HQs are increasingly expecting subsidiaries to pursue

entrepreneurial opportunities at the subsidiary level that benefit both local markets and

the MNE as a whole. There is a greater opportunity to advance the theory by focusing

on subsidiaries’ resistance to entrepreneurial initiative because, instead of playing the

subordinate role, subsidiary managers can and often do resist pursuing entrepreneurial

opportunities at subsidiary level.

In addition, scholars often assume that the relationship between HQ and

subsidiaries is one-sided. For instance, Birkinshaw (2014) describes a fundamental

power imbalance, where the HQ is the source of subsidiaries’ resources and legitimacy.

By affording agency to both parties, this article recognizes greater interdependence

between the two parties and draws attention to the two-sided nature of the relationship.

The interdependence of HQs and their subsidiaries provides the basis for identifying the

key elements that influence the effectiveness of the relationship between the parties. As

mentioned earlier, HQs’ supportive attitude towards subsidiary initiatives is necessary

33

but not sufficient to motivate subsidiary managers to pursue entrepreneurial

opportunities, since subsidiary managers do not embrace subsidiary initiatives simply

based on HQs’ expectation. Subsidiary managers act differently depending on the

differing contextual conditions in which they are embedded.

This article models the HQ-subsidiary relationship as two-sided, interdependent

and contextually embedded to examine the antecedents of an effective MNE’s HQ-

subsidiary relationship. The analysis identifies procedural justice, trust in the HQ, and

feeling trusted by the HQ as three key elements that collectively foster the development

of a HQ-subsidiary relationship that fosters the development of an entrepreneurial

culture at the subsidiary level, which in turn facilitates subsidiary managers’ decisions

to pursue subsidiary initiatives. In sum, the first article confronts some of the traditional

assumptions of MNE theory and advances a new framework that identifies the key

elements that facilitate an effective relationship between the HQs and subsidiaries of

contemporary MNEs.

1.4.2 Overview of Article Two

The second article in this thesis presents empirical evidence concerning the

antecedents, manifestation and consequences of the HQ-subsidiary relationship to

understand what motivates subsidiary managers to pursue entrepreneurial opportunities,

which in turn enhances foreign subsidiaries’ local responsiveness and strengthens

subsidiary initiatives that benefit the MNE as a whole in today’s competitive global

markets. Specifically, this article reports findings based on a survey of Chinese

subsidiaries of MNEs headquartered in the US and Europe. MNEs headquartered in

34

developed markets are facing serious competitive pressure from Chinese companies and

have recognized the increasing importance of their Chinese subsidiaries’ entrepreneurial

activities. This new phenomenon renders the study of Chinese subsidiaries especially

interesting. To examine this phenomenon, I use data collected from a survey based on

the perceptions of Chinese subsidiaries’ executive level managers. These data are vital

for examining behavioural aspects of the HQ-subsidiary relationship, where collecting

data on the cognitive dimensions of the relationship is more relevant than objective

accounts because managers’ perceptions are the key influencers of their actions

(Birkinshaw 2014). This article develops a series of hypotheses based on the

behavioural agency framework and tests them through a series of second-generation

multivariate analyses using partial least squares structural equation modelling, or PLS-

SEM. Compared to first-generation statistical techniques (such as ANOVA), PLS offers

extended capabilities for causal modelling, particularly in behavioural research (Lowry

and Gaskin 2014).

The findings from this study offer some interesting insights into the antecedents

and consequences of a subsidiary entrepreneurial culture, which I argue is the

manifestation of an effective HQ-subsidiary relationship. Firstly, subsidiary managers’

perception of being trusted by the HQ and the level of procedural justice influence the

subsidiaries’ entrepreneurial culture, which in turn strongly predicts the level of local

responsiveness and subsidiary initiative. Subsidiary managers’ trust in the HQ,

however, does not have a clear relationship with subsidiary entrepreneurial culture. This

result is surprising and counterintuitive, because there is ample evidence from previous

35

studies to support the argument that trust produces positive outcomes in international

business and in the HQ-subsidiary context in particular (Dirks 1999; Brower et al. 2009;

Hewett and O’Bearden 2001; Harvey et al. 2005).

To help clarify the influence of trust in the HQ-subsidiary relationship, in

contrast to previous research using traditional conceptions and measures of trust (e.g.

Baer et al. 2015), I focused on the influence of feeling trusted on subsidiary

entrepreneurial culture. I argue that in the HQ-subsidiary context, the risk-fostering

nature of feeling trusted plays a vital role. The strong predictive relationship observed

between feeling trusted and subsidiary entrepreneurial culture confirmed that the

positive side of feeling trusted prevailed in an environment that demands unscripted and

creative actions.

The second important insight from the second article comes from the significant

positive relationship observed between subsidiary entrepreneurial culture and local

responsiveness. This study is the first to examine how the internal contextual

environment influences local responsiveness. The article suggests that local

responsiveness is strongly influenced by the level of subsidiary entrepreneurial culture,

and this effect is even stronger for subsidiaries that have international responsibilities.

A third key observation from the second article is that subsidiary entrepreneurial

culture has an important role to play in the development of subsidiary initiative. The

empirical evidence from this study shows significantly stronger support to the proposed

predicting relationship between subsidiary entrepreneurial culture and subsidiary

initiative than the evidence collected by Birkinshaw et al. (1998).

36

In summary, this study provided empirical support that feeling trusted and

procedural justice are significant contributors to the subsidiary entrepreneurial culture

(the manifestation of an effective HQ-subsidiary relationship in modern MNEs), which

in turn is a significant determinant of subsidiary initiative and local responsiveness. On

the other hand, the study did not demonstrate a link between trust in the HQ and

subsidiary entrepreneurial culture.

1.4.3 Overview of Article Three

The third article of this thesis focuses on empirical evidence that helps to answer

research questions 2 and 3. Firstly, I examine interview data collected from subsidiary

managers of two MNEs to understand how feeling trusted/distrusted by the HQ and

trust/distrust in the HQ impact the HQ-subsidiary relationship, and investigate the

mechanisms through which these trust-related constructs impact subsidiary managers’

behaviour in terms of their willingness to pursue entrepreneurial opportunities at

subsidiary level. I then develop a novel integrative framework demonstrating how the

HQ-subsidiary relationship impacts MNEs’ foreign subsidiaries’ performance in terms

of local responsiveness and entrepreneurial initiatives that benefit global markets.

The primary mode of data collection for this article was semi-structured

interviews with top subsidiary managers of Western MNEs. I conducted all my

investigations in subsidiaries located in China. China is of particular interest because of

its status as the largest emerging economy, its market complexity and competitiveness,

and the recent success of Chinese companies’ global expansion. Chinese subsidiaries

are of increasing significance to MNEs’ overall performance (Driffield et al. 2016).

37

Additionally, I take advantage of my background in this context. As Morgan and

Smircich (1980) argued, the researcher’s experience and ability to understand the

phenomenon under study can be an important advantage in making sense of the data. I

speak Chinese as my mother tongue, worked in the US for nine years, and served as a

business leader for four different Western MNEs’ Chinese subsidiaries for 15 years.

Therefore, I am familiar with the Western MNE business culture. This helped me to

make sense of respondents’ accounts collected from interviews (Langley 1999).

I conducted qualitative data analysis following Miles and Huberman’s (1984)

interactive approach, which consists of three concurrent flows of activity: data

reduction, data display and conclusion-drawing/verification. Following Gioia et al.’s

(2013) approach, I inductively identify a series of aggregate themes concerning the

antecedents and consequences of the HQ-subsidiary relationship and develop a

framework for analysing different types of trusting relationship between HQs and their

subsidiaries concerning feeling trusted by the HQ, mutual trust, trusting in the HQ and

mutual distrust. For example, I reveal the social mechanism through which HQ

managers perceived trusting behaviour influences subsidiary managers to act in a more

proactive, innovative and risk-taking way, which in turn facilitates entrepreneurial

orientation at subsidiary level. While innovativeness, proactiveness and risk-taking have

been identified as key dimensions of entrepreneurial orientation (Miller 1983), and are

consistently used in literature (Rauch et al. 2009), this study is the first to provide

insights on how these key elements are facilitated in an MNE context.

38

In this article, the results clearly show that feeling trusted by the HQ is an

important antecedent of an effective HQ-subsidiary relationship that facilitates

entrepreneurial orientation in Chinese subsidiaries. Also, feeling trusted by the HQ is

found to be a necessary but not sufficient condition for Chinese subsidiary managers to

trust their HQ managers. These findings are an important extension to the trust

literature, because prior research has focused on the importance of trusting in managers

(Dirks and Ferrin 2002), and an empirical examination of feeling trusted by the HQ and

trusting in the HQ in an HQ-subsidiary context has been lacking to date. Furthermore,

this article presents empirical evidence that subsidiaries with mutual trust, that feel

trusted by the HQ, demonstrate entrepreneurial orientation, which improves the

subsidiary’s performance in local responsiveness, while the subsidiary’s initiatives

benefit the MNE as a whole. In contrast, subsidiaries with a mutually distrusting

relationship with the HQ exhibit poor performance in local responsiveness and

subsidiary initiatives, which results in low market share in China and a lack of

contribution to the overall MNE performance.

The findings from this article extend the subsidiary initiative literature and

deepen our understanding of the determinants of subsidiary initiatives that impact

subsidiaries’ local responsiveness and entrepreneurial subsidiary initiatives, affecting

the MNE’s overall performance. Prior research has identified organizational contexts

that prevent subsidiary initiative (Ambos et al. 2010; Birkinshaw 1997, 1999) but these

studies focused on HQs’ preference without considering subsidiary managers’

resistance to pursuing entrepreneurial initiatives. This study extends prior research on

39

subsidiary initiative by demonstrating how subsidiary managers’ perception of the HQ-

subsidiary relationship impacts their decision to pursue initiatives that benefit subsidiary

local responsiveness and MNEs’ overall performance.

1.4.4 Overview of Thesis Contribution

Overall, the research reported in this thesis offers three main contributions to the

existing literature on HQ-subsidiary relations. Specifically, the main contributions are to

(1) draw attention to the barriers to subsidiary initiative from the perspective of

subsidiary managers, especially the role of feeling trusted by HQ, (2) provide a richer

view of the nature and influence of trust in the HQ-subsidiary relationship, one that

highlights the asymmetrical nature of trust in this context, (3) illustrate the mechanisms

through which trust impacts subsidiary managers’ behaviour and intentions toward

pursuing entrepreneurial initiatives.

Birkinshaw (1999) suggested that a lack of subsidiary credibility and centralized

decision making processes are the two most significant obstacles of effective subsidiary

inititiave. This view suggests that the barriers to subsidiary initiative largely stem from

HQ’s resistance. However, as MNEs have evolved, HQ’s resistance to subsidiary

initiative has become a less significant barrier (Schotter and Beamish 2011). In

contemporary MNEs, subsidiaries often have a mandate to pursue entrepreneurial

initiatives (Cantwell and Mudambi 2005). Given this shift, I argue that a critical need is

to understand how and why subsidiary managers may resist these initiatives. To this

end, this thesis examines the key elements that motivate or supress subsidiary

manager’s willingness to pursue entrepreneurial initiatives. The findings from

40

subsidiary managers suggest that feeling trusted by HQ is the most significant

motivating factor of subsidiary initiative. Birkinshaw’s (1999) study found that

subsidiary managers counter HQ’s resistance to subsidiary initiative through the

building of personal relationship with corporate executives. The findings of this thesis,

in contrast, suggest that HQ executives need to make efforts to build a trusting

relationship with subsidiary managers in order to achieve successful subsidiary

initiative. In other words, feeling trusted by HQ is a prerequisite of subsidiary initiative

success in contemporary MNEs. This finding is highly significant for the HQ-subsidiary

relationship literature because it represents one of the first attempts to examine feeling

trusted in the HQ-subsidiary context and suggests that understanding subsidiary

managers’ thoughts and feelings is an important complement to the HQ-centric view

often found in the existing literature.

A second key contribution of the research is that it draws attention to the

asymmetrical nature of perceived trust in the HQ-subsidiary relationship. The extant

literature on organizational trust has focused on subordinates’ trust in their managers

(Dirks and Ferrin 2001). This thesis focuses on the nature and influence of

interpersonal trust in the context of the HQ-subsidiary dyad by simultaneously

examining subsidiary managers’ perception of being trusted by HQ and their trust in

HQ. The findings from the research suggest that subordinates would not trust their

managers if they don’t feel trusted by them. In other words, feeling trusted is a

precursor of trusting. Therefore, investigating subordinates’ perceptions of being

trusted by their managers is critical for advancing our understanding of the manager-

41

subordinate dyadic relationship. One of the interesting findings of this thesis is that trust

between managers (HQ) and subordinates (subsidiary) is asymmetrical. That is, trusting

and feeling trusted do not always mutually co-exist. For example, when subsidiary

managers feel trusted by HQ, they may or may not trust HQ back. However, feeling

trusted and trusting are not completely independent either. As mentioned earlier, in the

context of HQ-subsidiary relationship, subsidiary managers’ feeling trusted by HQ is

found to be a prerequisite of trusting in HQ. In short, the evidence from this thesis

suggests that subsidiary managers’ perception of being trusted by HQ is a necessary but

not sufficient condition for them to trust HQ. While the extant trust literature focuses

on examining the relationship between trust and job performance (Colquitt et al. 2007;

Dirks and Ferrin 2002), this thesis extends the literature concerning trust in the HQ-

subsidiary relationship by identifying the relationship between feeling trusted by HQ

and trusting in HQ.

A third key contribution of the research is that it draws attention to the power of

subsidiary manager’s perception of being trusted by HQ. The majority of previous

studies seeking to examine the consequences of trust on subordinate behaviour and

intentions have focused exclusively on subordinates’ trust in their managers (Dirks and

Ferrin 2001). The empirical evidence from Dirks and Ferrin (2001) demonstrates that

trusting in leaders positively impacts subordinates’ behaviour and intentions (e.g.,

organizational citizenship behaviour (OCB)) without regard to the leader’s trust in

subordinate. Brower et al.’s (2009) study represents one of the very few exceptions. It

examines the role of trust from both manager and subordinate perspectives and suggests

42

that if the manager did not trust the subordinate, subordinates’ trust in managers had

little impact on OCB. However, while providing strong support for the importance of

being trusted, Brower et al. (2009) did not examine the explanatory mechanisms that

illustrates how manager’s trust in subordinate impacts subordinate performance. This

thesis then investigates the underlying processes of trust and being trusted in HQ-

subsidiary relationship. It is widely understood that HQ and subsidiary managers often

have different perceptions and such differences have important implications in the

management of the HQ-subsidiary relationship (Birkinshaw et al. 2000). Hence, this

thesis examines the role of subsidiary manager’s perception of being trusted by HQ and

trusting in HQ. The findings of this thesis replicate and extend prior research on HQ-

subsidiary relationship by demonstrating the unique relationship between feeling trusted

by HQ and subsidiary initiative. Specifically, the results highlight the importance of

feeling trusted by HQ by demonstrating the strong support of the relationship of

subsidiary managers’ perception of being trusted by HQ to subsidiary managers’

willingness to take risk and pursue entrepreneurial initiatives. More importantly, the

insights of this thesis add to our understanding of trust by illustrating the mechanisms

through which feeling trusted by HQ impact subsidiary managers’ behaviour and

intentions toward subsidiary initiative. For example, HQ manager’s empowering

behaviour increases subsidiary manager’s perception of being trusted which facilitates

their proactive, innovative and risk-taking behaviour that leads to willingness to pursue

entrepreneurial initiatives.

43

In summary, this thesis contributes to the international business literature by

demonstrating that entrepreneurial initiative is a very human process, one that requires

trust and a positive relationship even in the presence of a mandate for initiative. It also

extends the literature on the nature and influence of trust in the context of HQ-

subsidiary relations by highlighting the importance of feeling trusted. The empirical

evidence of this thesis suggests that subsidiary manager’s perception of being trusted by

the HQ is a prerequisite of trusting in the HQ and plays a more critical role in subsidiary

initiative than acknowledged in prior research. In addition, the thesis also contributes to

the literature on subsidiary initiative and HQ-subsidiary relations by providing a more

detailed understanding of the nature, antecedents and consequences of trust in this

particular context. This further extends our understanding of the influence of trust in

international business because although trust is commonly posited as an influence on

this relationship, there is a dearth of systematic theoretical and empirical studies of its

nature and role in this context.

1.5 Organization of Thesis

This thesis is structured around three self-contained articles. The first is

conceptual, the second a quantitative, survey-based field study, and the third a

qualitative, interview-based field study. The first article has its own introduction,

theoretical background information, framework building, proposition development,

discussion, conclusion and reference list. The second and third empirical papers have

separate introductions, literature reviews, data and methodology sections, findings,

discussions and conclusions, and reference lists. The footnotes, tables, figures, page

44

numbers, titles and subtitles have a sequential order throughout the thesis. Chapter 2

presents the first article, which establishes the theoretical foundation of this thesis and

establishes a new framework that identifies the key elements that facilitate an effective

relationship between the HQs and subsidiaries of contemporary MNEs. Chapter 3

contains the second article, which follows the framework developed in the first article

and examines the antecedents, manifestation and consequences of the HQ-subsidiary

relationship to understand what motivates subsidiary managers to pursue

entrepreneurial opportunities that enhance local responsiveness and strengthen

subsidiary initiatives that benefit MNEs’ global markets. Chapter 4 elaborates the third

article, which grounds the study in the findings of the second article and further

investigates the mechanism through which trust influences subsidiary entrepreneurship

and how it impacts subsidiaries’ performance in local responsiveness and

entrepreneurial initiatives that benefit the MNE as a whole. Chapter 5 seeks to pull

together the overall contribution of the research, looking across the three articles. This

chapter provides a concluding discussion of the general findings, discusses the

limitations, offers ideas for future research and discusses the practical implications.

Finally, in Chapters 2, 3 and 4, I use the pronouns “we” and “our” rather than “I” and

“my” respectively to reflect that each article is associated with a working paper co-

authored with my main supervisor, Dr Mark Healey at the Alliance Manchester

Business School. To clarify my contribution to these three articles, I took the major role

in planning and execution, data acquisition, analysis and writing these papers. Dr

Healey provided valuable feedback and editing.

45

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Chapter 2

A Behavioural Agency Perspective on the HQ-Subsidiary Relationship

Abstract

The extant literature on the relationship between the headquarters of

multinational enterprises (MNEs) and their subsidiaries lacks a framework for

understanding the key behavioural drivers of this relationship in contemporary MNEs.

In this article, we confront some of the traditional assumptions of MNE theory and

build on the broadened agency perspective to outline a behavioural agency framework

that identifies the key elements that facilitate an effective relationship between the HQs

and subsidiaries of contemporary MNEs. This framework clarifies the role of

procedural justice and draws attention to the importance of trust to this relationship and

outlines an asymmetrical view of trust. Managerial implications of this research are

also discussed. This research provides a foundation for future research on the subject.

Keywords: HQ-subsidiary relationship, MNE, procedural justice, trust in the HQ,

feeling trusted by the HQ

54

2.1 Introduction

The relationship between headquarters (HQs) and their subsidiaries is a

cornerstone of research on multinational enterprises (MNEs). However, the nature of

this relationship is constantly evolving (Kostova, Marano, and Tallman 2016), creating

a challenge for researchers trying to understand its nature and consequences. Following

a period during which many HQs prioritized top-down formal control over their

subsidiaries’ activities, the HQs of many of today’s MNEs expect subsidiaries not only

to take more initiative but to pursue entrepreneurial opportunities that lead to growth in

local markets and benefit the MNE as a whole, enhancing their resources and

capabilities and providing a mechanism for bottom-up knowledge creation and transfer

(Birkinshaw and Hood 2016; Ambos, Ambos, and Schlegelmilch 2006; Foss and

Pedersen 2002). This new phenomenon is most evident in large emerging markets such

as China and India, countries that MNEs categorize as high growth regions. For

example, the large industrial conglomerate Honeywell International Inc. is encouraging

its local subsidiaries to develop east-for-east (serving local market demands) and east-

to-rest (serving global markets) capabilities through local R&D in China and India,

local sourcing, local manufacturing and local distribution models. Honeywell’s Chinese

subsidiary has developed innovative products that serve not only local markets but also

global needs, and the enterprise’s revenue in high growth regions has tripled in the last

ten years (Tedjarati 2016).

This expectation for greater subsidiary initiative and entrepreneurship is placing

additional burdens on subsidiary managers to recognize and respond to HQs’

55

expectations, which in turn places considerable demand on the HQ-subsidiary

relationship. In turn, there is a need for conceptual frameworks that shed light on how

subsidiaries cope with these demands and what features of HQ-subsidiary relationships

are conducive to subsidiary initiative and entrepreneurship. Hoenen and Kostova (2015)

recently argued that a broadened agency perspective can be useful for this purpose.

Agency theory (Arrow 1984; Jensen and Meckling 1976) draws attention to potential

conflicts of interest between HQs (the principal) and their subsidiaries (the agents),

whereas a broadened agency perspective highlights how the relationship between the

two parties depends on social and contextual factors. The emphasis on social factors

recognizes that both the principal and agents have interests beyond wealth

maximization, not least social interests such as trust, reciprocity and fairness, and that

these interests significantly shape decisions and actions. Recognizing the contextual

nature of this relationship draws attention to how it is embedded within particularized

national and institutional cultural contexts, such that, for example, national culture

determines how both parties view the relationship and how and why they make

decisions.

In this article, we build on the broadened agency perspective to outline a

behavioural agency framework for understanding the HQ-subsidiary relationship.

Behavioural agency models seek to combine agency theory with psychological theory

(Westphal and Zajac 2013; Wiseman and Gomez-Mejia 1998). A behavioural agency

framework highlights the social structural nature of the HQ-subsidiary relationship and

affords a central role to social cognitive factors, including actors’ motives, feelings,

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perceptions and beliefs. In particular, our analysis draws attention to the complex and

multifaceted nature of trust in the HQ-subsidiary relationship. While some scholars

have recognized the importance of trust to this relationship (e.g. Bouquet and

Birkinshaw 2008; Hewett and Bearden 2001; Li 2005), it has tended to be viewed as an

antecedent of other more central factors such as coordination or conflict resolution. In

contrast, we posit that trust is a key driver of the entrepreneurial activity of subsidiary

managers and that trust in this context is multifaceted, involving feelings of both being

trusted by the HQ and trusting in the HQ.

We develop our arguments as follows. We first set out some boundaries for our

theorizing by clarifying the phenomenon we seek to explain, namely the nature of

subsidiary entrepreneurial initiative among the foreign subsidiaries of MNEs. Next, we

explain why agency theory is useful for understanding the factors that influence

subsidiary managers’ decisions to pursue entrepreneurial opportunities, with a particular

focus on the relationship between HQs and subsidiaries. We develop a behavioural

agency framework for understanding subsidiary initiative from the perspective of

subsidiary managers, and develop a series of propositions concerning the behavioural

drivers of subsidiary initiative. We close by considering implications for research and

management practice.

2.2 Headquarters-Subsidiary Relations, Subsidiary Entrepreneurial Culture and

Subsidiary Initiative

Our analysis is concerned with the relationship between Western MNEs

headquartered mainly in either Europe or North America, and their foreign subsidiaries.

57

For the present purposes, we adapt the definition of an MNE from Dunning and Lundan

(2008, 3): “A multinational or transnational enterprise is an enterprise that engages in

foreign direct investment (FDI) and owns, or in some way, controls value-added

activities in more than one country”. In addition to the general definition of an MNE,

and as noted above, we recognize that many MNEs operating in the twenty-first century

face competitive pressure to encourage their mature foreign subsidiaries to pursue

entrepreneurial opportunities that benefit both local responsiveness and the MNE as a

whole. Hence, we focus our analysis on MNEs seeking to meet this twin imperative.

We define a foreign subsidiary as an MNE’s established and directly owned

legal entity in a foreign country of a host region. Our argument is that an effective

relationship between an MNE’s HQ and its foreign subsidiary motivates top subsidiary

managers to conduct entrepreneurial initiatives. Subsidiary initiative is defined as the

entrepreneurial pursuit of new market opportunities initiated by the subsidiary without

the HQ’s explicit directive (Birkinshaw, Hood, and Jonsson 1998a).

The study of MNEs and their subsidiaries has always followed developments in

global industry (Kostova, Marano, and Tallman 2016). As Western MNEs increasingly

internationalized their activities in the 1960s and 1970s, scholars sought to understand

how organizational design and control systems helped MNEs coordinate and regulate

the activities of entities operating in diverse markets with differing systems and

technologies (e.g. Hymer 1970; Perlmutter 1969Hymer (1970). Thus, the dominant

conception of the HQ-subsidiary relationship was in terms of the command and control

of headquarters. Both in terms of how this relationship was conceptualized and how

58

researchers studied it (Ambos and Mahnke 2010), little consideration was given to

subsidiary-side factors, such as their resistance to implementing HQ decisions (Paterson

and Brock 2002).

As business became more globalized, Bartlett and Ghoshal’s (1989) seminal

work on transnational organizations explicated the twin pressures that MNEs’ foreign

subsidiaries face in terms of local responsiveness and global coordination. Formulation

of the integration-responsiveness framework provided additional insights into the HQ-

subsidiary relationship (Prahalad and Doz 1987). Along the same lines, Gupta and

Govindarajan (1991) developed a network theory of MNEs and directed attention to

informal control and the non-hierarchical aspects of the HQ-subsidiary relationship.

Building on the network perspective, Birkinshaw (1999) studied subsidiary initiatives as

the manifestation of MNE entrepreneurship: the key finding from this work was that

subsidiary managers counter HQs’ resistance to subsidiary initiatives through building

subsidiary credibility and personal relationships with HQ managers (Birkinshaw 1999).

In sum, the locus of MNE research shifted from HQs’ formal control without

consideration of subsidiaries’ resistance (Joseph 1970) to HQs’ informal control and

subsidiaries’ dual role of global integration and local adaptation (Prahalad and Doz

1987), and then to subsidiary entrepreneurial initiatives in modern MNEs (Birkinshaw

2014a). In this article, we follow the evolution of the literature and identify subsidiary

entrepreneurial culture and the initiative this produces as the central phenomenon of

interest.

59

The consequences of subsidiary entrepreneurial initiative are significant not only

for the subsidiary but also for the MNE as a whole (Birkinshaw 2014a). Research shows

that subsidiary initiative is particularly important for explorative activities—i.e.

technological innovation and learning—for enterprises whose corporate organization

seems best suited for exploitative activities—i.e. coordination and control of existing

operations (Teece 2007). Put differently, the innovation capability of many MNEs

depends on the entrepreneurship of their subsidiaries. Previous research has examined

HQs’ resistance to subsidiary initiatives and assumed subsidiary managers had

unconditional intention to explore entrepreneurial opportunities (Birkinshaw 1998). The

tables have turned in many of today’s MNEs. HQ executives are encouraging subsidiary

initiatives not only to pursue entrepreneurial opportunities at the subsidiary level, but

also to undertake initiatives that benefit both local markets and the MNE as a whole.

This expectation is placing additional burdens on subsidiary managers to recognize and

respond to HQs’ expectations, which in turn places considerable demand on the HQ-

subsidiary relationship.

Given this new phenomenon, it is time to ease the focus on HQs’ resistance of

subsidiary initiatives (cf. Birkinshaw 2014) and instead examine the factors that enable

and constrain subsidiary managers in pursuing entrepreneurial opportunities at the

subsidiary level. Birkinshaw (2014b) recently argued that it is important to recognize

the existence of the fundamental power imbalance between subsidiaries and HQs,

because subsidiaries rely on their HQ for resources. However, we argue that there is a

greater opportunity to advance understanding of inter-firm variations in subsidiary

60

initiative by focusing on subsidiaries’ resistance to and pursuit of entrepreneurial

initiatives, because instead of playing the subordinate role, subsidiary managers can and

often do resist pursuing entrepreneurial opportunities at the subsidiary level. They can,

because not pursuing subsidiary initiatives is not as obvious as not following HQ’s

directives and it is harder for the HQ to detect; they often do resist subsidiary initiatives

because entrepreneurial initiative involves risk-taking and, as agents, subsidiary

managers are often risk averse. This change of focus demands a new conceptualization

of an effective HQ-subsidiary relationship, which we argue is a vital pre-requisite for

subsidiary entrepreneurship and initiative.

We define an effective HQ-subsidiary relationship in an MNE as a productive

working relationship between an HQ and a foreign subsidiary that facilitates the

development of an entrepreneurial culture among subsidiary managers. An

entrepreneurial culture is a culture that motivates employees of MNE subsidiaries to

take the initiative (Birkinshaw 1997b). A subsidiary initiative concerns “a discrete,

proactive undertaking that advances a new way for the corporation to use or expand its

resources” (Birkinshaw 1997, 207), where the thrust for the initiative comes from

subsidiary managers (rather than HQ) and leads to substantive results for the subsidiary

(e.g. developing new products in the local market, exporting products internationally).

Research shows that a subsidiary entrepreneurial culture involves the development

among subsidiary managers of an entrepreneurial outlook or vision, a proactive and

risk-taking orientation that leads to experimentation, and a learning orientation that

61

facilitates knowledge exchange (Birkinshaw 1999; Boojihawon, Dimitratos, and Young

2007; Li and Lee 2015).

We maintain that when the relationship between the MNE and a subsidiary is

not functioning effectively (i.e. it is one of conflict, ambiguity or mistrust), the

subsidiary is unlikely to develop an entrepreneurial culture. Many new product

development and market penetration ideas originate from foreign subsidiaries, and did

not result from headquarters granting more autonomy to subsidiary managers (Rugman,

Verbeke, and Yuan 2011). These are entrepreneurial activities instigated at subsidiary

level but which require resource support from headquarters. They are not necessarily

the result of headquarters’ guidance and resource allocation. Through subsidiary

entrepreneurial initiatives, subsidiary managers can develop firm-specific advantages

that benefit the MNE as a whole (Birkinshaw and Hood 1998). However, developing

new activities requires very different conditions from maintaining ongoing ones, which

can make entrepreneurship difficult in an established business (Block 1982). From this

perspective, HQs’ expectation of subsidiary initiatives alone is not sufficient to motivate

subsidiary managers to pursue entrepreneurial opportunities. Rather, we maintain that

subsidiary managers’ willingness to conduct entrepreneurial activities depends on the

existence of a subsidiary entrepreneurial culture, a necessary condition for which is an

effective, high quality working relationship between HQ and the subsidiary. To better

understand the drivers of an effective relationship from the subsidiary managers’

perspective, we adopt a behavioural agency approach.

62

2.3 Towards a Behavioural Agency Perspective on the HQ-Subsidiary Relationship

We locate our analysis of the factors that influence subsidiary managers’

decisions to pursue entrepreneurial opportunities within a broadened agency perspective

(cf. Hoenen and Kostova 2014). Agency theory (Arrow 1984; Jensen and Meckling

1976) has proved useful for understanding the HQ-subsidiary relationship, because

agency concerns characterize the relationship (Roth and O'Donnell 1996). These

concerns include HQs (the principals) delegating authority to subsidiaries (the agents),

subsidiaries having potentially conflicting motives that cause subsidiaries to depart from

corporate interests, and HQ being unable to observe whether the subsidiary is exercising

the principal’s authority. As Hoenen and Kostova (2014) noted, since the 1960s,

scholars have broadened agency theory to consider an expanded set of problems,

including multilateral rather than bilateral problems and dynamic rather than static

problems. Most relevant to the present analysis, (Hoenen and Kostova 2014) observe

that in recent years scholars have begun to develop a social view of agency. This view

recognizes that the motives of principals and agents may be broader than wealth

maximization, and actions may be driven by social mechanisms such as trust, justice

and reciprocity (e.g. Hendry 2002; Wiseman et al. 2012).

We take the social view of agency as our starting point to build a behavioural

agency framework for understanding the HQ-subsidiary relationship. According to

Crossan et al. (1999), a good framework identifies the central phenomenon of interest,

renders explicit key premises or assumptions, and describes relationships among the

elements of the framework. Having identified subsidiary entrepreneurial initiative as

63

our phenomenon of interest, below we state the key premises of our framework and

examine the relationships among the key elements of the framework. Three key

premises underpin our framework and support the development of a series of

propositions concerning the drivers of subsidiary initiative.

Premise 1: Executives of MNE HQs set expectations for subsidiaries to pursue

entrepreneurial initiatives, and these expectations can influence the extent to which

subsidiaries engage in entrepreneurial activity.

Premise 2: Subsidiaries vary in their reactions to HQs’ expectations of initiative;

when HQ executives expect subsidiaries to pursue initiatives, some subsidiaries will do

so to a greater extent while others will do so to a lesser extent.

Premise 3: A subsidiary’s reaction to HQ’s expectations of initiative depends on

social and psychological processes, including subsidiary managers’ perceptions of and

attitudes and feelings towards their relationship with the HQ.

Premise 1 recognizes that modern MNEs have matured and their foreign

subsidiaries have grown in size and capabilities (Roth and Nigh 1992). A mature

subsidiary in mega-markets is expected to contribute to an MNE’s overall

competitiveness. This view is in line with the typology developed by Birkinshaw and

Morrison (1995). They stated that subsidiaries that have a world mandate are expected

to achieve both local responsiveness and global integration (Birkinshaw and Morrison

1995b). In addition to the Honeywell example mentioned earlier, GE Healthcare also

expects its Chinese subsidiary to implement a reverse innovation strategy to disrupt

developed markets in North America and Europe. Previous research has provided

64

theoretical and empirical support for the idea that subsidiary managers counter HQs’

resistance to subsidiary initiatives (Birkinshaw 1999). As MNEs mature, HQ’s new

expectation of subsidiary entrepreneurial initiatives creates a demand for a different

conceptual lens to examine the new interactions existing in the HQ-subsidiary

relationship. We suggest that the dynamics between the HQ and subsidiary managers

can be fruitfully examined from a social psychological perspective.

Premise 2 argues the need to understand why some subsidiary managers pursue

entrepreneurial opportunities while others do not (Birkinshaw 1997a). We cannot

assume that individual subsidiary managers will automatically pursue entrepreneurial

initiatives simply because they are expected to do so. Although little research has

examined subsidiary managers’ resistance to entrepreneurial initiatives, we maintain

that even when HQ encourages subsidiary initiatives, some individual subsidiary

managers will take the opportunity to pursue entrepreneurial opportunities while others

will still only follow routines or HQ’s clear directives. Subsidiary managers recognize

that pursuing entrepreneurial opportunities at subsidiary level may generate potential

conflicts between HQ and subsidiaries: for example, HQ and subsidiary may have a

different view on the potential of certain opportunities, or they may not agree on the

amount of investment required for certain opportunities. Roth and Nigh (1992) provided

empirical evidence that subsidiary managers’ perception of the effectiveness of the HQ-

subsidiary relationship is positively correlated with the level of conflict between the HQ

and subsidiaries.

65

Premise 3 holds that subsidiary managers’ decision to conduct entrepreneurial

initiatives is contingent on their perception of the effectiveness of the HQ-subsidiary

relationship. From a behavioural agency perspective, subsidiaries’ reactions to HQs’

expectations depend on a specific set of social and psychological processes, not least

subsidiary managers’ perceptions of and attitudes towards their relationship with HQ.

The idea that subsidiary managers’ perception of HQ’s support is an important

antecedent of their willingness to conduct entrepreneurial initiatives at the subsidiary

level is in line with wider research on the development of an entrepreneurial

environment within corporations(Kuratko, Montagno, and Hornsby 1990; Hornsby,

Kuratko, and Zahra 2002). While it is not necessary for HQ to support every specific

initiative proposed by subsidiaries, we main that there are three necessary conditions

required for subsidiary managers to take the entrepreneurial initiative, each of which is

contingent on their relationship with the HQ. Firstly, subsidiary managers must believe

that the HQ is willing to openly discuss proposals that may appear not aligned with

corporate objectives, because most subsidiary entrepreneurial initiatives are perceived

as misaligned with corporate objectives due to bounded rationality constraints faced by

HQ managers (Verbeke and Yuan 2005b). Secondly, subsidiary managers must believe

that the HQ is willing to take risks and realign resources quickly to accommodate the

investments needed by promising subsidiary initiatives. Entrepreneurial activities

involve a great deal of uncertainty which requires flexibility in planning and frequent

adjustment of the original concept to changing realities (Kanter 1985). Thirdly,

subsidiary managers must feel that the HQ has sufficient tolerance for uncertainty and

66

ambiguity in the early stages of subsidiary initiatives, as well as tolerance for failure. It

is problematic, then, that in large organizations like MNEs there is a tendency to search

for a consensus which, in turn, confines activities that challenge the status quo (Kanter

1985).

The foregoing premises establish the basis for conceiving HQs’ and

subsidiaries’ attitudes towards subsidiary initiative as two separate dimensions. Based

on these premises, we derive four types of HQ-subsidiary relationship, depicted in

Figure 2.1, which we term ‘implicitly conflicting’, ‘explicitly conflicting’, ‘HQ-

controlled’ and ‘bilateral initiative’. The extant literature focuses on explicit conflict

and bilateral initiative relationships and provides a partial explanation of HQ-controlled

relationships. In contrast, the implicit conflicting relationship has been largely

unexplored. Most research assumes that subsidiaries are willing to pursue

entrepreneurial opportunities as long as their HQ encourages it. However, as Figure 2.1

indicates, HQ’s mandate or encouragement is necessary but not sufficient for an

effective HQ-subsidiary relationship that motivates subsidiary managers to pursue

entrepreneurial initiatives.

67

Figure 2.1. Four Types of HQ-Subsidiary Relationship

An HQ-controlled relationship exists when both HQ and subsidiary resist

subsidiary initiatives; in such situations, the relationship is heavily controlled by the HQ

but without conflict between the parties. However, in this sense, a conflict-free

relationship is not necessarily an effective one for the contemporary MNE. A

harmonious relationship can be achieved by subsidiary managers strictly following HQ

directives, which hinders positive development of the subsidiary business and the

overall performance of the MNE because important strategic knowledge is likely to

remain embedded within the subsidiaries due to the bounded rationality constraints

faced by the HQ (Bartlett and Ghoshal 1993; Hedlund 1986). Therefore, as MNEs

develop and their subsidiaries mature in size and capabilities, a strongly HQ-controlled

relationship is inimical to subsidiary initiative.

68

The opposite of an HQ-controlled relationship is one characterized by bilateral

initiative. In such relationships, both the HQ and the subsidiary genuinely commit in

full to the development of autonomous subsidiary entrepreneurial activity. For many

contemporary MNEs, such arrangements are the epitome of an effective HQ-subsidiary

relationship.

In an explicitly conflicting relationship, HQs resist subsidiary initiative while a

subsidiary insists on striving for entrepreneurial opportunities. In such relationships, the

conflict between parties is likely to become obvious. Relaxing the assumption that

subsidiary managers will automatically pursue entrepreneurial opportunities when they

perceive the HQ’s expectation of subsidiary initiative leads to identification of an

implicitly conflicting relationship. By giving greater agency to subsidiary managers, we

recognize that subsidiaries can resist HQs’ mandates for entrepreneurial initiative. Due

to the punitive consequences of noncompliance, we suspect that in most cases such

resistance will be passive in nature (i.e. withholding full effort from local

entrepreneurship) rather than active (i.e. rejecting HQ’s mandates for initiative).

Conducting autonomous subsidiary activities when HQ strongly resists (i.e. an

explicitly conflicting relationship) creates a tension that is obvious, because it is easy

for HQ to identify activities that overstep the mandate. On the other hand, when

subsidiary managers do not fulfil the HQ’s expectations on conducting entrepreneurial

initiatives (i.e. an implicitly conflicting relationship), the conflict between the parties is

likely to be more subtle and difficult to spot. The implicit nature of such conflict is

another potential reason why scholars have overlooked its existence.

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By affording greater agency to both parties, our analysis implies greater

interdependence between the two parties and draws attention to the two sided-nature of

the relationship. HQs’ supportive attitude towards subsidiary initiatives is necessary, but

not sufficient to motivate subsidiary managers pursuing entrepreneurial opportunities,

since subsidiary managers do not just embrace subsidiary initiatives simply based on

their HQ’s expectation. Subsidiary managers act differently depending on the differing

contextual conditions in which they are embedded (Hoenen and Kostova 2015). As one

subsidiary manager of an MNE memorably observed regarding this paradox,

“Headquarters likes wild ducks, but every day is a hunting season” (anonymous,

personal communication, 2015). This comment exemplifies the common sentiment that

subsidiary managers hesitate to become ‘wild ducks’ (pursue entrepreneurial initiatives)

because they are afraid of ‘being hunted’ (unfairly penalized) even though they know

HQ likes ‘wild ducks’ (encourages subsidiary initiatives). Below, we use this view of

the HQ-subsidiary relationship as two-sided, interdependent and contextually embedded

to examine the antecedents of an effective MNE HQ-subsidiary relationship.

Our typology of HQ-subsidiary relationships sets the stage for analysing the

conditions under which subsidiaries are more and less likely to take entrepreneurial

initiative. Next, we examine these conditions in more detail.

2.4 Social and Psychological Antecedents of Subsidiary Initiative

Prior research suggests that social and psychological processes are relevant to

agency problems between HQs and subsidiaries for three reasons. These reasons

concern moral hazard, honest incompetence and information asymmetry.

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Moral hazard. Classic agency theory focuses on agents’ self-interest (Jensen and

Meckling 1976), while an extended agency theory perspective suggests that

opportunism also exists in principals’ behaviours. Internal politics at headquarters level

may motivate HQ managers to conduct inappropriate self-interest activities which

compromise subsidiary managers’ wellbeing (Foss, Foss, and Nell 2012). HQ

managers’ opportunistic behaviours may give rise to their subsidiary managers’ distrust

and suspicion. The integration of trust and agency theory in the MNE context has also

been studied by other scholars. However, previous research focused on principals’

distrust in agents, which in turn focused on control mechanism studies (e.g. Roth and

O'Donnell 1996). Hoenen and Kostova (2014) recently drew our attention to

opportunistic behaviour and honest incompetence at principal (headquarters) level and

argued that these phenomena generate distrust throughout the organization, which is

damaging to the organization, including subsidiaries. Hence, subsidiary managers’ trust

in the HQ is an important element in the HQ-subsidiary relationship (Hoenen and

Kostova 2014).

Honest incompetence. While classic agency theory attributes poor execution of

delegated authority to agents’ self-interest behaviours, extended agency theory argues

that an agent’s honest incompetence (Hendry 2002) might also be the root cause

(Ghoshal and Moran 1996). Building on this perspective and combining with HQs’

bounded rationality (Simon 1972) constraints, we argue that the honest incompetence

perspective can also be applied to HQ managers, which also leads to distrust and

suspicion throughout the organization. Even though sometimes the trusted party does

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reciprocate, that is not always the case (Brower et al. 2008). In the MNE context, due to

cultural distance and bounded rationality, honest incompetence may exist in both the

HQ and subsidiaries. Subsidiary managers may unintentionally make strategic errors or

be wrongly judged for making an error, but in either case, the root course is not

misaligned interests between HQ and subsidiaries (Filatotchev and Wright 2011).

Therefore, subsidiary managers’ feeling trusted by the HQ is another important element

of the HQ-subsidiary relationship. In addition, as honest incompetence rather than

opportunism has been identified as an alternative root cause of agents’ failure to execute

their delegated authority, we argue that subsidiary managers’ willingness to follow

HQs’ direction of pursuing entrepreneurial opportunities depends on the existence of

subsidiary managers’ feeling trusted by their HQ.

Information asymmetry. With an assumption of information asymmetry,

classical agency theory argues that principals are unable to fully observe agents’

behaviours. Whereas Hoenen and Kostova (2014) discussed self-interest on the part of

principals, a social view of agency draws attention to information asymmetry on the

part of agents. We contend that, due to information asymmetry, agents are not able fully

to observe principals’ true intentions and behaviours. This implies that a just system is

important because it enables subsidiary managers to challenge and refute HQ managers’

opportunistic behaviour and serves as a basis that facilitates high quality

communication, whereupon HQ provides the necessary rationale behind decisions

(Foss, Foss, and Nell 2012).

2.4.1 Procedural Justice

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The headquarters-subsidiary relationship is a case of a superior-subordinate

relationship; therefore, applying social psychology theories such as procedural justice is

relevant (Birkinshaw et al. 2000). HQs’ expectation of subsidiary entrepreneurial

initiatives and other key decisions are made during MNEs’ strategic planning process.

The fairness of the decision-making process is paramount because it directly impacts

people’s reaction to the decision outcomes arrived at through those procedures (Lind

and Tyler 1988). An increased level of procedural justice generates better acceptance

and compliance with the decision outcome (Thibaut and Walker 1975).

In the MNE context, HQs’ expectation of subsidiary initiative is an important

strategic goal and subsidiary managers’ commitment to that goal is critical. Empirical

evidence shows that procedural justice positively affects subsidiary managers’

commitment, trust and outcome satisfaction (Kim and Mauborgne 1991). It is important

to motivate and obtain subsidiary managers’ commitment to implement strategies

during the strategic decision-making process instead of seeking compliance after the

strategies have been formulated (Kim and Mauborgne 1995): the quality of the strategy

implementation will be reduced if corporate management fails to secure the

implementing organization’s motivation to implement the corporate strategy at the start

of formulating the strategy (Guth and MacMillan 1986).

As mentioned earlier, opportunism at HQ level and information asymmetry may

be sources of HQ managers’ self-interested activities that compromise the fairness of

the strategic planning process. If the decision-making process is perceived as unfair,

subsidiary managers will hesitate to take the necessary risk to conduct entrepreneurial

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initiatives even when they are expected to do so. On the other hand, the content of the

decisions made by HQ executives is perceived more favourably by subsidiary managers

if they perceive the decision-making process is fair, and they will be motivated and

committed to accept and execute those decisions. Procedural justice reduces HQ-level

opportunism, because this system enables subsidiary managers to challenge and refute

HQ managers’ opportunistic behaviour and serves as a basis that facilitates high quality

communication where HQ provides the necessary rationale behind decisions (Foss,

Foss, and Nell 2012). The presence of a just process facilitates effective interaction

between the HQ and subsidiary managers, which in turn improves knowledge sharing

between the HQ and the subsidiary, because the communication becomes bilateral

instead of only top-down. In short, subsidiary managers’ perception of a just process of

designing the content of the strategy, of which the HQ’s expectation of subsidiary

initiative is an important part, motivates the implementation of subsidiary initiatives.

Previous research suggests that there are five elements of procedural justice that

are likely to impact subsidiary managers’ perception of a just process: 1) the quality of

bilateral communication; 2) whether or not there is an opportunity for subsidiary

managers to challenge headquarters’ decisions; 3) whether or not headquarters

managers are familiar with local conditions; 4) whether or not headquarters managers

are willing to explain their decisions and make the decision-making process transparent;

and 5) the consistency of decision-making procedures (Kim and Mauborgne 1995).

Together, these five components of procedural justice help to mitigate the negative

effects of subsidiary and headquarters managers selecting different facets or interpreting

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the same information differently, so that divergence between corporate and subsidiary

managers can be overcome (Verbeke and Yuan 2005b). These arguments suggest that

the existence of procedural justice provides coherence between the HQ and subsidiary

managers and better aligns both parties on the content and implementation of the MNE

strategy, which makes the HQ-subsidiary relationship more effective with less conflict.

Such a relationship is a precondition for the development of an entrepreneurial culture.

Thus, we posit that:

Proposition 1: The greater the procedural justice perceived by subsidiary

managers, the more likely it is that the subsidiary will develop an

entrepreneurial culture.

2.4.2 Trust

Previous researches from various disciplines agree that trust benefits

organizations in different ways. See Table 2.1 for examples of studies on trust in the

organizational context.

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Table 2.1: Examples of Studies on Trust in the Organizational Context

Key Concept/Findings Type of

Study Source

Defines trust as a willingness to be vulnerable to another party, develops a model of dyadic trust in an

organizational context, and proposes that trust will lead to risk-taking in a relationship Conceptual

Mayer, Davis, and

Schoorman (1995)

Explores two fundamentally different models that describe how trust might have positive effects on attitudes,

perceptions, behaviour, and performance outcomes within organizational settings Conceptual

Dirks and Ferrin

(2001)

Provides the first meta-analysis of the relationships between trust in leadership and attitudinal and behavioural

work consequences—e.g. organizational citizenship behaviour (OCB), job performance and satisfaction, etc. Empirical

Dirks and Ferrin

(2002)

Proposes that trust varies within person and across relationships; it is not mutual nor necessarily reciprocal Conceptual Schoorman, Mayer,

and Davis (2007)

Examines and finds a positive relationship between sales manager’s role-modelling behaviour and employees’

trust, job satisfaction and work performance Empirical Rich (1997)

Examines and finds that subordinates’ trust in leaders is positively related to team citizenship behaviours:

when leaders feel trusted by subordinates, teams show more citizenship behaviours Empirical Lau and Lam (2008)

Examines the effect of felt trust on employee work outcomes and finds that when employees feel trusted by

supervisors their organization-based self-evaluation (OBSE) and work performance are positively affected Empirical

Lau, Lam, and Wen

(2014)

Develops a model and propositions that link symmetry and asymmetry in the institutional and cultural support

for trust in international collaborations with the degree of partner interdependence. Identifies implications for

governance and trust-building investments

Conceptual Zaheer and Zaheer

(2006)

Develops a conceptual framework to illustrate when the home country, host country or firm conditions will

dominate the nature of trust in a cross-border exchange relationship Conceptual

Zaheer and Kamal

(2011)

Surveys importers trading with overseas manufacturers and finds that trust is positively related to relationship

performance outcomes and enhances performance under conditions of high interdependence Empirical

Katsikeas, Skarmeas,

and Bello (2009)

Examines how general social trust at the subnational level affects foreign subsidiary performance and detects

that a positive effect of social trust is contingent on local embeddedness of the foreign subsidiaries Empirical Lu, Song, and Shan

Examines the relationship between psychological empowerment and trust in the organization and supervisor

and reveals a strong and positive relationship between trust in the supervisor and the subordinate’s perception

of psychological empowerment

Empirical

FINDIKLI,

GULDEN, and

SEMERCIOZ (2010)

Examines the relationships between trust and quality of communication relationship and employees’

satisfaction; reveals that trust is positively related to both the quality of communication relationship and

employee satisfaction

Empirical Wulandari and

Burgess (2010)

Examines the effects of organizational trust and burnout on organizational performance and finds a significant

positive relationship between organizational trust and organizational performance Empirical

Çelik, TURUNÇ, and

BEGENİRBAŞ

(2011)

Argues that out-group trust is important to international business performance and provides evidence that at

national level, dispositional trust positively influences out-group trust while categorization-based trust impedes

out-group trust

Empirical Muethel and Bond

(2013)

Examines the impact of language barriers on trust formation in multinational teams Empirical Tenzer, Pudelko, and

Harzing (2014)

Conducts in-depth case studies of two foreign-controlled enterprises in China and shows that in the case of

foreign firms in emerging economies (China), perceived vulnerability is an antecedent of trust and it is

negatively related to trust. This is in contrast to previous studies that frame vulnerability as the consequence of

trust (Mayer, Davis, and Schoorman 1995). It is also argued that control fosters trust indirectly because locals’

compliance with control increases their trustworthiness

Empirical Tsui-Auch and

Möllering (2010)

Examines trust relationships between senior business executives and their overseas partners and finds that

senior executives have higher affect-based trust in overseas partners of the same cultural ethnicity as

themselves

Empirical Jiang et al. (2011)

Investigates the differences between Chinese and American managers in the configuration of trusting

relationships within their professional networks and finds that affect- and cognition-based trust are more

intertwined for Chinese than for American managers; the effect of economic exchange on affect- based trust is

more positive for Chinese than for Americans, whereas the effect of friendship is more positive for Americans

than for Chinese

Empirical Chua, Morris, and

Ingram (2009)

Simulates international business (buyer–seller) negotiations using Chinese and American executives and finds

that greater levels of tension lead to lower trust in both Chinese and American participants Empirical

Lee, Yang, and

Graham (2006)

Examines the relationship between social capital and value creation at business unit level and finds that social

interaction, trustworthiness and shared vision have significant effects, directly or indirectly, on resource

exchange and combination, which in turn has a positive impact on new product development

Empirical Tsai and Ghoshal

(1998)

Argues that when MNEs’ parent mandates a practice, its subsidiaries vary in adoption response; provides

evidence that when subsidiary units trust their parents more, the level of implementation is higher Empirical

Kostova and Roth

(2002)

Examines the relationship between trust and shared vision and inward knowledge transfer from both external

relations and HQ to subsidiary; the results show that trust plays a more influential role in inter-organizational

knowledge transfer, while shared vision has more impact on intra-organizational (HQ-subsidiary) knowledge

transfer

Empirical Li (2005)

Suggests that the cognitive component of trust (vs. the affective component) is a more stable and reliable

mechanism maintained in the HQ-subsidiary relationship, and mutual trust between HQ and subsidiary

managers might help minimize agency problems

Empirical Gurkov and Morley

(2017)

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The dominant definition of trust used in organizational research came from

Rousseau and colleagues (1998, 395), who provided a cross-disciplinary definition of

trust as “a psychological state comprising the intention to accept vulnerability based

upon positive expectations of the intentions or behaviours of another”. We adopt this

definition and agree with Schoorman, Mayer, and Davis (2007) that trust is an aspect of

relationships and it varies within people and across relationships. Parties process

information about others before deciding on how much risk to take with them

(Schoorman, Mayer, and Davis 2007). In addition, trust is an important element of

working relationships (Lau, Lam, and Wen 2014), and its impact on attitudinal and

behavioural work consequences—e.g. organizational citizenship behaviour (OCB), job

performance and satisfaction, etc.—has been found repeatedly (Dirks and Ferrin 2002;

Brower et al. 2009). Trust is linked to employees’ attitudinal outcomes and intentions,

because individuals perceive their managers as possessing the authority to make

decisions that may affect their job satisfaction significantly (e.g. job assignments,

guidance, training, performance evaluation) (Rich 1997). While this perspective on trust

directly affecting individuals’ attitudinal and behavioural outcomes has dominated how

trust has been studied in research, another perspective suggests that trust plays a

moderating role and provides the conditions under which positive attitudes and

perceptions are more likely to occur (Dirks and Ferrin 2001). Under the second

perspective, trust affects how one party interprets another party’s past actions or

assesses future behaviours, and this assessment and interpretation process then fosters

or inhibits positive outcomes of the relationship (Dirks and Ferrin 2001). While trust

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has been studied extensively, feeling trusted remains an under-explored construct. With

a few exceptions, studies on the effects of feeling trusted are very limited (Lau and Lam

2008). While trust and feeling trusted do share many similarities (e.g. both concern a

willingness to be vulnerable) and are often related (Lau, Lam, and Wen 2014), these

two constructs are independent, conceptually different, need not be balanced or mutual,

and have different effects in a relationship (Brower et al. 2008).

In the context of the HQ-subsidiary relationship, studies on trust have been

focused on cooperative behaviours. Research suggests that trust is significantly related

to the extent of knowledge and resource exchange among different units of MNEs,

which in turn significantly affect product innovation (Tsai and Ghoshal 1998). McEvily,

Perrone, and Zaheer (2003) suggest that trust increases openness in a relationship,

which in turn influences the process of knowledge sharing and facilitates joint problem-

solving. Kostova and Roth (2002) empirical evidence shows that subsidiary units report

a higher level of implementation when they trust their HQ more. Li (2005) also

provides empirical evidence that trust is influential on inward (from HQ to subsidiary)

knowledge transfer in the HQ-subsidiary relationship. Recently, Gurkov and Morley

(2017) suggested that trust is the one of the key elements central to how a collective

psychological contract develops in the HQ-subsidiary relationship. The authors argued

that cognitive trust (vs. affective trust) is a more stable and reliable mechanism

maintained in the HQ-subsidiary relationship. This is the mechanism by which one

party believes the other party does the right thing in the right way (Gurkov and Morley

2017). The authors believe that mutual trust in the HQ-subsidiary relationship decreases

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monitoring costs due to agency problems and balances subsidiary initiatives and

worldwide programmes.

Taken together, trust in general plays a central role in cooperative relationships.

In organizational settings—specifically in the HQ-subsidiary context—trust can be an

important determinant of knowledge exchange, joint problem solving, product

innovation and strategy implementation (Tsai 2000; McEvily, Perrone, and Zaheer

2003; Kostova and Roth 2002; Li 2005). The majority of studies seeking to investigate

the consequences of trust on subsidiary managers’ behaviour and intentions have

focused on subsidiary managers’ trust in the HQ. However, in manager-subordinate

dyads, of which the HQ-subsidiary relationship is one, it is important to examine trust

from both parties’ perspectives (Brower, Schoorman, and Tan 2000). In addition, Lau,

Lam, and Wen (2014) stated that trust may not always be felt: in other words, when HQ

managers trust subsidiary managers, it is not necessarily felt by the subsidiary

managers. Hence, we argue that both trust in the HQ and feeling trusted by the HQ from

subsidiary managers’ perspective potentially influence their behaviour and intentions.

When subsidiary managers have trust in the HQ, they are willing to accept vulnerability

based on their expectation of HQ leaders’ positive intention and behaviour. A trustor

expects the trustee not to exploit the vulnerability the trustor has exposed, which

facilitates a cooperative relationship (Mayer, Davis, and Schoorman 1995; Rousseau et

al. 1998; Dirks and Ferrin 2002). In contrast, when subsidiary managers feel trusted by

the HQ, they feel that the HQ is willing to assume risks with them and expects positive

intentions and behaviour from them. This motivates subsidiary managers to make extra

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efforts in job performance. Employees feeling trusted by leaders feel positive about

themselves, which increases their self-confidence and motivation to pursue difficult

opportunities (Lau, Lam, and Wen 2014; Eden 1990). Lau, Lam, and Wen (2014)

suggest that the key difference between trusting and feeling trusted is their referents.

Applying this in the HQ-subsidiary relationship, we suggest that the key difference

between trusting in the HQ and feeling trusted by the HQ is their referents: even

through both constructs are from the subsidiary managers’ perspective, in trusting in the

HQ, the referent (subsidiary manager) is the trustor, and in feeling trusted by the HQ,

the referent (subsidiary manager) is the trustee.

Based on the above analysis, we suggest that subsidiary managers are putting

themselves in a vulnerable position whenever they decide to pursue entrepreneurial

opportunities. The process of pursuing entrepreneurial opportunities at subsidiary level

is a risk-taking behaviour for two reasons. Firstly, pursuing entrepreneurial

opportunities exposes subsidiary managers to greater uncertainty than conducting

familiar routine activities. There are more variables that are out of subsidiary managers’

control and subsidiary managers’ performance may be negatively judged by the HQ due

to the higher failure rate. HQs’ fair judgement of subsidiary managers’ performance

depends on the HQ’s willingness to assume the same risk with subsidiaries. Secondly,

even though the HQ may explicitly express its support and expectation of subsidiary

initiatives, subsidiary managers still worry about the legitimacy of any specific

opportunities they are pursuing and the investment decisions they are making, because

HQ may view prospects differently due to the honest incompetence issue and bonded

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rationality constraints. Therefore, we argue that trust plays a key role in subsidiary

managers’ willingness to pursue entrepreneurial opportunities. Below, we illustrate how

the mechanism of trust in the HQ and feeling trusted by the HQ operate in the context

of pursuing entrepreneurial opportunities at the subsidiary level.

Trust in the HQ. If trust exists in the organization, especially between

headquarters and subsidiaries, it may mitigate a divergence in judgement between HQ

and subsidiaries (Verbeke and Yuan 2005a). A divergence in judgement is a difference

in interpretation of identical information due to the different experiential knowledge

base (Verbeke and Yuan 2005b). With trust, headquarters managers and subsidiary

managers will be investigating the same facets of relevant information and make similar

interpretations on the information, because a trusting relationship facilitates more

informal communications between the two parties (Verbeke and Yuan 2005b). When

subsidiary managers have high levels of trust in the HQ, they are less likely to be

suspicious of the HQ’s intentions and less likely to believe that the HQ will second

guess their intentions and the rationales of their entrepreneurial activities. In

consequence, subsidiary managers will feel more confident that their subsidiary

initiatives are perceived positively and supported by the HQ with the necessary

resources. In contrast, subordinates who do not trust their managers may be distracted

from performing their work and demotivated to conduct activities beyond the minimum

requirements (Mayer and Gavin 2005).

The success of specific subsidiary initiatives depends on continued and reliable

support from the HQ. For subsidiary managers to be willing to put themselves in a

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vulnerable psychological state, they must have confidence in their HQ’s integrity and

reliability. Trust exists between two exchange partners when one party has confidence

in another party’s integrity and reliability (Morgan and Hunt 1994). Subsidiary

managers conducting entrepreneurial initiatives should place confident expectation on

the HQ because they are unable to detect the HQ’s attitude towards specific subsidiary

level strategic initiatives a priori. Trust provides an environment for a higher level of

exchange of idiosyncratic resources, which relates to strategic linkages (Tsai 2000).

Subsidiary managers’ trust in their HQ facilitates effective communication with the HQ

in relation to specific entrepreneurial opportunities. Empirical evidence shows that trust

facilitates a shared vision on inward knowledge transfer between headquarters and

subsidiaries (Li 2005) and can directly predict inter- and intra-organizational

cooperation (Smith, Carroll, and Ashford 1995).

We contend that another aspect of entrepreneurial initiative is its long-term

nature. From spotting a new opportunity to harvest, it usually takes longer than just

acting on routine existing opportunities. Subsidiary managers pursuing longer-term

initiatives need to have commitment to the organization for the long term. Trust is vital

in this connection, because it facilitates subsidiary managers’ commitment to the

organization (Kim and Mauborgne 1993). Based on this evidence, we suggest that

subsidiary managers’ trust in the HQ facilitates effective communication and

cooperation between the HQ and subsidiaries and provides a higher level of strategic

linkages. Thus, we posit that:

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Proposition 2: The greater subsidiary managers’ trust in the HQ, the more likely

it is that the subsidiary will develop an entrepreneurial culture.

Feeling trusted by the HQ. As mentioned earlier, subsidiary managers’ feeling

trusted by the HQ is another important element of the HQ-subsidiary relationship. Trust

does not have to be mutual, in that one party can trust the other without being trusted

back, or one can feel trusted by another without trusting back (Schoorman, Mayer, and

Davis 2007). In a manager and subordinate relationship, the two parties face different

types and levels of risk (Korsgaard and Sapienza 2002), and they may have different

interpretations of the same events, leading them to make different risk assessments of

the situation (Roberson 2006). Being trusted by the manager has significant influence

on subordinates’ behaviour and performance, but through different mechanisms than

subordinates’ trust in managers (Brower et al. 2009). Feeling trusted makes the trusted

party feel competent (Salamon and Robinson 2008); it is a source of self-confidence

(Conger and Kanungo 1998) and a form of psychological empowerment (Spreitzer

1995). The effects of self-confidence and psychological empowerment enrich the

experience of the party that feels trusted and motivates more productive and prosocial

behaviour (Brower et al. 2009). While trusting another party is putting oneself in a

vulnerable position (Schoorman, Mayer, and Davis 2007), feeling trusted, on the other

hand, makes the trusted party feel that the other party is willing to assume risk with him

(Lau, Lam, and Wen 2014).

In the context of the HQ-subsidiary relationship, psychologically empowered

subsidiary managers perceive that HQ managers are willing to assume risk with them,

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which is an important antecedent for them to conduct subsidiary entrepreneurial

activities. As stated previously, subsidiary initiatives have a higher failure rate than

routine activities. Subsidiary managers take higher risks when pursuing entrepreneurial

opportunities, and unintentional strategic errors maybe made in the process. We suggest

that feeling trusted by the HQ is an important antecedent of subsidiary managers’

willingness to take those higher risks for three reasons. Firstly, the HQ’s trust serves as

an assurance to subsidiary managers that the HQ is willing to assume the same risk with

them. Employees who perceive themselves to be trusted tend to believe that the

supervisor who invests trust in them is willing to assume risk with them (Lau and Lam

2008). Secondly, if subsidiary managers feel themselves to be trusted by the HQ, they

have more confidence in their capabilities and feel empowered by the HQ to pursue

non-routine and higher risk entrepreneurial opportunities. Feeling trusted is a source of

self-confidence, a form of psychological empowerment (Conger and Kanungo 1998;

Spreitzer 1995). Thirdly, when subsidiary managers feel that they are trusted by the HQ,

they are somewhat bounded by the trust and may feel obligated to carry out duties as

expected by the HQ that invests trust in them (Deutsch 1958).

Our analysis suggests that when subsidiary managers perceive themselves to be

trusted by the HQ, they feel more confident in pursuing subsidiary initiatives that they

believe will benefit the MNE as a whole. Psychologically empowered subsidiary

managers perceive that HQ managers are willing to assume risk with them, which is an

important antecedent for them to conduct subsidiary entrepreneurial initiatives. Thus,

we posit that:

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Proposition 3: The more subsidiary managers feel trusted by the HQ, the more

likely it is that the subsidiary will develop an entrepreneurial culture.

2.5 Implications for Theory, Research and Practice

The central contribution of this article is the three-element framework that explains the

drivers of a high-quality relationship between MNEs’ HQs and their subsidiaries. It is

our intention that this new conceptual framework will stimulate more discussion among

MNE scholars and practitioners on the topic of the HQ-subsidiary relationship with a

behavioural agency perspective. Scholars and practitioners are interested in the answers

to the same questions. What constitutes an effective relationship between HQs and their

subsidiaries in contemporary MNEs? What factors facilitate and/or impede the

development and maintenance of a constructive relationship between these parties?

Focusing on the conditions that encourage subsidiary managers to pursue

entrepreneurial opportunities, we have begun to sketch answers to these questions based

on social psychological theory. Figure 2.2 depicts the central elements of our

framework and the relationships among them.

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Figure 2.2. HQ-Subsidiary Relationship Framework

2.5.1 Key Elements of an Effective HQ-Subsidiary Relationship

As MNEs evolve, scholars need to account for the interactive and

interdependent nature of the HQ-subsidiary relationship, especially when trying to

understand what types of relationship facilitate subsidiary entrepreneurial initiative.

Traditional theories of the MNE focus on control, coordination, structure and HQ

mandates and thus overlook essential parts of this problem (Bartlett and Ghoshal 1989;

Birkinshaw and Morrison 1995; Prahalad and Doz 1987; Richman and Copen 1973).

For example, extant frameworks focus on reducing conflicts between HQ and

subsidiary managers (Roth and Nigh 1992), based on the premise that a conflict-free

relationship is an effective relationship. In contrast, our arguments suggest that a

conflict-free HQ-subsidiary relationship is not sufficient to motivate subsidiary

managers to pursue entrepreneurial opportunities which benefits the MNE as a whole.

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The question of what makes subsidiary managers pursue entrepreneurial

opportunities requires us to examine more than whether the HQ encourages subsidiary

managers to do so. Scholars and managers need to examine the multiple elements that

motivate or impede subsidiary managers to conduct entrepreneurial initiatives at the

subsidiary level. Furthermore, even if some elements motivate subsidiary initiatives,

they need to be integrated with other elements that may impede subsidiary initiatives so

that we can examine the collective impact of these elements. This theory suggests that it

is not the individual element that motivates or impedes subsidiary initiatives; instead,

we maintain that it is the perceived effectiveness of the HQ-subsidiary relationship

(influenced by the four key drivers we have identified) that impacts subsidiary

managers’ decision to pursue entrepreneurial opportunities.

Our re-conceptualization of the HQ-subsidiary relationship framework from a

behavioural agency perspective illustrates the value of a cross-disciplinary account of

the dynamic interaction between HQs and subsidiary managers. It requires researchers’

and managers’ ability to link social psychology, strategic management and human

resource management to assess the perceived effectiveness of the HQ-subsidiary

relationship. This article specifically addresses how the contextual influence (the HQ-

subsidiary relationship) impacts the effectiveness of implementing subsidiary

entrepreneurial initiatives, which may result in disruptive innovation. Disruptive

innovation is one of the most important sustainable growth engines for every MNE

(Christensen and Raynor 2013).

2.5.2 Implications for Managing MNEs’ Subsidiaries

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Our analysis of the HQ-subsidiary relationship sheds new light on the challenge

of effectively managing MNE subsidiaries for the twin imperatives of achieving growth

in local markets and benefiting the MNE as a whole, enhancing the MNE’s resources

and capabilities and providing a mechanism for bottom-up knowledge creation and

transfer.

Our research suggests that HQs’ explicit encouragement of subsidiary initiative

does not necessarily result in subsidiary managers pursuing entrepreneurial

opportunities. Because subsidiary managers perceive that conducting entrepreneurial

activities involves risks, they often resist doing so in a non-entrepreneurial environment.

Unlike explicitly refusing to follow HQ’s directives, not pursing entrepreneurial

opportunities at subsidiary level is difficult for the HQ to detect and monitor. Therefore,

the only effective way to motivate subsidiary managers to take risk and pursue

entrepreneurial opportunities is to foster an entrepreneurial culture through facilitating

the development of an innovation-friendly HQ-subsidiary relationship. In this

interactive relationship, HQ executives do not necessarily have to support every specific

innovative idea proposed by subsidiary managers, but the following three conditions

must be met for subsidiary managers to be willing to conduct subsidiary initiatives.

Firstly, HQ executives must be willing to entertain open discussions on

subsidiary managers’ proposals that may appear to be misaligned with corporate

priorities. Due to bounded rationality constraints faced by HQ managers, most

subsidiary entrepreneurial initiatives are perceived as misaligned with corporate

objectives (Verbeke and Yuan 2005b). HQ executives must make a conscious effort to

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withstand the ‘HQ knows best’ syndrome (Bouquet, Birkinshaw, and Barsoux 2016)

and foster an entrepreneurial culture at the subsidiary level. Establishing a fair decision-

making process to facilitate strategic planning and new product development activities

facilitates effective interactions between HQ and subsidiary managers, which in turn

improves knowledge sharing between HQ and subsidiary, because the communication

becomes bilateral instead of only top-down.

Secondly, HQ executives need to recognize the nature of uncertainty of

entrepreneurial initiatives and explicitly assure subsidiary managers that they are

willing to support promising opportunities through remaining flexible on realignment of

resources needed. Subsidiary managers are fully aware that pursuing entrepreneurial

opportunities involves risk in two ways—the nature of uncertainty of these

opportunities creates possibilities for subsidiary managers to fail, and lack of necessary

support from HQ may cause the project to fail. Either one of these failures concerns

subsidiary managers, because it may negatively impact their prospect of employment.

Therefore, HQ managers need to make subsidiary managers believe that they

understand the risks involved and are willing to invest resources when needed. This

kind of support earns the HQ trust from subsidiary managers, and only with the

existence of trust in the HQ are subsidiary managers motivated to pursue

entrepreneurial opportunities.

Thirdly, HQ executives must demonstrate their ability to deal with ambiguity in

the early implementation stage of subsidiary initiatives, as well as tolerance for failure.

HQ executives have a tendency to seek a high level of clarity and consensus, which

89

restricts activities that challenge the status quo (Kanter 1985). It is often difficult for

subsidiary managers to collect enough market data to justify their new entrepreneurial

initiative proposals. HQ executives need to demonstrate their willingness to trust

subsidiary managers’ judgement and provide constructive feedback instead of simply

challenging their proposal on lack of supporting data. HQ executives need to offer

suggestions and help instead of criticism when reviewing these proposals. They need to

refrain from acting like a judge, instead being a true partner with a vested interest. In

other words, HQ executives need to demonstrate that they are willing to assume the

same level of risk to motivate subsidiary managers to pursue entrepreneurial

opportunities. In addition, HQ managers should take the opportunity to share global

market requirements with subsidiary managers whenever appropriate so that the

initiatives they are pursuing may benefit not only the local market but also the MNE as

a whole.

In summary, our analysis highlights the role of systems and practices that

support the development of the procedural justice process, trust in and trust of HQs,

thereby fostering an entrepreneurial culture and facilitating the development of an

innovation-friendly relationship. Our analysis suggests that MNE managers should pay

greater attention to relationship-building practices that might support the development

of trust in the HQ and feeling trusted by the HQ. Moreover, there is a clear need to

understand better the specific types of structure and practice that best support the

development of a culture of autonomous innovation among subsidiary managers,

ranging from acceptance of risk-taking to rewarding innovative actions, creativity

90

training and management development programmes focused on supporting innovation

in others (Cooke 2013). In addition, future research should examine which specific HR

practices are most effective for developing skills in explicitly managing the types of

HQ-subsidiary relationship we have identified.

2.6 Concluding Remarks

This article emphasizes the need to examine the HQ-subsidiary relationship in a

contemporary MNE from a new perspective. As MNEs evolve in the twenty-first

century and HQs’ expectation of subsidiary initiatives becomes a norm in mega-

markets, research scholars and managers need to extend their thinking to consider how

the key elements interact with each other and collectively influence the effectiveness of

the HQ-subsidiary relationship: this ultimately motivates subsidiary managers to pursue

entrepreneurial opportunities, which eventually generate disruptive innovation that

benefits the MNE as a whole in both local and global markets. This framework should

serve the purpose of drawing the attention of researchers and managers to these key

elements. Moreover, the tentative propositions derived from our framework should

serve as useful guides to future empirical research seeking to validate our re-

conceptualization of the HQ-subsidiary relationship.

In summary, in this article we have confronted some of the traditional

assumptions of MNE theory and advanced a new framework that identifies the key

elements that facilitate an effective relationship between the HQs and subsidiaries of

contemporary MNEs. We hope that our framework encourages more research that

91

examines the types of HQ-subsidiary relationship that motivate subsidiary

entrepreneurial initiatives that benefit the MNE as a whole.

92

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Chapter 3

Headquarters-Subsidiary Relationships: The Role of Trust and Justice in the

Pursuit of Subsidiary Entrepreneurship and Initiative

Abstract

Previous research tends to assume that managers of the local subsidiaries of

multinational enterprises (MNEs) are willing to pursue entrepreneurial opportunities

whenever global headquarters (HQ) explicitly encourages them to do so. In this study,

we challenge this assumption and propose that a strong subsidiary entrepreneurial

culture is a necessary condition for subsidiary managers to pursue subsidiary initiatives

and engage in the type of local responsiveness that benefits subsidiaries and the MNE as

a whole. To better understand how and why these conditions arise, we focus on the

behavioural factors that foster the development of a subsidiary entrepreneurial culture.

Based on a survey of managers of a cross-section of Chinese subsidiaries of MNEs, we

propose and test the hypotheses that procedural justice, trust in the HQ and feeling

trusted by the HQ are key drivers for developing a subsidiary entrepreneurial culture.

Findings reveal that both procedural justice and feeling trusted by the HQ have a

positive relationship with subsidiary entrepreneurial culture, whereas trust in the HQ

does not. In turn, subsidiary entrepreneurial culture is positively associated with local

responsiveness and subsidiary initiative. Overall, our findings help to identify the

behavioural drivers of subsidiary initiative among subsidiary managers. We discuss

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implications for theory, research and practice of the effective management of the

subsidiary-headquarters relationship.

Keywords: HQ-subsidiary relationship, procedural justice, trust in the HQ, feeling

trusted by the HQ, subsidiary entrepreneurial culture, local responsiveness, subsidiary

initiative

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3.1 Introduction

Pursuing entrepreneurial opportunities at the foreign subsidiary level of

multinational enterprises (MNEs) has recently drawn considerable attention from both

management researchers and management practitioners ((Birkinshaw 2014a; Ambos,

Andersson, and Birkinshaw 2010; Bartlett and Ghoshal 1989; Rugman and Verbeke

2001; Rugman and Li 2007). For example, GE Healthcare’s Chinese subsidiary

developed new ultrasound equipment that improved GE’s local responsiveness and

disrupted North American and European markets (Govindarajan and Trimble 2013;

Immelt, Govindarajan, and Trimble 2009). Similarly, the corporate headquarters (HQ)

of the industrial conglomerate Honeywell is encouraging its Chinese subsidiaries to

build up local new product development capabilities—east-for-east (local

responsiveness) and east-to-rest (serving global markets) (Tedjarati 2016). However, as

Qin and Healey (2016) argued, the question of what leads subsidiary managers to

pursue entrepreneurial opportunities requires us to examine more than whether HQs

expect subsidiary managers to do so. Qin and Healey (2016) argued that subsidiary

managers can, and often do, resist pursuing entrepreneurial opportunities at subsidiary

level instead of always playing the subordinate role. Not pursuing entrepreneurial

initiatives is not as obvious as not following HQs’ directives; therefore, subsidiary

managers can resist subsidiary initiatives without worrying about being detected by the

HQ. In addition, because entrepreneurial activities involve risk-taking and, as agents,

subsidiary managers are often risk averse, they often do resist subsidiary initiatives.

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Extant research has shown that subsidiary entrepreneurship can draw on local,

internal, and global market opportunities to develop new products, enter new markets,

or facilitate more efficient internal process within the MNE network (Clark and

Ramachandran 2019). For example, Birkinshaw (1997) argues that subsidiary

entrepreneurship can potentially enhance local responsiveness, worldwide learning and

global integration. However, empirical evidence supporting a direct relationship

between entrepreneurship and subsidiary initiative has been lacking. For example, in

their empirical study, Birkinshaw and Hood (1998) only found moderate support of a

direct relationship between subsidiary entrepreneurial culture and subsidiary initiative.

Scott et al. (2010) also failed to find empirical evidence that supports this relationship.

The purpose of the present study is to focus on the antecedents, manifestations and

consequences of the HQ-subsidiary relationship in order to understand what motivates

subsidiary managers to pursue entrepreneurial opportunities. Understanding the factors

that lead to subsidiary entrepreneurship is important because subsidiary

entrepreneurship enhances a foreign subsidiary’s local responsiveness and strengthens

subsidiary initiatives that may benefit the MNE as a whole in today’s competitive

global markets (Birkinshaw 1999).

We structure this paper as follows. We first discuss the theoretical foundations

of the HQ-subsidiary relationship and outline the social and psychological mechanisms

that lead to entrepreneurial activities among subsidiary managers. Secondly, we identify

the antecedents, manifestations and consequences of the HQ-subsidiary relationship and

develop formal hypotheses regarding their interrelationships. After outlining our

110

methods, measures and data sources, we then test our hypotheses using a survey of

managers in the Chinese subsidiaries of MNEs operating in the industrial products

industry, using structural equation modelling. We close with a discussion of our

findings.

3.2 Theoretical Background

Thus far, research on subsidiary entrepreneurial culture has focused on

subsidiary-specific resources and capabilities (Verbeke and Yuan, 2013),

entrepreneurial competencies (Dimitratos et al., 2014a, 2014b), HQ’s intervention

hazard (Foss et al., 2012), political heterarchy (Williams and Lee, 2011),

entrepreneurial learning (Dimitratos et al., 2014a, 2014b; Scott et al., 2010), subsidiary

credibility and communication (Birkinshaw, 1999), the external environment that

promotes or impedes subsidiary entrepreneurial culture, such as customers, suppliers,

and competitors (e.g., Birkinshaw et al., 2005; Konara and Shirodkar, 2018; Nam et al.,

2014), and HQ-subsidiary relationship (Kostova et al., 2016; Schotter and Beamish,

2011). However, the extant research linking HQ-subsidiary relationship with subsidiary

entrepreneurial activities has focused on subsidiary’s issue selling and HQ’s evaluation

and approval of entrepreneurial ideas (Schmid et al., 2014), but it has largely

overlooked the personal motivation of subsidiary managers to pursue subsidiary

initiative. Birkinshaw (1997) specifically pointed out the importance and called for

further investigation on why some individuals choose to pursue entrepreneurial

opportunities while others do not, but research on this critical element has been lacking

so far. Table 3.1a below summarizes research on subsidiary entrepreneurship.

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Table 3.1a. Summary of Research on Subsidiary Entrepreneurship

Key Concept/Findings

Type of

Study Source

Proposed distinct configurations (three‐way moderation effects) of capabilities, slack, and

environmental factors (i.e. dynamism and hostility) to explain entrepreneurship Empirical

Verbeke and Yuan

(2013)

Provided a comprehensive operationalization of firm-specific variables that constitute multinational

enterprise subsidiary entrepreneurial competencies. It suggested a 26-item set of scales to accurately

measure subsidiary entrepreneurial competencies.

Empirical Dimitratos, Liouka,

and Young (2014)

Identified two learning modes of multinational subsidiaries namely managerial and entrepreneurial

learning. Empirical

Dimitratos et al.

(2014)

Emphasized the interplay between subsidiary entrepreneurship and the subsidiary’s competitive

environment—it shows how certain subsidiary scope emerge as a function of these factors, and how they

ultimately affect the performance of the subsidiary.

Empirical Birkinshaw, Hood,

and Young (2005)

Explained why firms' innovations vary across countries and revealed significant interaction effects of in-

group collectivism and education, uncertainty avoidance and political stability, and in group-collectivism

and political stability on cross-national levels of innovation.

Empirical Nam et al. (2014)

Investigated political heterarchy (mechanisms by which subsidiary managers enhance their power base

through heterarchy) as both direct and moderating factor of subsidiary entrepreneurship Empirical

Williams and Lee

(2011)

Investigated and found that subsidiary initiative is promoted by a high level of distinctive subsidiary

capabilities and is supressed by a high level of decision centralization, a low level of subsidiary

credibility, and a low level of corporate-subsidiary communication

Empirical Birkinshaw (1999)

Argued that HQ’s intervention might be harmful to subsidiaries Conceptual Foss, Foss, and Nell

(2012)

Examined the entire HQ-subsidiary conflict process and provided insights on subsidiary managers acting

as boundary spanners to conduct issue selling and manage conflicts Empirical

Schotter and

Beamish (2011)

Examined the direct and indirect effects of managers’ perception of procedural justice on the in-role and

extra-role behaviour of MNEs’ subsidiary top management in the context of the global resource allocation

decision process; Attempted but failed to link procedural justice to subsidiary manager’s extra-role

behaviour

Empirical Kim and Mauborgne

(1996)

Qin and Healey (2016) adopted a social view of agency and built a behavioural

agency framework for understanding the HQ-subsidiary relationship. Behavioural

agency models seek to combine agency theory with psychological theory to explain

behavioural phenomena (Westphal and Zajac 2013; Wiseman and Gomez-Mejia 1998).

This view recognizes that the actions of principals and agents may be driven by social

mechanisms such as trust, justice and reciprocity, because their motives may be broader

than wealth maximization (e.g. Hendry 2002; Wiseman et al. 2012). The social view of

agency leads us to adopt a behavioural agency perspective in our re-conceptualization

of the HQ-subsidiary relationship framework, and to apply broadened agency theory

(Hoenen and Kostova 2014) in developing specific hypotheses regarding how the

contextual influence (HQ-subsidiary relationship) impacts the effectiveness of

implementing subsidiary entrepreneurial initiatives.

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3.2.1 Re-Conceptualization of the HQ-Subsidiary Relationship

Qin and Healey (2016) reconceptualized the HQ-subsidiary relationship and

developed a typology based on the attitude of the HQ and subsidiaries towards

subsidiary initiative as two dimensions. They derived four types of HQ-subsidiary

relationship, termed implicitly conflicting, explicitly conflicting, HQ-controlled and

bilateral initiative. Figure 3.1 reproduces the figure from Qin and Healey (2016) to

illustrate the four types of HQ-subsidiary relationship based on the two dimensions.

Figure 3.1. Four Types of HQ-Subsidiary Relationship

Source: Qin and Healey (2016) PP. 14

As mentioned earlier, most research assumes that subsidiaries will be willing to

pursue entrepreneurial opportunities if their HQ encourages it. However, as Figure 3.1

indicates, HQs’ mandate or encouragement of subsidiary initiatives is necessary but not

sufficient to facilitate a subsidiary entrepreneurial culture. Relaxing the assumption that

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subsidiary managers will automatically pursue entrepreneurial opportunities when they

perceive that their HQ’s expectation of subsidiary initiative leads to identification of an

implicitly conflicting relationship. In bilateral initiative relationships, both the HQ and

the subsidiary genuinely commit to the development of autonomous subsidiary

entrepreneurial activity (Qin and Healey 2016). Qin and Healey (2016) suggest that

such arrangements are the epitome of an effective HQ-subsidiary relationship for many

contemporary MNEs. In short, we will focus on understanding what facilitates

subsidiary managers’ willingness to pursue subsidiary initiatives when their HQ

managers explicitly encourage them to do so.

3.2.2 Social and Contextual Aspects of the HQ-Subsidiary Relationship

By affording agency to both the HQ and the subsidiary, Qin and Healey (2016)

suggest that there is greater interdependence between the two parties than is often

acknowledged (Gupta and Govindarajan 1991; Ghoshal and Nohria 1989; Nohria and

Ghoshal 1994; Roth and O'donnell 1996), thereby drawing attention to the two-sided

nature of the relationship. The interdependence of HQs and their subsidiaries provides

the basis for identifying the key behavioural factors that influence the effectiveness of

the relationship between the parties. Subsidiary managers act differently depending on

the differing contextual conditions in which they are embedded (Hoenen and Kostova

2015) and they do not just embrace risk-taking initiatives simply based on their HQ’s

expectation (Qin and Healey 2016). In this study, we focus on two key behavioural

drivers of entrepreneurial initiative—procedural justice and trust—that may vary across

firms and which may help us better understand the conditions under which

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headquarters-subsidiary relationships inhibit or support the development of an

entrepreneurial culture at the local level. Table 3.1 provides an overview of previous

studies of justice and trust in the headquarters-subsidiary relationship. As this summary

shows, while scholars have posited that these factors are important to this relationship,

their influence on subsidiary entrepreneurial culture and subsidiary initiative has not

been systematically theorized nor tested empirically.

Table 3.1b. Summary of Studies of Trust and Procedural Justice in the HQ-

Subsidiary Relationship

Key Concept/Findings Type of Study Source

Opened the debate on the influence of language on the HQ-subsidiary relationship and suggested that a language barrier might cause

mistrust in the HQ-subsidiary communication cycle Conceptual Harzing and Feely (2008)

Examined the impact of language barriers on trust formation in multinational teams and revealed that the reactions to language barriers

of members of multinational teams mediates the relationship between language barriers and different aspects of perceived

trustworthiness and intention to trust

Empirical Tenzer, Pudelko, and

Harzing (2014)

Examined and found a positive relationship between trust and inward knowledge transfer to subsidiaries from subsidiaries’ corporate

and external relations Empirical Li (2005)

Examined the perception gap in the HQ-subsidiary relationship and found that subsidiaries’ overestimation of their role is associated

with greater control from HQ, which is in turn associated with lower level HQ-subsidiary cooperation. This implies lower level of trust in the HQ-subsidiary relationship

Empirical Birkinshaw et al. (2000)

Examined how cultural differences impact the HQ-subsidiary relationship and found that the more interaction between the HQ and

subsidiaries, the more important the role that cultural differences play; frequent interactions might be a prerequisite for a mutually

trusting HQ and subsidiary relationship

Empirical Pahlberg (1995)

Developed a framework to diagnose the degree of collaborative intent and the role of trust between the HQ and subsidiaries in the

context of new product rollout Empirical

Tasoluk, Yaprak, and

Calantone (2006)

Examined the determinants and outcomes of the adoption of high performance work systems (HPWS) in MNEs’ foreign subsidiaries

and found that organizational climate—which includes trust, morale, leadership credibility, etc.—mediates the positive effect of HPWS

on subsidiary performance

Empirical Foley, Ngo, and Loi (2012)

Examined the relationship between psychological empowerment and trust in the organization and supervisor, and revealed a strong and

positive relationship between trust in the supervisor and subordinates’ perception of psychological empowerment Empirical

FINDIKLI, GULDEN, and

SEMERCIOZ (2010)

Examined the relationships between trust, quality of communication and employees’ satisfaction; revealed that trust is positively

related to both the quality of communication and employee satisfaction Empirical

Wulandari and Burgess

(2010)

Examined the effects of organizational trust and burnout on organizational performance and found a significant positive relationship

between organizational trust and organizational performance Empirical

Çelik, TURUNÇ, and

BEGENİRBAŞ (2011)

Conducted in-depth case studies of two foreign-controlled enterprises in China and showed that in the case of foreign firms in

emerging economies (China), perceived vulnerability is an antecedent of trust and is negatively related to trust, which was in contrast

to previous studies that frame vulnerability as the consequence of trust (Mayer, Davis, and Schoorman 1995). It also argued that

control fosters trust indirectly because locals’ compliance with control increases their trustworthiness

Empirical Tsui-Auch and Möllering

(2010)

Examined trust relationships between senior business executives and their overseas partners and found that senior executives have

higher affect-based trust in overseas partners of the same cultural ethnicity as themselves Empirical Jiang et al. (2011)

Investigated the differences between Chinese and American managers in the configuration of trusting relationships within their

professional networks and found that affect- and cognition-based trust were more intertwined for Chinese than for American managers,

and the effect of economic exchange on affect-based trust was more positive for Chinese than for Americans, whereas the effect of

friendship was more positive for Americans than for Chinese

Empirical Chua, Morris, and Ingram

(2009)

Simulated international business (buyer-seller) negotiations using Chinese and American executives and found that greater levels of

tension lead to lower trust in both Chinese and American participants Empirical

Lee, Yang, and Graham

(2006)

Examined the role of procedural justice in global strategic decision-making processes and found positive and significant effects on the

higher-order attitudes of organizational commitment, trust in head office management and social harmony between head office and

subsidiary top managers

Empirical Kim and Mauborgne

(1991)

Examined the effect of procedural justice beyond attitudes to the behaviour of compliance and found that procedural justice enhances

subsidiary top managers to execute global strategy Empirical

Kim and Mauborgne

(1993)

Assessed the effect of procedural justice in global strategic decision-making on the content of the resulting strategic decisions and

found that it does affect MNEs’ ability to achieve the global strategic objective Empirical

Kim and Mauborgne

(1995)

Examined the direct and indirect effects of managers’ perception of procedural justice on the in-role and extra-role behaviour of

MNEs’ subsidiary top management in the context of the global resource allocation decision process; found that procedural justice

induces subsidiary managers’ in-role and extra-role behaviour through the attitudinal mediator of commitment to support decisions

Empirical Kim and Mauborgne

(1996)

Offered initial framework combining strategic contexts, characteristics of due process of decision-making, and perception of procedural

justice within MNEs, and specified how to manage the HQ-subsidiary relationship to produce desired knowledge flow patterns Conceptual Ellis (2000)

Examined the relationship between HRM practices and performance using procedural justice, organizational support and trust as

relational exchange mechanisms; found that procedural justice acts as a mediating variable between HRM practices and perceived

organizational support

Empirical Tremblay et al. (2010)

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3.3 Hypotheses

3.3.1 Subsidiary Entrepreneurial Culture

An entrepreneurial culture is a culture that motivates employees of MNE

subsidiaries to take the initiative (Birkinshaw 1997b). A subsidiary initiative concerns

“a discrete, proactive undertaking that advances a new way for the corporation to use or

expand its resources” (Birkinshaw 1997, 207) and subsidiary managers (rather than HQ)

are the ones that come up with new initiative ideas which lead to substantive results for

the subsidiary, such as developing new products in the local market or exporting

products internationally (Birkinshaw 1997b; Rugman, Verbeke, and Yuan 2011).

Previous studies show that subsidiary entrepreneurial culture is formed by subsidiary

managers developing an entrepreneurial outlook or vision, a proactive and risk-taking

orientation that leads to experimentation and a learning orientation that facilitates

knowledge exchange (Birkinshaw 1999; Boojihawon, Dimitratos, and Young 2007; Li

and Lee 2015).

Many new business model, market penetration and new product development

ideas originate from foreign subsidiaries (Rugman, Verbeke, and Yuan 2011). These are

entrepreneurial initiatives that are instigated at the subsidiary level but that require

resource support from headquarters. They are not the result of explicit guidance from

headquarters or the direct result of headquarters’ resource allocation. Through

subsidiary initiatives, subsidiary managers can develop firm-specific advantages that

benefit MNEs as a whole (Birkinshaw and Hood 1998). However, developing new

initiatives involves a very different set of activities from maintaining ongoing ones. We

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suggest that subsidiary managers’ willingness to pursue entrepreneurial opportunities

depends on the existence of a supportive subsidiary entrepreneurial culture.

While the HQ’s support and tolerance for risk play an important role in

facilitating a subsidiary entrepreneurial culture (Kuratko, Montagno, and Hornsby

1990), it is not necessary for the HQ to support every specific initiative proposed by

subsidiaries (Qin and Healey 2016). Qin and Healey (2016) argued that subsidiary

managers need to perceive three things to engage in entrepreneurial activity. Firstly,

subsidiary managers must believe that the HQ is willing to entertain open discussions

on proposals that may appear not to be aligned with corporate objectives. This belief

may not always develop since, due to bounded rationality constraints faced by HQ

managers, most HQ managers perceive subsidiary entrepreneurial initiatives as

misaligned with corporate objectives (Verbeke and Yuan 2005b). Secondly, subsidiary

managers must believe that the HQ is willing to assume risks with the subsidiary and

realign resources as necessary to develop promising initiatives, because entrepreneurial

activities involve a great deal of uncertainty and flexible planning, and frequent

adjustments of the original concept to changing realities are necessary (Kanter 1985).

Thirdly, subsidiary managers must believe that the HQ has appropriate tolerance for

uncertainty, ambiguity and even failure in the early stages of subsidiary initiatives. The

tendency to search for a consensus is common in large organizations and may constrain

activities that challenge the status quo (Kanter 1985).

3.3.2 Procedural Justice

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Birkinshaw et al. (2000) suggested that applying social psychology theories such

as procedural justice is relevant because the headquarters-subsidiary relationship is a

case of a superior-subordinate relationship. Key decisions, including HQs’ expectation

of subsidiaries pursuing entrepreneurial opportunities, are made during MNEs’ strategic

planning process. The fairness of the decision-making process is of primary importance

because it directly impacts agents’ reactions to the decision outcomes derived from

those procedures (Lind and Tyler 1988).

While distributive justice focuses on the fairness of an outcome (Adams 1965),

procedural justice focuses on the fairness of the process (Thibaut and Walker 1975).

They suggested that when agents perceive that the decision process is fair (i.e. there is a

high level of procedural justice), the resulting sense of equity generates stronger

acceptance of, and compliance with, the decision outcome (Thibaut and Walker 1975).

After Thibaut and Walker (1975) introduced the concept of procedural justice,

Leventhal and colleagues extended this notion to the organizational context (Leventhal

1980; Leventhal, Karuza, and Fry 1980). We define procedural justice here as the

strategy-making process being perceived as fair by top subsidiary managers in an MNE.

This definition is consistent with the empirical study conducted by Kim and Mauborgne

(1991). Empirical evidence shows that procedural justice positively affects the

subsidiary top management’s commitment, trust and outcome satisfaction (Kim and

Mauborgne 1991).

Entrepreneurial subsidiary initiative has become a significant part of a modern

MNE’s overall strategy, because it benefits the company as a whole (Birkinshaw

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2014a). Therefore, subsidiary managers’ commitment to implementing innovative

strategies is critical. Seeking compliance after the strategies have been formulated is

less effective than motivating and obtaining subsidiary managers’ commitment to

implement strategies during the strategic decision-making process (Kim and Mauborgne

1995). It is important to secure the implementing organization’s motivation to execute

the corporate strategy at the start of formulating the strategy, because the quality of

strategy implementation will be reduced if corporate management fails to do so (Guth

and MacMillan 1986). However, as Foss, Foss, and Nell (2012) suggested, internal

politics at the headquarters level may motivate HQ managers to conduct inappropriate

self-interest activities which compromise subsidiary managers’ wellbeing. Qin and

Healey (2016) suggested that opportunism at the HQ level and information asymmetry

may be a source of HQ managers’ self-interest activities that compromise the fairness of

the strategic planning process. Furthermore, if subsidiary managers’ perceive the

decision-making process to be unfair, they will hesitate to take the necessary risk to

pursue entrepreneurial activities even when they are expected to do so (Qin and Healey

2016). On the other hand, if the subsidiary managers perceive the decision-making

process to be fair, they will be motivated and committed to accept and execute the

decisions made by HQ executives, because the content of those decisions (resulting

from a perceived fair process) is likely to be perceived more favourably by subsidiary

managers (Qin and Healey 2016). A fair system serves as a basis facilitating high

quality communication, where the HQ provides the necessary rationale behind

decisions, enabling subsidiary managers to challenge and refute HQ managers’

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opportunistic behaviour; therefore, procedural justice reduces HQ-level opportunism

(Foss, Foss, and Nell 2012). Hence, Qin and Healey (2016) suggested that HQ and

subsidiary managers interact more effectively when a just process is present, and the

effectiveness of these interactions facilitates bilateral instead of only top-town

communication and improves knowledge sharing between the HQ and the subsidiary.

Our analysis above suggests that procedural justice improves the effectiveness

of the HQ-subsidiary relationship by providing coherence between the HQ and

subsidiary managers and better aligning both parties on the content and implementation

of the MNE strategy. An effective HQ-subsidiary relationship motivates subsidiary

managers to pursue entrepreneurial opportunities (Qin and Healey 2016).

Hypothesis 1: The greater the level of procedural justice perceived by subsidiary

managers, the higher the level of subsidiary entrepreneurial culture.

3.3.3 Trust in the HQ

Although scholars have defined trust in many different ways, the dominant

definition used in organizational research is that provided by Rousseau and colleagues

(1998, 395), who provided a cross-disciplinary definition of trust as “a psychological

state comprising the intention to accept vulnerability based upon positive expectations

of the intentions or behaviour of another”. Trust has been identified as having

significant importance in the international business literature. For instance, trust has

been shown to influence the formation of international alliances (Parkhe 1998),

international business negotiations (Lee, Yang, and Graham 2006) and cross-border

partnerships (Aulakh, Kotabe, and Sahay 1996). In addition, trust plays an important

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role in working relationships (Lau, Lam, and Wen 2014) and empirical evidence

repeatedly shows that trust impacts attitudinal and behavioural work consequences—

e.g. OCB, job performance and satisfaction, etc. (Dirks and Ferrin 2002; Brower et al.

2009). Trust is linked to employees’ attitudinal outcomes and intentions, because

individuals perceive their managers to possess the authority to make decisions that may

affect their job satisfaction significantly—e.g. job assignments, guidance, training and

performance evaluation (Rich 1997).

Qin and Healey (2016) suggested that, in the process of pursuing subsidiary

initiatives, subsidiary managers are putting themselves in a vulnerable position because

they are conducting activities other than familiar routines. Subsidiary managers

pursuing subsidiary entrepreneurial opportunities are in a vulnerable position for two

reasons. Firstly, pursuing entrepreneurial opportunities exposes subsidiary managers to

greater uncertainty, because the failure rate is higher for entrepreneurial than routine

activities. There are more variables that are beyond subsidiary managers’ control and

subsidiary managers’ performance may be negatively judged by the HQ due to the

higher failure rate. HQs’ fair judgement of subsidiary managers’ performance depends

on the HQ’s integrity of taking the same risk with subsidiaries. Secondly, even though

the HQ may explicitly express its support for and expectation of entrepreneurial

activities, subsidiary managers may still worry about the legitimacy of any specific

opportunities they are pursuing and the investment decisions they are making, not least

because the HQ may view prospects differently due to divergence in judgement

(Verbeke and Yuan 2005b). A divergence in judgement is a difference in interpretation

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of identical information due to a different experiential knowledge base (Verbeke and

Yuan 2005b). In contrast, if trust exists in the organization—especially between the

headquarters and subsidiaries—the divergence in judgement may be mitigated (Verbeke

and Yuan 2005b). With sufficient levels of trust, headquarters managers and subsidiary

managers will investigate the same facets of relevant information and make similar

interpretations of the information, because a trusting relationship facilitates more

informal communications between the two parties (Verbeke and Yuan 2005b).

Subsidiary managers pursuing entrepreneurial opportunities may be required to

show goodwill towards the HQ because they may be unable to detect the HQ’s attitude

towards specific subsidiary level strategic initiatives a priori. Trust provides an

environment for a higher level of exchange of idiosyncratic resources, which relates to

strategic linkages (Tsai 2000). Subsidiary managers’ trust in their HQ facilitates

effective communication with the HQ on specific entrepreneurial opportunities. From

the above analysis, we suggest that subsidiary managers’ trust in their HQ facilitates

effective communication and cooperation between the HQ and subsidiaries and

provides a higher level of strategic linkages, which in turn strengthens the

entrepreneurial contextual environment at the subsidiary level.

Hypothesis 2: The greater the level of subsidiary managers’ trust in the HQ, the

higher the level of subsidiary entrepreneurial culture.

3.3.4 Feeling Trusted by the HQ

Trust has been studied extensively, but feeling trusted remains an under-

explored construct. With a few exceptions, there are very limited studies on the effects

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of feeling trusted (Lau and Lam 2008). Even though trusting and feeling trusted share

many similarities—e.g. both concern a willingness to be vulnerable—and are often

related (Lau, Lam, and Wen 2014), they are two independent and conceptually different

constructs that need not be balanced or mutual, and they have different effects in a

relationship (Brower et al. 2008). Previous studies have focused on subsidiary

managers’ trust in the HQ when seeking to investigate the consequences of trust on

subsidiary managers’ behaviour and intentions. However, it is important to examine

trust from both parties’ perspectives in a manager-subordinate dyad (e.g. the HQ-

subsidiary relationship) (Brower, Schoorman, and Tan 2000). In addition, Lau, Lam,

and Wen (2014) stated that trust may not always be felt. In the context of the HQ-

subsidiary relationship, subsidiary managers do not necessarily feel HQ managers’ trust

in them. Therefore, as Qin and Healey (2016) argued, both trust in the HQ and feeling

trusted by the HQ from subsidiary managers’ perspective may potentially influence

their behaviour and intentions. Subsidiary managers are willing to accept vulnerability

based on their expectation of HQ leaders’ positive intention and behaviour when

subsidiary managers trust in the HQ managers. A cooperative relationship is facilitated

when the truster expects the trustee not to exploit the vulnerability the truster has

exposed (Mayer, Davis, and Schoorman 1995; Rousseau et al. 1998; Dirks and Ferrin

2002). Following this line of reasoning, Qin and Healey (2016) argued that when

subsidiary managers feel trusted by the HQ, they feel that the HQ is willing to assume

risks with them and expects positive intentions and behaviour from them. This

motivates subsidiary managers to make extra efforts in job performance. Employees

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feel positively about their self-confidence, which increases their motivation to pursue

difficult opportunities when they feel trusted by their leaders (Lau, Lam, and Wen 2014;

Eden 1990). Lau, Lam, and Wen (2014) suggested that the key difference between

trusting and feeling trusted is their referents. In the context of the HQ-subsidiary

relationship, even though both constructs are from subsidiary managers’ perspective,

the referent (subsidiary manager) is the truster in trusting in the HQ, while in feeling

trusted by the HQ the referent (subsidiary manager) is the trustee.

As Qin and Healey (2016) argued, pursuing entrepreneurial opportunities

translates to facing greater uncertainty than conducting familiar routine activities. Thus,

subsidiary managers take higher risks when pursuing entrepreneurial opportunities. We

suggest that feeling trusted by the HQ is an important antecedent of subsidiary

managers’ willingness to take those higher risks for three reasons.

Firstly, the HQ’s trust serves as an assurance to subsidiary managers that the HQ

is willing to assume the same risk with them. Employees who perceive being trusted

tend to believe that their supervisor, who invests trust in them, is willing to assume risk

with them (Lau and Lam 2008). Secondly, if subsidiary managers feel trusted by the

HQ, they have more confidence in their capabilities and are empowered by the HQ to

pursue non-routine and higher risk entrepreneurial opportunities. Feeling trusted makes

the trusted party feel competent (Salamon and Robinson 2008); it is a source of self-

confidence (Conger and Kanungo 1998) and a form of psychological empowerment

(Spreitzer 1995). Thirdly, when subsidiary managers feel trusted by the HQ, they are

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somewhat bounded by the trust and may feel obligated to carry out duties as expected

by the HQ which has invested trust in them (Deutsch 1958).

Our analysis suggests that when subsidiary managers perceive themselves to be

trusted by the HQ, they feel more confident, psychologically empowered and believe in

their HQ managers’ willingness to assume the same risk with them: this is an important

antecedent of their pursuing entrepreneurial activities at subsidiary level, which

strengthens the entrepreneurial culture at the subsidiary.

Hypothesis 3: The greater the degree to which subsidiary managers feel trusted

by the HQ, the higher the level of subsidiary entrepreneurial culture.

3.3.5 Subsidiary Initiative

Recent empirical evidence has shown that subsidiary initiatives have significant

consequences for the subsidiary and the MNE as a whole (Birkinshaw 2014a). In recent

years, the digital economy has changed the global competitive landscape (Teece 2016).

Innovation speed from large emerging markets such as China and India is accelerating

faster than that of mature markets such as North America and Europe (Baller, Dutta,

and Lanvin 2016; Cano-Kollmann et al. 2016). Therefore, there is a sense of urgency

for large MNEs located in mature markets to react to this new competitive pressure.

Pursuing entrepreneurial initiatives at the foreign subsidiary level can help MNEs to

change from within (Cantwell and Mudambi 2005; Rugman and Verbeke 2001).

HQ executives are now encouraging, instead of resisting, subsidiary initiatives

(O'Brien et al. 2018). This expectation is placing additional burdens on subsidiary

managers to recognize and respond to their HQ’s expectations, which in turn places

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considerable demand on the HQ-subsidiary relationship. Given this new phenomenon, it

is time to ease the focus on HQs’ resistance of subsidiary initiatives (cf. Birkinshaw,

2014) and instead examine the potential resistance from subsidiary managers in

pursuing entrepreneurial opportunities at the subsidiary level. Qin and Healey (2016)

suggested that HQs’ expectation of entrepreneurial activities alone is not sufficient to

motivate subsidiary managers to conduct entrepreneurial initiatives. Birkinshaw, Hood,

and Jonsson (1998a) stated that it is intuitively obvious that an entrepreneurial culture

fosters initiative-taking behaviour. This implies that an entrepreneurial subsidiary

culture is an organizational context that promotes subsidiary initiative. As mentioned

earlier, a subsidiary entrepreneurial culture involves the development among subsidiary

managers of an entrepreneurial outlook or vision and a proactive and risk-taking

orientation (Birkinshaw 1999; Boojihawon, Dimitratos, and Young 2007; Li and Lee

2015), and conducting subsidiary initiatives such as new product development, business

process innovation and trying a new business model are inherently risky (Ambos,

Andersson, and Birkinshaw 2010). Therefore, less entrepreneurial subsidiaries lack the

proactivity and risk-taking implicit in engaging new initiatives (O'Brien et al. 2018). In

short, an overall contextual environment of a subsidiary entrepreneurial culture is

needed for subsidiary managers to be willing to make the effort to pursue subsidiary

initiatives. Thus, we posit that:

Hypothesis 4A: The more entrepreneurial the subsidiary culture, the higher the

level of subsidiary initiative.

3.3.6 Local Responsiveness

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A high degree of local responsiveness is necessary for MNEs to maintain strong

competitiveness in a host country (Ghoshal and Nohria 1989). Local responsiveness

concerns MNEs’ attempt to respond to the specific needs of their foreign subsidiaries’

host country (Luo 2001). For example, they need to respond to different business

cultures, market conditions, customer tastes or regulatory requirements (Golden 1992;

Roth, Schweiger, and Morrison 1991). As mentioned earlier, some Chinese companies’

increased competitiveness in global markets has put additional pressure on western

MNEs to respond with a more aggressive strategy, one of which is to effectively

compete with Chinese companies in their home (Chinese) market. Therefore, local

responsiveness has become more critical than ever for the survival and the growth of

MNEs. Little research has been done to examine the determinants of local

responsiveness, the exception being Luo (2001). Luo (2001) provided empirical

evidence that there are three categories of factor that influence local responsiveness,

namely the host country’s national environmental factors, industrial structure factors

and organizational factors. For example, Luo (2001) found that a subsidiary’s

relationship with a host country’s government agency and local business community

play an important role in influencing local responsiveness. Our study, on the other hand,

focuses on the internal dimensions that influence subsidiaries’ local responsiveness.

Specifically, we suggest that a subsidiary entrepreneurial culture is an important

influencer of local responsiveness.

For subsidiaries to successfully respond to host countries’ specific needs that are

different from those of their home countries, they need to be sufficiently differentiated

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(Prahalad and Doz 1987; Martinez and Jarillo 1991; Golden 1992). Perceptions of

specific host market needs may differ between HQ managers and subsidiary managers

(Birkinshaw et al. 2000), and local managers are in a better position to appraise these

local dynamics and form responses (Birkinshaw 1997b). In other words, there is no

existing knowledge from HQ for subsidiary managers to use to respond to different

local market requirements. Hence, we suggest that subsidiary managers must

proactively screen local market needs and innovatively develop solutions to satisfy

these needs. Localized learning is important when MNEs expand into new territories

(Tallman 1991), and a subsidiary entrepreneurial culture develops among subsidiary

managers with an entrepreneurial outlook, a proactive orientation that leads to

experimentation and a learning orientation (Boojihawon, Dimitratos, and Young 2007).

In addition, when subsidiaries operate in host countries that have unfamiliar

business and commercial practices from those of the MNE’s home country—e.g. higher

price sensitivity, unique payment terms, different decision-making rationale (Luo

2001)—the MNE often faces uncertainty and risks embodied in the complex

environment that are beyond the control of the firm (Root 1988). Therefore, in addition

to the importance of localized learning when MNEs operate in foreign countries

(Tallman 1991), we contend that subsidiary managers’ risk-taking behaviour is essential

to respond to local specific needs effectively. A subsidiary entrepreneurial culture also

involves the development among subsidiary managers of a risk-taking orientation

(Birkinshaw 1999). Based on the above analysis, we posit that:

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Hypothesis 4B: The more entrepreneurial the subsidiary culture, the higher the

level of local responsiveness.

Figure 3.2 illustrates our arguments and depicts interrelations among our focal

theoretical constructs. Next, we will put our proposed model to an empirical test and

examine the relationships between the three antecedents (trust in the HQ, feeling trusted

by the HQ and procedural justice) and subsidiary entrepreneurial culture, and the

subsequent relationship between entrepreneurial culture and subsidiary initiative and

local responsiveness.

Figure 3.2. HQ-Subsidiary Relationship Model

3.4 Methodology

3.4.1 Sample and Data Collection

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The Chinese subsidiaries of MNEs operating in a range of industries served as

the sample pool for this study. We targeted MNEs headquartered in US and European

countries. The home countries of these MNEs represent developed economies and they

can benefit most from their foreign subsidiaries’ initiatives, because they face fierce

competitive pressure from Chinese competitors in their home country markets

(Tedjarati 2016).

Our study focuses on Chinese subsidiaries for three reasons. Firstly, China is the

largest emerging economy in the world and has become one of the most important

markets for Western MNEs. Secondly, MNEs started to establish subsidiaries in China

three decades ago. A lot of these subsidiaries have matured through growing their size

and capabilities and have started to take on more strategic responsibilities instead of

merely implementing headquarters’ directives (Rugman, Verbeke, and Yuan 2011).

Thirdly, more and more Chinese companies are establishing their own presence in

developed markets and becoming imminent threats to Western MNEs’ home markets.

For example, Huawei has challenged Cisco’s leading position in the US and Europe,

and Hikvision has disrupted the security equipment industry in the US and Europe. In

short, MNEs headquartered in developed markets face serious competitive pressure

from Chinese companies and have recognized the increasing importance of their

Chinese subsidiaries’ entrepreneurial activities. This new phenomenon renders our

study of Chinese subsidiaries especially interesting.

Our target respondents are senior executives, and it is difficult to gain access to

them (Cycyota and Harrison 2006). Senior executives in China are often ‘protected’ by

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their assistants through email and phone filtering; therefore, sending them a survey

questionnaire through paper mail or email can generate an extremely low response rate.

In order to overcome the access barrier, we tried to follow Cycyota and Harrison (2006)

suggestion of approaching executives through their existing social network. However,

our attempt to use China’s American Chamber of Commerce and European Union

Chamber of Commerce to send out surveys to our target respondents failed. We were

left with the choice of using our personal and professional contacts to reach our target

group, which is another social network approach to access hard-to-reach communities

for research (Hirsch 1995). This chain referral sampling method is referred to as

respondent-driven sampling and is designed to overcome the challenges of recruiting

participants from a hard-to-reach community (Sadler et al. 2010; Heckathorn 1997;

Spreen and Zwaagstra 1994). Some recently published studies also used this chain

referral sampling strategy to access their hard-to-reach respondents. For example,

Graebner (2004) and Kannan‐Narasimhan and Lawrence (2018) used a chain referral

sampling strategy to reach executive level informants such as senior level managers,

CEOs and board members.

We initially sent our survey to ten senior executives of MNEs’ Chinese

subsidiaries. These ten initial respondents represented senior executives of MNEs’

Chinese subsidiaries in different industries. We then asked them not only to respond to

the survey but also to send the survey to at least one, but no more than four, other

Chinese subsidiary executives who qualified as our targeted respondents. Our targeted

respondents are CXOs (General Manager, Managing Director, CEO, CFO, CMO, CTO,

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Head of HR, etc.) of MNEs’ Chinese subsidiaries that had been in full operation since

no later than 31 December 2012. We set the ‘minimum age’ of the subsidiary as a

criterion because we did not want to include subsidiaries that had fewer than five years’

full operating experience in China: they are too new to be mature enough to have

opportunities to undertake initiatives (Birkinshaw 2014a). We followed respondent-

driven sampling literature by providing suitable incentives and ensuring anonymity to

the respondents to mitigate chain referral sampling bias (Heckathorn 1997; Magnani et

al. 2005).

Our approach generated 110 valid responses. Yang, Wang, and Su (2006)

provided evidence that the median sample size used in studies published between 1992

and 2003 in top international business journals (Journal of International Business

Studies, Management International Review, Journal of World Business, International

Marketing Review, Journal of International Marketing and International Business

Review) was 180, which is larger than the minimum satisfactory sample size of 100 per

study suggested by Bailey (2008). Our sample size of 110 is relatively small but

consistent with recently published studies. For example, Nell and Ambos (2013)

recently used a sample size of 120 in their study on the topic of the HQ-subsidiary

relationship, while Turnipseed and Turnipseed (2013) used a sample size of 106 to

study the relationship between organizational citizenship behaviour and innovation

climate. In addition, one of the advantages of using Partial Least Square ( PLS ) is its

accommodation of a small sample size (Hair, Ringle, and Sarstedt 2011). We will

discuss statistical considerations concerning sample size further in a later section.

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Using chain referral sampling enabled us to ask our initial respondents to report

how many surveys they sent out and how many were completed so that we could

estimate the response rate. Our sampling approach provided us with a very high

response rate of 95 per cent, without counting respondents who were approached but

refused to participate without even seeing the survey questions. If we include all

respondents being approached, our response rate was 73 per cent. We approached 150

respondents in total, 115 of whom agreed to participate in the survey; we received 110

valid responses before the deadline set for the survey submission. According to Cycyota

and Harrison (2006) study, the median response rate of empirical studies on executives

is 32 per cent. Our 73 per cent response rate is high because we used a social network

approach to access our targeted executives, and this approach makes executive more

likely to disclose strategic information to a researcher (D'aveni 2010). Non-respondents

represent a small portion of the total sample and are unlikely to be significantly

different from the respondents: this reduces concerns regarding non-response bias

(Rogelberg and Stanton 2007).

Our survey focused on the perceptions of Chinese subsidiaries’ executive level

managers. Since we are studying behavioural aspects of the HQ-subsidiary relationship,

collecting data on the cognitive dimensions is more relevant than objective accounts,

because managers’ perceptions are the key influencers of their actions (Birkinshaw

2014a).

To design the questionnaire, where possible we adapted previously validated

measures from the existing literature, making modifications to the geographical and

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theoretical context where necessary. For example, in our chosen measure of subsidiary

initiative (adapted from Birkinshaw et al. 1998), we changed the focus of the questions

from the original Swedish subsidiaries’ initiatives to Chinese subsidiaries’ initiatives.

Because our target respondents are top subsidiary managers of western MNEs who have

daily interactions with their HQ managers in English, we designed our questionnaire in

English. We kept the survey relatively short (five pages, which most respondents

finished in less than 15 minutes) to reduce respondent fatigue, reduce nonresponse bias

and protect data quality (Rogelberg and Stanton 2007).

Due to the difficulty of obtaining data from senior executives in China, it was

necessary to measure our independent variables and dependent variables

contemporaneously. Following (Birkinshaw 2014a; Ambos, Andersson, and Birkinshaw

2010; Najafi-Tavani, Giroud, and Andersson 2014; Ambos, Ambos, and Schlegelmilch

2006; Birkinshaw and Hood 1998), we took several measures to limit potential common

method variance, including placing a control variable between the dependent and

independent variables, and mixing the response formats of the measures (Chang, Van

Witteloostuijn, and Eden 2010; Podsakoff et al. 2003). Based on the feedback we

received in debriefs with a subset of respondents, participants were unable to map the

hypothesized relations between constructs. The confidentiality of respondents was

assured by not collecting any personally identifying information.

As illustrated in Table 3.2, our sample comprised firms operating in ten different

industries and headquartered in more than ten different countries. We compared the

characteristics of our sampled firms with the membership information of Chinese

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subsidiaries posted on the websites of the American Chamber of Commerce in China

and European Union Chamber of Commerce in China. Our sample has approximately

the same industry and country representation as the overall MNE presence in China.

Hence, we are confident that our sample represents an adequate, albeit small, cross-

section of the general population of senior managers of Western MNEs’ Chinese

subsidiaries. While the United States had the largest representation (64), European

countries (40) represented 36 per cent of the total sample.

Table 3.2. Sample Description

3.4.2 Measures

We adapted all our construct measures from previous research, including

influential studies of MNE subsidiaries (e.g. Birkinshaw et al. 1998, 2014; Kim and

Industry Number of Respondents

(%) Country of HQ Number of Respondents

Automotive 8 (7%) USA 64

Manufacturing 35 (32%) Finland 4

Chemical 8 (7%) France 7

Business Services 7 (6%) Germany 10

Entertainment 2 (2%) Netherland 4

Logistics 5 (5%) Italy 1

Consumer Goods 12 (11%) Belgium 1

Healthcare 6 (5%) Sweden 3

Information & Communication 22 (20%) Switzerland 5

Pharmaceutical 5 (5%) United Kingdom 4

Unidentified 6

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Mauborgne, 1991, 1993). The questions for the construct measurements are displayed in

Appendix 3.1.

Subsidiary initiatives. We operationalized this construct by adopting the

measure used by Birkinshaw et al. (1998), because we were also interested in the

internationally focused efforts of the initiatives in this study. Five items were included

in the scale and each item referred to different aspects of subsidiary initiatives. Chinese

subsidiary managers were asked to assess to what extent a series of activities had

occurred in their subsidiary over the past ten years (e.g. new products developed in

China and then sold internationally; new international business activities that were

started in China; new corporate investments in R&D or manufacturing attracted by

Chinese management) on a five-point Likert scale (1 = never to 5 = plentifully). Mean

values of the five indicators of this construct are 2.84, 3.46, 2.79, 3.61 and 3.39 and the

respective standard deviations are 1.32, 1.23, 1.26, 1.15 and 1.18. See Table 3.3 for

descriptive statistics at both indicator and latent variable level. The scale showed good

reliability (Cronbach’s α = 0.71).

Subsidiary entrepreneurial culture. Following Birkinshaw et al. (1998), we

measured this construct by adopting the five highest loading items from Kuratko et al.’s

(1990) intrapreneurial assessment index. These five questions were related to the

openness to entrepreneurship of subsidiaries’ working environment, their risk-taking

and degree of innovation (Birkinshaw, Hood, and Jonsson 1998a). We asked

respondents to indicate how characteristic each of a series of statements was in

describing their subsidiary on a seven-point Likert scale (1 = not at all characteristic to

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7 = highly characteristic), with sample items including individual risk-takers are

recognized whether successful or not; there is encouragement for calculated risks; and

being a risk-taker is considered a positive attribute. Mean values of the five indicators

of this construct are 5.06, 4.93, 4.03, 4.49 and 4.34 and the respective standard

deviations are 1.37, 1.41, 1.47, 1.37 and 1.45. See Table 3.3 for descriptive statistics at

both indicator and latent variable level. The scale showed good reliability (Cronbach’s α

= 0.88).

Trust in the HQ. We adopted Kim and Mauborgne’s (1993) measure to

operationalize this construct. Four items were included in the scale. The first item asked

respondents directly how much trust they had in HQ; the other three items indirectly

asked respondents to assess their trust in the HQ through three different specific

scenarios. We asked respondents to indicate to what extent they agreed with a series of

statements on a seven-point Likert scale (1 = not at all to 7 = totally). Sample items

included: How much confidence and trust do you have in head office management?

How willing are you to accept and follow the strategic decisions made by head office

management? How free do you feel to discuss with head office management the

problems and difficulties faced by your unit without fear of jeopardizing your position

or having your comment held against you later on? How willing are you to accept and

follow those strategic decisions made by head office management? Mean values of the

four indicators of this construct are 4.99, 4.44, 4.96 and 5.03 and the respective standard

deviations are 1.23, 1.33, 1.14 and 1.29. See Table 3.3 for descriptive statistics at both

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indicator and latent variable level. The scale showed good reliability (Cronbach’s α =

0.86).

Feeling trusted by the HQ. We adopted this measure from a context unrelated to

MNE-subsidiary relationships. As no previous MNE-subsidiary studies have measured

this construct, we had to adopt a relatively understudied measurement from research on

business leaders in China by Lau et al. (2007). The scales were developed within the

Chinese business context, and Lau et al. (2007) suggested that the antecedents of feeling

trusted might be different cross-culturally. Since we are measuring Chinese subsidiary

managers’ felt trust, we believe these scales are applicable to our study. The four items

of measurement were picked after Lau et al. (2007) asked 100 mid-level managers what

kind of behaviour their superiors displayed that made them feel trusted. Asking about

trusting behaviours instead of a direct question such as whether their managers trust

them avoids a possible multiple interpretation of feeling trusted among respondents and

social desirability bias (Lau et al., 2007). The psychometric properties of this multi-

indicator construct have also been tested by conducting confirmatory factor analysis,

and construct validity was confirmed by Lau et al. (2007). To the best of our

knowledge, we are the first to adopt this measure and apply it to the HQ-subsidiary

context. Four items are included in the scale, each of which asks subsidiary managers to

assess the trusting behaviour of their HQ managers instead of asking them whether they

felt trusted by their HQ managers directly. We asked respondents to indicate how true a

series of statements were on a seven-point Likert scale (1 = not at all true to 7 =

completely true), using items including HQ manager delegates important work to me;

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HQ manager consults with me about confidential information within my organization;

and HQ manager informs me about his/her personal developmental plans. Mean values

of the four indicators of this construct are 5.22, 4.85, 4.96 and 4.38 and the respective

standard deviations are 1.25, 1.38, 1.38 and 1.58. See Table 3.3 for descriptive statistics

at both indicator and latent variable level. The scale showed good reliability

(Cronbach’s α = 0.85).

Procedural justice. This construct was operationalized by adopting the measure

used by Kim and Mauborgne (1993). Five items were included in the scale, each item

referring to different aspects of subsidiary managers’ perceived fairness during MNEs’

strategic decision-making process. We asked subsidiary managers to indicate how

strongly they agreed with a series of statements on a seven-point Likert scale (1 =

strongly disagree to 7 = strongly agree). Sample items included head office managers

apply consistent decision-making procedures across subsidiary units; subsidiary units

can challenge and refute the strategic views of head office managers; and subsidiary

units receive a full account of the final strategic decisions made by head offices. Mean

values of the five indicators of this construct are 5.16, 4.7, 4.21, 4.73 and 4.85; the

respective standard deviations are 1.22, 1.25, 1.56, 1.45 and 1.38. See Table 3.3 for

descriptive statistics at both indicator and latent variable level. The scale showed good

reliability (Cronbach’s α = 0.84).

Local responsiveness. We measured this construct by adopting a measure from

Luo (2001). Three items are included in this measure, each item assessing different

aspects of subsidiaries’ local responsiveness to changing customer needs, government

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policies and market/completion dynamics. The first item referred to subsidiaries’

response to the host country’s environmental changes. The second item referred to

subsidiaries’ adoption of different strategies and policies in the host country. The third

item referred to subsidiaries’ structural flexibility and adaptability in the host country.

We asked respondents to indicate how strongly they agreed with a series of statements

on a seven-point Likert scale (1 = strongly disagree to 7 = strongly agree). A sample

statement was: During subsidiary operations, we respond quickly to environmental

changes in the host country in each of the following areas (consumer needs/government

policies/market conditions/rivalry situation). Mean values of the three indicators of this

construct are 5.02, 4.92, and 4.63 and the respective standard deviations are 1.43, 1.18,

and 1.34. See Table 3.3 for descriptive statistics at both indicator and latent variable

level. The scale showed good reliability (Cronbach’s α = 0.87).

Table 3.3a. Descriptive Statistics and Correlations at Latent Variable Level

Mean Standard

Deviation

Feeling Trusted

by HQ

Local

Responsiveness

Procedural

justice

Subsidiary

Entrepreneurial

Culture

Subsidiary

Initiative

Trust in

HQ

Feeling Trusted by HQ 4.85 1.16 1.000

Local Responsiveness 4.85 1.18 0.558 1.000

Procedural justice 4.73 1.07 0.657 0.654 1.000

Sub Entrepreneurial Culture 4.57 1.17 0.566 0.609 0.655 1.000

Subsidiary Initiative 3.22 0.84 0.302 0.210 0.341 0.418 1.000

Trust in HQ 4.85 1.05 0.743 0.608 0.787 0.606 0.348 1.000

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Table 3.3b. Descriptive Statistics and Correlations at Indicator Level

3.4.3 Common Method Bias

Before testing our model, we would like to discuss how we addressed common

method bias concerns in our study, since our study used self-reported data, which is a

potential source of measurement error (Podsakoff et al. 2003). We used some

procedural mechanisms to avoid common method bias. Firstly, all of our scale items

were adopted from well-established scales in the literature, which reduces the risk of

common method bias (Podsakoff et al. 2003; Lindell and Whitney 2001). Secondly, we

explicitly told our respondents that their anonymity was strictly protected, which

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reduces respondents’ evaluation apprehension. Protecting respondent anonymity has

been suggested as one procedure that reduces method biases (Podsakoff et al. 2003).

Thirdly, we used different scale formats for different variables throughout the

questionnaire, which reduces common method biases caused by visual commonalities

and anchoring effects (Podsakoff et al. 2003).

In addition to procedural remedies, we also conducted statistical tests to check

for common method bias. Firstly, we performed Harman’s one-factor test in SPSS: the

result confirmed that there is no one single factor emerging that can explain more than

40 per cent of the variance among the constructs (Podsakoff and Organ 1986).

Secondly, we performed a more rigorous full collinearity test in SmartPLS as a

comprehensive procedure that simultaneously assesses both vertical and lateral

collinearity (Kock 2015). Through this procedure, which is fully automated by

SmartPLS, we examined variance inflation factors (VIF) for all latent variables in our

model and confirmed that they are all below 3.3. According to Kock (2015), any

occurrence of a VIF greater than 3.3 is an indication that the model might be

contaminated by common method bias. Based on the procedural remedies and two

statistical tests’ confirmation, we are confident that common method bias cannot

account for the interrelationships observed between variables.

3.5 Research Findings

3.5.1 Analytical Approach

We tested our hypotheses using a second-generation multivariate technique,

namely partial least squares structural equation model, or PLS-SEM. Compared to first-

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generation statistical techniques (such as ANOVA), PLS offers extended modelling

capabilities in terms of causal modelling, particularly in behavioural research (Lowry

and Gaskin 2014). We chose PLS in this study for three reasons. Firstly, instead of

running a series of regression models, PLS allows us to analyse more advanced and

complex models and, unlike first-generation techniques, PLS does not assume normality

in data (Becker, Klein, and Wetzels 2012). Secondly, PLS-SEM is preferred to

covariance-based structural equation modelling (CB-SEM) in the early stage of theory

building and testing (Birkinshaw, Hood, and Jonsson 1998a). Our study is exploratory

in nature and is in the early stage of theory building and testing, and our primary

concern is the prediction of the antecedents of dependent variables (subsidiary

initiatives and local responsiveness). Thirdly, PLS works well with relatively small

sample sizes (Lowry and Gaskin 2014). Compared to CB-SEM, PLS-SEM works more

effectively with smaller sample sizes (Fornell and Bookstein 1982; Haenlein and

Kaplan 2004; Chin and Newsted 1999).

Chin (1998) and Hair, Ringle, and Sarstedt (2011) recommend that the

minimum sample size for PLS-SEM is equal to the larger of (a) ten times the largest

number of formative indicators used to measure a construct; or (b) ten times the largest

number of structural paths directed at a particular latent construct in the structural

model. Our model uses all reflective indicators; therefore, we follow (b) to derive our

minimum sample size requirement. The latent construct with the largest number of

structural paths in our model is ‘subsidiary entrepreneurial culture’: it has three

structural paths directed at it. Hence, the minimum sample size required for our study is

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30, according to Hair et al. (2013). In addition, when considering effect size, reliability

and other issues likely affecting the statistical power of the PLS-SEM method, there is a

different rule of thumb concerning minimum sample size. In order for our proposed

model (four predictors in a multiple regression model) to detect a medium effect size at

the five per cent probability level with statistical power of 0.8, we need a minimum of

84 observations (Cohen 1992). Our sample size is 110, a relatively small one, but it met

the criteria of PLS testing according to Chin (1998), Cohen (1992) and Hair et al.

(2011).

We follow the suggestion of Becker, Klein, and Wetzels (2012) and specify our

model as a reflective-formative hierarchical latent variable model. Our reasoning is as

follows. The three lower-order constructs—namely, trust in the HQ, feeling trusted by

the HQ and procedural justice—are reflectively measured constructs that do not share a

common course but which collectively influence a higher order construct—namely,

subsidiary entrepreneurial culture—which, in turn, fully mediates the influence on

another two endogenous variables—subsidiary initiative and local responsiveness. We

tested our model using SmartPLS 3.0 (Ringle, Wende, and Becker 2015), using its

default settings for both PLS algorithm (path weighting scheme, maximum iteration

value at 300, and a stop criterion value of 10^–7^) and bootstrapping (5,000

subsamples, no sign changes, one-tailed and five per cent significance level). Our

objective is to explain the variance (R²) of three endogenous latent variables (i.e.

subsidiary entrepreneurial culture, subsidiary initiative and local responsiveness).

3.5.2 Assessing the Measurement Models

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We established construct validity by running a bootstrap of the model in PLS

with 5,000 resamples. This essentially involves performing a confirmatory factory

analysis on the resampled data. As indicated in Table 3.4, all our indicator loadings

were higher than 0.6 and significant at the α = 0.001 level (p < 0.001). After running the

PLS algorithm in SmartPLS, we obtained a matrix of loadings and cross-loadings for all

reflective indicators in our model. As illustrated in Table 3.5, all the indicator loadings

are higher than their cross-loadings. An additional discriminant validity test was

performed by SmartPLS, the results of which are reported in Table 3.6. These results

show that the average variance extracted of each of our latent constructs is higher than

the construct’s highest squared correlation with any other latent construct (Fornell and

Larcker 1981), meaning that each of our latent construct has the strongest relationship

with its assigned indicators than with another latent variable in our model. This

confirms the discriminant validity of our model.

PLS also measures a construct’s internal consistency through a composite

reliability score, equivalent to Cronbach’s alpha; Table 3.7 shows these results. Each

construct in our model has a composite reliability score higher than 0.8 and a

Cronbach’s alpha score higher than 0.7; thus, our measures demonstrate high reliability

(Nunnally and Bernstein 1967; Hair, Ringle, and Sarstedt 2011). In summary, we have

established internal consistency reliability, indicator reliability, convergent validity and

discriminant validity for our reflective measurement model according to established

PLS model evaluation guidelines (Hair, Ringle, and Sarstedt 2011).

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Table 3.4. Indicator Loadings

Table 3.5. Cross-Loadings of Measurement Items

Construct (Latent Variable) Indicator Loading Standard Deviation P Values

Subsidiary Entrepreneurial Culture E1 0.8 0.05 0.000

E2 0.8 0.04 0.000

E3 0.9 0.03 0.000

E4 0.8 0.06 0.000

E5 0.9 0.03 0.000

Feeling Trusted by HQ F1 0.8 0.04 0.000

F2 0.9 0.03 0.000

F3 0.9 0.02 0.000

F4 0.8 0.05 0.000

Local Responsiveness L1 0.9 0.03 0.000

L2 0.9 0.02 0.000

L3 0.9 0.02 0.000

Procedural Justice P1 0.8 0.03 0.000

P2 0.8 0.04 0.000

P3 0.7 0.06 0.000

P4 0.8 0.06 0.000

P5 0.7 0.05 0.000

Subsidiary Initiative S1 0.8 0.06 0.000

S2 0.6 0.12 0.000

S3 0.7 0.09 0.000

S4 0.7 0.10 0.000

S5 0.6 0.13 0.000

Trust in HQ T1 0.9 0.02 0.000

T2 0.8 0.04 0.000

T3 0.8 0.05 0.000

T4 0.8 0.04 0.000

Subsidiary Entrepreneurial Culture Feeling Trusted by HQ Procedural Justice Subsidiary Initiative Trust in HQ

E1 0.77 0.50 0.50 0.37 0.50

E2 0.79 0.50 0.56 0.38 0.49

E3 0.87 0.46 0.56 0.34 0.52

E4 0.78 0.35 0.44 0.27 0.43

E5 0.88 0.48 0.61 0.33 0.53

F1 0.43 0.82 0.47 0.27 0.60

F2 0.51 0.85 0.66 0.28 0.70

F3 0.45 0.88 0.52 0.17 0.58

F4 0.47 0.76 0.50 0.28 0.57

L1 0.52 0.46 0.49 0.15 0.53

L2 0.55 0.47 0.61 0.19 0.50

L3 0.57 0.56 0.65 0.22 0.60

P1 0.59 0.61 0.84 0.29 0.67

P2 0.55 0.55 0.82 0.26 0.67

P3 0.48 0.48 0.73 0.24 0.53

P4 0.38 0.44 0.77 0.25 0.57

P5 0.50 0.45 0.72 0.28 0.60

S1 0.29 0.25 0.25 0.81 0.24

S2 0.21 0.22 0.28 0.595 0.30

S3 0.38 0.21 0.21 0.70 0.23

S4 0.27 0.21 0.25 0.67 0.26

S5 0.19 0.11 0.17 0.591 0.16

T1 0.55 0.71 0.77 0.30 0.89

T2 0.46 0.61 0.67 0.25 0.83

T3 0.44 0.61 0.52 0.27 0.80

T4 0.56 0.56 0.65 0.34 0.83

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Table 3.6. Fornell-Larcker Criterion

Table 3.7. Construct Reliability

3.5.3 Assessing the Structural Model

The primary output from SmartPLS is in terms of the coefficient (R²) of

endogenous latent variables and path coefficients between endogenous and exogenous

constructs. The significance of R² and path coefficients was calculated using

bootstrapping in SmartPLS. As summarized in Table 3.8, the three endogenous latent

variables in our model—namely subsidiary entrepreneurial culture, subsidiary initiative

and local responsiveness—have R² values of 0.47, 0.18 and 0.37 respectively; all of

them are significant at α 0.01 level (p < 0.01).

Table 3.8. R² Measures of Endogenous Latent Variables

Table 3.9 indicates that, of the pathways hypothesized, four path coefficients are

significant, one at five per cent level (p < 0.05) and the other three at one per cent level

Feeling trusted by HQ Local Responsiveness Procedural Justice Subsidiary Entrepreneurial Culture Subsidiary Initiative Trust in HQ

Feeling trusted by HQ 0.827

Local Responsiveness 0.558 0.891

Procedural Justice 0.657 0.654 0.777

Subsidiary Entrepreneurial Culture 0.566 0.609 0.655 0.819

Subsidiary Initiative 0.302 0.210 0.341 0.418 0.676

Trust in HQ 0.743 0.608 0.787 0.606 0.348 0.838

Cronbach's Alpha Composite Reliability Average Variance Extracted (AVE)

Feeling Trusted by HQ 0.8 0.9 0.7

Local Responsiveness 0.9 0.9 0.8

Procedural Justice 0.8 0.9 0.8

Subsidiary Entrepreneurial Culture 0.9 0.9 0.7

Subsidiary Initiative 0.7 0.8 0.5

Trust in HQ 0.9 0.9 0.7

Endogenous Latent Variable R² Standard Deviation T Statistics P Values

Local Responsiveness 0.37 0.08 4.82 0.000

Subsidiary Entrepreneurial Culture 0.47 0.07 6.37 0.000

Subsidiary Initiative 0.18 0.07 2.69 0.007

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(p < 0.01). One path coefficient was found not to be statistically significant, namely the

path between trust in the HQ and subsidiary entrepreneurial culture.

Table 3.9. Path Coefficients

We also ran the blindfolding procedure in SmartPLS and obtained Q² values for

all the constructs to obtain a cross-validated redundancy measure (Geisser 1974; Stone

1974). As indicated in Table 3.10, the resulting Q² values for all the constructs are

larger than zero, which confirms that our exogenous constructs have predictive

relevance for the endogenous constructs in our model (Hair, Ringle, and Sarstedt 2011).

Table 3.10. Q² Predictive Relevance

3.5.4 Tests of Hypotheses

H1 predicted a significant positive relationship between procedural justice and

subsidiary entrepreneurial culture. The path coefficient between procedural justice and

Path Coefficient Standard Deviation T Statistics P Values

Feeling trusted by HQ -> Subsidiary Entrepreneurial Culture 0.19 0.11 1.66 0.049

Procedural Justice -> Subsidiary Entrepreneurial Culture 0.43 0.12 3.55 0.000

Subsidiary Entrepreneurial Culture -> Local Responsiveness 0.61 0.06 9.55 0.000

Subsidiary Entrepreneurial Culture -> Subsidiary Initiative 0.42 0.08 5.60 0.000

Trust in HQ -> Subsidiary Entrepreneurial Culture 0.12 0.13 0.93 0.177

Construct Q²

Feeling Trusted by HQ 0.5

Local Responsiveness 0.5

Procedural Justice 0.4

Subsidiary Entrepreneurial Culture 0.5

Subsidiary Initiative 0.2

Trust in HQ 0.5

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subsidiary entrepreneurial culture is positive and very strong with a value of 0.43, and is

highly significant (p < 0.001). Therefore, our findings support H1.

Contrary to the prediction of H2, we found no statistically significant

relationship between trust in the HQ and subsidiary entrepreneurial culture. The path

coefficient between trust in the HQ and subsidiary entrepreneurial culture has a low

value of 0.12 and is not statistically significant, which indicates a weak relationship.

The path coefficient needs to be close to 0.2 and significant to demonstrate meaningful

predictive power (Lowry and Gaskin 2014). In addition, to rule out the explanation that

weak statistical power might be the reason for not detecting a significant relationship

between trust in the HQ and subsidiary entrepreneurial culture, we made a calculation

based on the value of R², number of predictors, sample size and probability level of 0.05

(Soper 2009). The result confirmed that our model had sufficient statistical power to

detect a significant relationship between these constructs. Therefore, we confirm that

H2 is not empirically supported.

H3 proposed that feeling trusted by the HQ is another important antecedent of

subsidiary entrepreneurial culture. The path coefficient between feeling trusted and

subsidiary entrepreneurial culture is 0.19 and significant at the five per cent level (p <

0.05). Hence, H3 is supported.

We also predicted significant positive relationships between subsidiary

entrepreneurial culture and subsidiary initiative (H4a) and between subsidiary

entrepreneurial culture and local responsiveness (H4b). The path coefficient between

subsidiary entrepreneurial culture and subsidiary initiative is 0.42 and the path

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coefficient between subsidiary entrepreneurial culture and local responsiveness is 0.61;

both are significant (p < 0.001). Hence, both H4a and H4b received strong empirical

support. The results reveal a much stronger relationship between subsidiary

entrepreneurial culture and subsidiary initiative than that observed by Birkinshaw et al.

(1998). Their data showed a relatively low path coefficient of 0.09 between

entrepreneurial culture and subsidiary initiative at five per cent significance level; they

consider this result moderately supports a predictive relationship between

entrepreneurial culture and subsidiary initiative (Birkinshaw, Hood, and Jonsson

1998a).

As shown in Table 3.6 (above), the R² of subsidiary entrepreneurial culture is

0.47 and significant (p < 0.001). This means that feeling trusted by the HQ, trust in the

HQ and procedural justice collectively explained almost half of the variance in

subsidiary entrepreneurial culture. The variance explained for subsidiary initiative (R²)

is 0.18 and significant (p < 0.001). The variance explained for local responsiveness (R²)

is 0.37 and significant (p < 0.001). We conclude that, overall, the three endogenous

variables (subsidiary entrepreneurial culture, subsidiary initiative and local

responsiveness) explain a significant degree of the variance in our model. There is no

consensus on what level of R² is high: judgement depends on the discipline of the

research (Hair, Ringle, and Sarstedt 2011). In Nell and Ambos (2013) study, the R² of

their endogenous variable was 0.29; in Birkinshaw and Hood (1998) study, the R²s of

the three endogenous variables were between 0.12 and 0.53. Therefore, we feel safe

suggesting that the variance explained in our study is within the range of prior published

150

studies of the headquarters-subsidiary relationship. Figure 3.3 summarizes the results of

our model testing.

Note: Numbers outside parentheses are path coefficients and inside are P values.

Figure 3.3. Path Coefficients and R2 for Theoretical Model

3.5.5 Post-Hoc Analysis

Birkinshaw and Morrison (1995a) categorized subsidiaries in three different

roles—local implementers, specialized contributors and world mandates—and provided

empirical evidence to show that world mandates have different characteristics (e.g.

higher strategic autonomy, lower level of internal flow of products, and more

internationally configured value-chain). Subsidiaries with world mandates have high

levels of resources and expertise and work with HQs to develop and implement strategy

(Roth and Morrison 1992) to achieve both global integration and local responsiveness

151

(Jarillo and Martíanez 1990). We believe it might be interesting to investigate our

proposed path relationships in world mandates from our sample data.

We operationalized ‘world mandate’ by modifying the measurement used in

Birkinshaw, Hood, and Jonsson (1998b). Instead of asking subsidiary managers what

percentage of their revenue was gained from international responsibilities, we asked

respondents whether their subsidiaries have international responsibilities (e.g.

undertaking activities such as manufacturing, R&D or product management on behalf of

the corporation as a whole). Of the respondents, 67 (61%) indicated yes and 43 (39%)

no. We then performed a PLS analysis by separating our sample into two groups:

subsidiaries with world mandates (N=67) and those without world mandates (N=43).

The post-hoc analysis resulted in some interesting findings.

Firstly, for subsidiaries with world mandates, hypotheses 1, 3, 4a and 4b are still

supported and hypothesis 2 is still not supported. Secondly, the significant increases of

R² for subsidiary entrepreneurial culture and local responsiveness, along with

significant increases in the corresponding paths pointing to them (except for the non-

significant path between trust in the HQ and subsidiary entrepreneurial culture),

demonstrate that H1, H3 and H4b find stronger support among subsidiaries with world

mandates. Table 3.11 summarizes our findings concerning the effects of subsidiaries

with world mandates on the theoretical relationships in our model.

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Table 3.11. Summary of PLS Findings for Subsidiaries with World Mandates

3.6 Discussion

The findings from this study offer some interesting insights on the antecedents

and consequences of subsidiary entrepreneurial culture, which we have argued is a

manifestation of an effective HQ-subsidiary relationship. Most substantively, we found

that subsidiary managers’ feelings of being trusted by the HQ and perceptions of

procedural justice influence how entrepreneurial a subsidiary’s culture is, which in turn

strongly predicts the level of local responsiveness and subsidiary initiative.

After Leventhal and colleagues extended the concept of procedural justice to the

organizational context (Leventhal 1980; Leventhal, Karuza, and Fry 1980), Kim and

Mauborgne (1991) extended the construct in the MNE context and provided empirical

evidence to show that procedural justice positively affects subsidiary top management’s

commitment, trust and outcome satisfaction. Building on this work, Kim and

Mauborgne (1993) empirically examined and provided evidence that the existence of

procedural justice directly facilitates subsidiary managers’ compliance with HQ’s

strategic decisions. Our finding of a significant predictive relationship between

procedural justice and entrepreneurial culture extends our understanding of this

construct. The linkage between procedural justice and entrepreneurial culture is

important because, as Kim and Mauborgne (1993) suggested, subsidiary managers’

Hypothesis PathPath Coefficients with

World Mandate P Values

Support for

Hypothesis?

1 Procedural Justice -> Subsidiary Entrepreneurial Culture (H1) 0.57 0.00 Yes

2 Trust in HQ -> Subsidiary Entrepreneurial Culture (H2) 0.03 0.44 No

3 Feeling Trusted by HQ -> Subsidiary Entrepreneurial Culture (H3) 0.23 0.05 Yes

4a Subsidiary Entrepreneurial Culture -> Subsidiary Initiative (H4a) 0.38 0.00 Yes

4b Subsidiary Entrepreneurial Culture -> Local Responsiveness (H4b) 0.77 0.00 Yes

R² P Values

Variance explained in Local Responsiveness 0.590 0.000

Variance explained in Subsidiary Entrepreneurial Culture 0.580 0.000

Variance explained Subsidiary Initiative 0.140 0.034

153

compliant behaviour is not conducive to the creation of an effective strategy. It only

follows and implements the HQ’s strategic decisions to the letter and in the spirit in

which they were issued (Kim and Mauborgne 1993). Subsidiary entrepreneurial culture,

on the other hand, involves the development among subsidiary managers of a proactive

and risk-taking orientation that leads to experimentation, learning and innovation

(Birkinshaw 1997b). Therefore, subsidiary entrepreneurial culture creates an

organizational context that encourages subsidiary managers’ input in the strategy-

making process, which we believe is beneficial to the effectiveness of the overall

strategy because many new product development and market penetration ideas originate

from foreign subsidiaries (Rugman, Verbeke, and Yuan 2011). Kim and Mauborgne

(1996) attempted to link procedural justice to subsidiary managers’ extra-role

behaviour, which includes innovative actions, spontaneous cooperation and creative

behaviour (Katz 1964). However, their empirical evidence showed that there was a lack

of relationship between procedural justice and extra-role behaviour (Kim and

Mauborgne 1996). Therefore, our finding of a predictive relationship between

procedural justice and subsidiary entrepreneurial culture is an important contribution to

the procedural justice literature.

Our findings suggest that feeling trusted plays a more important role in

influencing subsidiary entrepreneurial culture than has previously been recognized.

Previous research on the influence of trust in HQ-subsidiary relationships focused on

cooperative behaviours—for example, knowledge and resource exchange, joint problem

solving among different units of MNEs (Tsai and Ghoshal 1998; Zaheer, McEvily, and

154

Perrone 1998; Li 2005), and minimizing perception gaps between HQ and subsidiary

managers and decreasing monitoring costs due to agency problems (Birkinshaw et al.

2000; Gurkov and Morley 2017). Our finding of the important role that feeling trusted

by the HQ plays in fostering subsidiary entrepreneurial culture represents one of the

first attempts to examine feeling trusted in HQ-subsidiary relationships.

The results concerning feeling trusted illustrate the importance in this context of

separating, theoretically and empirically, the general concept of trust from the more

specific concepts of trust in the HQ and feeling trusted by the HQ. Our results suggest

that these two concepts have distinct effects on the subsidiary entrepreneurial culture,

consistent with a behavioural agency perspective on the HQ-subsidiary relationship

(Hoenen and Kostova 2014; Kostova et al. 2016; Qin and Healey 2016).

More generally, studies of the influence of trust in organizations have tended to

link it to improved job performance (Lau, Lam, and Wen 2014; Brower et al. 2009;

Salamon and Robinson 2008). Baer et al. (2015), on the other hand, challenged this

consensus about feeling trusted and argued that this construct is a double-edged sword.

The positive side of feeling trusted is that it might have motivational effects through a

sense of psychological empowerment (Spreitzer 1995); the negative side is that

employees who perceive being trusted may have accrued idiosyncrasy credits that

enable them to deviate from group norms without penalty, which may result in a lower

job performance level (Hollander 1992).

While Baer et al. (2015) empirical study focused on traditional measures of job

performance, our study focused on the positive relationship between feeling trusted and

155

subsidiary entrepreneurial culture, suggesting that the risk-fostering nature of feeling

trusted plays a more important role in the context of subsidiary entrepreneurship and

initiative. The strong predictive relationship between feeling trusted and subsidiary

entrepreneurial culture confirmed that the positive side of feeling trusted prevails in an

environment that demands unscripted and creative actions. The evidence of stronger

predictive power of feeling trusted in subsidiaries with world mandates further

strengthens our proposed relationship. HQs demand that subsidiaries with world

mandates develop products that serve international markets, but HQs do not provide

specific guidance or scripted actions for the subsidiaries to follow, which creates an

environment that encourages/demands that subsidiary managers conduct novel and non-

routine activities. Our results show that feeling trusted plays a more important role in

predicting the level of subsidiary entrepreneurial culture in subsidiaries with world

mandates than in those without.

We failed to find a clear relationship between subsidiary managers’ trust in the

HQ and subsidiary entrepreneurial culture. This result is surprising and counterintuitive,

because there is ample evidence from previous empirical studies supporting the positive

outcomes of trust in international business and HQ-subsidiary relations more generally

(Dirks 1999; Brower et al. 2008; Hewett and Bearden 2001; Harvey et al. 2005). The

reason may lie in the possibility that subsidiary managers’ trust in the HQ is insufficient

to influence subsidiary entrepreneurial culture. Previous empirical evidence showed that

subordinates’ trust in managers has a positive impact on task performance, OCB and

counterproductive behaviour (including intention to quit) (Rotundo and Sackett 2002;

156

Dirks 1999). The lack of a predictive relationship between trust in the HQ and

subsidiary entrepreneurial culture found in our study implies that these three job

performance measures (task performance, OCB and counterproductive behaviour) do

not foster entrepreneurial culture, even though OCB does link to new idea generation

(Turnipseed and Wilson 2009). Our study implies that new idea generation might be

different from fostering entrepreneurial culture: we suggest that further study on this

topic could be fruitful.

A further important insight from our findings comes from the strong relationship

observed between subsidiary entrepreneurial culture and local responsiveness. Limited

research has shed some light on the influence of host countries’ environmental

complexity, industry structural factors and firms’ established networks on local

responsiveness (Birkinshaw, Morrison, and Hulland 1995; Luo 2001). However, as Luo

(2001) suggested, there are still a number of internal contextual factors (e.g. MNEs’

strategic goals, tacitness of deployed knowledge, risk-taking ability) that may be

pertinent to local responsiveness. Our study is the first to examine how internal

contextual factors—for example, subsidiary entrepreneurial culture—influence local

responsiveness. Risk-taking behaviour is an important element of entrepreneurial

culture (Kuratko, Montagno, and Hornsby 1990) and our finding of the strong

predictive relationship between subsidiary entrepreneurial culture and local

responsiveness advances the knowledge on local responsiveness. With the increased

pressure of global competition from Chinese companies, Western MNEs are paying

more attention to competing effectively with Chinese companies. The old mind-set of

157

so-called global strategy developed by HQs seems to be losing its effectiveness in the

contemporary business world (Rugman 2001; Rugman and Verbeke 2004). Therefore,

improving MNEs’ local responsiveness to compete effectively with Chinese companies

is becoming a critical strategic intent. The empirical evidence we obtained from China

also provides important insights into MNEs with subsidiaries operating in China.

Interestingly, the relationship between subsidiary entrepreneurial culture and

local responsiveness is stronger for subsidiaries with world mandates than for those

without such mandates. This finding suggests that local responsiveness is strongly

influenced by the level of subsidiary entrepreneurial culture, and this effect is even

stronger for subsidiaries that have international responsibilities. Birkinshaw, Hood, and

Jonsson (1998b) suggest that subsidiaries with world mandates have been assigned

international responsibilities by their HQ. Because it is the HQ that provides the

specifications of the products sold internationally, the routine activities of subsidiaries

with world mandates include a certain level of specific guidance from the HQ which

results in more subsidiary conformity than creativity. Therefore, subsidiary

entrepreneurial culture becomes more important for subsidiaries with world mandates if

they want to achieve a high level of local responsiveness. The empirical evidence we

found in this study supports this argument.

A further key insight from the present study is that subsidiary entrepreneurial

culture has an important role to play in the development of subsidiary initiative. While

it is widely acknowledged that subsidiary entrepreneurship promotes subsidiary

initiatives either directly or as a mediator (Birkinshaw and Hood 1998; Rugman and

158

Verbeke 2003; O'Brien et al. 2018; Scott, Gibbons, and Coughlan 2010), empirical

evidence supporting a direct relationship between subsidiary entrepreneurship and

subsidiary initiative has been lacking. For example, Scott, Gibbons, and Coughlan

(2010) empirical evidence failed to support a direct relationship between subsidiary

entrepreneurship and initiative generation, and Birkinshaw and Hood (1998) results

only moderately supported this relationship. The empirical evidence in the current study

offers significantly stronger support to the proposed predictive relationship between

subsidiary entrepreneurial culture and subsidiary initiative than the evidence collected

by Birkinshaw, Hood, and Jonsson (1998b). The effective size shown in our study (path

coefficient = 0.41) is significantly larger than theirs (path coefficient = 0.09). Our

interpretation suggests that this may be because we used a more contemporary sample

that represents the change in the dynamics of the modern business environment.

Alternatively, this might simply be attributed to culture distance, since our data are

collected from Chinese subsidiaries of Western MNEs.

Our study has some important limitations. Firstly, we collected all data from

subsidiary managers. Even though we believe the perceptions of the subsidiary

managers are important for the constructs we examined, this may have created some

bias. Therefore, collecting the HQ perspective in future studies is recommended

(Birkinshaw and Hood 1998). Secondly, focusing on Chinese subsidiaries limits

generalizability. While examining evidence from China helps practitioners better

understand how to manage the working relationship in the largest emerging market, this

study does not address different dynamics in the HQ-subsidiary relationship if the HQ

159

and subsidiary reside in countries with less cultural distance (Qin, Ramburuth, and

Wang 2008; Cui et al. 2006; Tihanyi, Griffith, and Russell 2005).

3.7 Conclusion and Implications

Overall, our study provides support for our theorizing that feeling trusted and

procedural justice are significant contributors to subsidiary entrepreneurial culture. We

have argued that subsidiary entrepreneurial culture is the ultimate manifestation of an

effective HQ-subsidiary relationship in modern MNEs, not least because, as we have

shown, it is a significant predictor of subsidiary initiative and local responsiveness.

Trust in the HQ represents subsidiary managers’ willingness to accept vulnerability

based on positive expectations of the HQ’s behaviour in response to subsidiary risk-

taking. Pursuing entrepreneurial opportunities requires that subsidiary managers assume

a certain level of risk, and trust in the HQ facilitates the development of a supportive

climate for entrepreneurship and innovation, one that mitigates some of these risks of

these activities.

3.7.1 Implications for Research

There is considerable scope for future research examining the role that trust in

the HQ plays in modern MNEs—specifically, examining the effects of trusting in the

HQ and comparing these with the effects that subordinates’ trust in managers have on

job performance (Rotundo and Sackett 2002) in terms of task performance, OCB and

counterproductive behaviour. In addition, a further understanding of how subsidiary

managers’ trust in HQs differs in different cultural distances might be fruitful (Doney,

Cannon, and Mullen 1998; Zaheer and Zaheer 2006; Lewis and Gates 2005).

160

Furthermore, examining the antecedents, manifestations and consequences of an

effective HQ-subsidiary relationship in a contemporary MNE provides evidence that

pursuing entrepreneurial opportunities at subsidiary level is motivated by subsidiary

managers’ perception of the HQ-subsidiary relationship instead of just HQs’

expectations. This finding challenges some of the traditional assumptions of MNE

theory (Bartlett and Ghoshal 1989; Birkinshaw, Morrison, and Hulland 1995) and

should motivate scholars and practitioners to consider how these key elements interact

with each other and collectively influence the effectiveness of the HQ-subsidiary

relationship, which ultimately motivates subsidiary managers to pursue entrepreneurial

opportunities to the benefits of both local and global markets.

3.7.2 Implications for Practice

If MNE’s HQ executives really want their foreign subsidiary managers to pursue

entrepreneurial initiatives that respond to intensified competition in both home and

foreign markets, they had better act in a way that facilitates entrepreneurial culture at

subsidiary level. Subsidiary entrepreneurial culture is a manifestation of an effective

HQ-subsidiary relationship. And this relationship is influenced by the day-to-day

interactions between individual subsidiary and HQ managers. Subsidiary managers’

perception of how these day-to-day interactions with HQ manages is especially

important, because their perception of being trusted by HQ and the level of procedural

justice are evidenced to be two key elements that facilitate an entrepreneurial culture at

subsidiary level. Therefore, HQ managers not only need to act in a trusting way but also

should make efforts to ensure those trust being felt by subsidiary managers. In addition,

161

instilling and communicating a fair decision-making process is critical to improve the

effectiveness of the HQ-subsidiary relationship which in turn motivates subsidiary

managers to pursue entrepreneurial initiatives.

162

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APPENDIX 3.1. Survey Items

Subsidiary initiative. Five-item five-point Likert scale developed by Birkinshaw et al.

(1998).

To what extent have the following activities occurred in your subsidiary over the past

ten years?

(1) New products developed in China and then sold internationally.

(2) Successful bids for corporate investments in China.

(3) New international business activities that were started in China.

(4) Enhancements to product lines which are already sold internationally.

(5) New corporate investments in R&D or manufacturing attracted by Chinese

management.

1 = never, 5 = plentifully.

Subsidiary entrepreneurial culture. Five-item seven-point Likert scale developed by

Kuratko et al. (1990) and adopted by Birkinshaw et al. (1998).

Indicate how characteristic each of the following statements is in describing your

subsidiary:

(1) There is top management support of entrepreneurial activity.

(2) Top management has experience with innovation.

(3) Individual risk-takers are recognized whether successful or not.

(4) There is encouragement for calculated risks.

(5) Being a risk-taker is considered a positive attribute.

1 = not characteristic at all, 7 = strongly characteristic.

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Local responsiveness. Three-item seven-point Likert scale developed Luo (2001).

Determinants of local responsiveness: perspectives from foreign subsidiaries in an

emerging market:

(1) During subsidiary operations, we respond quickly to environmental changes in the

host country in each of the following areas (consumer needs/government

policies/market conditions/rivalry situation).

(2) During subsidiary operations, we adopt different strategies and policies under

different conditions or situations in each of the following areas (consumer

needs/government policies/market conditions/rivalry situation).

(3) During subsidiary operations, we are structurally flexible and adaptable in response

to indigenous contingencies from each of the following areas (consumer

needs/government policies/market conditions/rivalry situation).

1 = not true at all, 7 = very true.

Feeling trusted. Four-item seven-point Likert scale developed by Lau et al. (2007).

Feeling trusted by business leaders in China: antecedents and the mediating role of

value congruence:

(1) HQ manager delegates important work to me.

(2) HQ manager empowers me with great decision-making power.

(3) HQ manager consults with me in relation to confidential information within my

organization

(4) HQ manager informs me about his/her personal developmental plans.

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Trust in head office management. Four-item seven-point Likert scale developed by

Kim and Mauborgne (1993).

Procedural justice, attitudes and subsidiary top management compliance with MNC

strategic decisions:

Four items measured the trust subsidiary top managers have in head office management:

(1) How much confidence and trust do you have in head office management?

(2) Head office management at times must make decisions which seem to be against the

interests of your unit. When this happens, how much trust do you have that your unit's

current sacrifice will be justified by the head office's future support for your unit?

(3) How willing are you to accept and follow those strategic decisions made by head

office management?

(4) How free do you feel to discuss with head office management the problems and

difficulties faced by your unit without fear of jeopardizing your position or having your

comment held against you later?

Procedural justice. Five item seven-point Likert scale developed by Kim and

Mauborgne (1991).

To measure procedural justice in the MNE perceived by subsidiary managers:

(1) Bilateral communication exists between the managers of head offices and subsidiary

units involved in multinationals' strategic decision-making.

(2) Head office managers apply consistent decision-making procedures across

subsidiary units.

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(3) Subsidiary units can challenge and refute the strategic views of head office

managers.

(4) Subsidiary units receive a full account of the final strategic decisions of head

offices.

(5) Head office managers involved in strategic decision-making are well informed about

the local situations of subsidiary units.

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Chapter 4

A Closer Look at the Antecedents and Consequences of Feeling Trusted by the HQ

and Trust in the HQ, and the Impacts on Subsidiary Performance

Abstract

In today’s global business environment, multinational enterprises (MNEs) must build

and maintain a high-quality relationship with their foreign subsidiaries to benefit from

local innovation. Although previous research has identified trust – specifically,

subsidiary manager’s feeling trusted by headquarters (HQ) – as a key driver of

subsidiary entrepreneurial culture, we know little about its nature and influence in this

context. In this study, we examine the antecedents and consequences of subsidiary

managers’ feeling trusted by the HQ and trust in the HQ and analyse the mechanisms

through which trust influences subsidiary entrepreneurial orientation. Based on semi-

structured depth interviews with subsidiary executives managing seven business units at

the Chinese subsidiaries of two Western MNEs operating in the industrial products

sector, we compare the nature of the HQ-subsidiary relationship in high and low

performing subsidiaries. Findings reveal that feeling trusted by the HQ and trust in the

HQ influence subsidiary managers’ behaviour in different ways. Specifically, subsidiary

manager’s perception of being trusted by the HQ fosters subsidiary entrepreneurial

orientation and their trusting in the HQ facilitates organizational citizenship behaviour.

Cross-subsidiary comparisons show how different HQ-subsidiary relationships lead to

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various levels of subsidiary local responsiveness, which is in turn important for global

competitiveness. We discuss implications for research and practice.

Keywords: Trust; HQ-subsidiary relationship; MNE performance; Entrepreneurial

Orientation; Organizational citizenship behaviour; Local responsiveness; Subsidiary

initiative

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4.1 Introduction

China has been the world’s second largest economy since 2011 and today its

GDP is larger than the GDPs of Brazil, Russia and India combined. The increasing

significance of the Chinese market has created unique opportunities that few

multinational enterprises (MNEs) can afford to ignore. However, conducting successful

business in China is increasingly challenging because the competition from both

domestic and multinational companies remains fierce, and the rapid exploitation of

digital innovation, such as e-commerce and the Internet of Things, has disrupted

traditional industries with established business models.

In responding to the increasing significance and challenges of the Chinese

market, MNEs are expecting their Chinese subsidiaries to become more adaptive and

innovative to effectively compete with Chinese companies which are not only rapidly

moving up the value chain and capturing the domestic market share, but also quickly

expanding into global markets and becoming industry leaders in those global markets.

For example, according to a recent report by IHS Markit (Cropley et al, 2017), the

Chinese company Hikvision Digital Technology has become the world’s largest

supplier in the video surveillance market since 2011, only ten years after the company

was founded. The idea that succeeding in China today is a prerequisite for MNEs

seeking to succeed elsewhere in the world tomorrow (Yiu and Mercer, 2014) is rapidly

supplanting the conventional wisdom that developing markets lag behind the developed

world. The anecdotal evidence shows that progressive MNEs are giving mandates to

their Chinese subsidiaries to innovate and pursue entrepreneurial opportunities faster

190

than subsidiaries in other parts of the world, including the home countries where their

global headquarters reside. For example, both companies we interviewed have asked

their Chinese subsidiaries to shorten their new product development cycle from 18 to 12

months, while the global average remains at 24 to 36 months.

The ability of MNEs to benefit from the entrepreneurial activities of their

foreign subsidiaries has recently drawn considerable attention from both management

researchers and practitioners (Birkinshaw 2014a; Ambos, Andersson, and Birkinshaw

2010; Bartlett and Ghoshal 1989; Rugman and Verbeke 2001; Rugman and Li 2007).

For example, GE Healthcare’s Chinese subsidiary developed new ultrasound equipment

that improved GE’s local responsiveness and disrupted North American and European

markets (Govindarajan and Trimble 2013; Immelt, Govindarajan, and Trimble 2009).

Another evidence is that Honeywell’s corporate headquarters (HQ) is encouraging its

Chinese subsidiaries to develop east-to-east (local responsiveness) and east-to-rest

(serving global markets) capabilities through local R&D in China’s local sourcing, local

manufacturing and local distribution models. Honeywell’s Chinese subsidiary has

developed innovative products that serve not only local markets but also global needs

(Tedjarati 2016).

However, as Qin and Healey (2016) argued, the question of what motivates or

demotivates MNEs’ subsidiary managers to pursue entrepreneurial opportunities

requires researchers to look beyond obvious factors such as a centralized decision-

making structure, subsidiary leadership capabilities and local market dynamics

(Birkinshaw 1999), because these factors do not explain subsidiary initiative from the

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behavioural perspective. This paper seeks to address the question of what motivates or

demotivates subsidiary managers to pursue entrepreneurial opportunities when they are

expected to do so by focusing on how subsidiary managers’ perceptions of “feeling

trusted by the HQ” and “trusting in the HQ” impact the HQ-subsidiary relationship,

which our previous paper identifies as impacting a foreign subsidiary’s local

responsiveness and subsidiary initiatives (Qin and Healey 2017). Qin and Healey (2016)

argue that subsidiary managers can and often do resist pursuing entrepreneurial

opportunities at subsidiary level because pursuing these non-routine activities may

involve additional risks that subsidiary managers might not be willing to take; on the

other hand, not pursuing them is not as obvious as not following the HQ’s specific

directives and it is hard to for the HQ to detect.

We ground this study in a previous empirical study of the nature, antecedents

and consequences of an effective HQ-subsidiary relationship in China (Qin and Healey

2017). Qin and Healey’s (2017) findings showed that feeling trusted and procedural

justice are two key predictors of subsidiary entrepreneurial culture and local

responsiveness. In addition, one surprising finding was that trust in the HQ was not a

significant predictor of subsidiary entrepreneurship. These counterintuitive findings are

interesting because they deviate from previous empirical evidence.

There have been few studies of the role of trust and justice in the HQ-subsidiary

relationship and how these factors affect the entrepreneurial activities of MNE

subsidiaries (Young and Tavares 2004; Birkinshaw et al. 2000; Hewett and Bearden

2001; Mahnke, Venzin, and Zahra 2007). In a recent survey study, Qin and Healey

192

(2017) found that when subsidiary managers felt more trusted by the HQ and

experienced greater procedural justice in their dealings with the HQ, the culture of their

subsidiaries was more entrepreneurial, and in turn, their subsidiaries were more

responsive to local market conditions and took more initiative in their entrepreneurial

actions. However, Qin and Healey (2017) did not examine the antecedents of trust and

procedural justice in the HQ-subsidiary relationship; nor did they reveal the

mechanisms through which trust and procedural justice influence subsidiary

entrepreneurship.

In this study, we set out to explore these issues related to trust. We decided to

focus in this study on subsidiary managers feeling trusted/distrusted by the HQ and

having trust/distrust in the HQ, because while the nature and influence of procedural

justice in the MNE-subsidiary context has been widely studied (Kim and Mauborgne,

1991, 1993, 1995, 1996; Lin and Hsieh 2010; Taggart 1997; Verbeke et al. 2013), there

have been relatively few field studies focusing on the nature and influence of trust in

this context. To this end, we draw on multiple comparative case studies of seven

Chinese subsidiaries owned by two Western MNEs to further understand how feeling

trusted/distrusted by the HQ and having trust/distrust in the HQ impact the HQ-

subsidiary relationship. Our goal is to investigate how these related constructs impact

subsidiary managers’ behaviour in terms of their willingness to pursue entrepreneurial

opportunities at the subsidiary level.

The current paper adds to the literature of HQ-subsidiary relationship in three

ways: (i) deepens our understanding of the antecedents of trust between HQ and

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subsidiary managers, including the different antecedents of trust and distrust in HQ,

feeling trusted and distrusted by HQ. Previous studies of the HQ-subsidiary relationship

often discuss the potential influence of trust but there have been few empirical studies

of trust in this context. For instance, Bouquet and Birkinshaw (2008) argued that by

undertaking activities such as profile building subsidiaries can build trust among HQs,

which in turn means that HQs are more likely to provide recognition and resources to

those subsidiaries. But, like other authors who discuss the role of trust in this context

these authors stopped short of measuring trust. In one of few empirical studies of trust

in HQ-subsidiary relationships, Li (2005) found that there was a positive relationship

between trust and inward transfer of knowledge to the subsidiary; but, the relationship

was only positive for trust in relationship ties with external organizations and not for

trust between subsidiaries and their headquarters. However, there have been no specific

studies of the antecedents of interpersonal trust between HQ and subsidiary managers;

hence, we do not know the origins and causes of trust in this context. In contrast, the

present study examines directly the antecedents of trust between HQ and subsidiary

managers. Moreover, the results reveal that trust/distrust in HQ and feeling

trusted/distrusted by HQ have different antecedents. (ii) deepens our understanding of

the consequences of trust/distrust in HQ and feeling trusted/distrusted by HQ,

specifically, the mechanism through which trust influences subsidiary managers’

attitude and behaviour towards pursuing entrepreneurial initiatives. Previous studies

have consistently shown that trust affects attitudinal and behavioural work

consequences – e.g. Organizational Citizenship Behaviour (OCB), job performance and

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job satisfaction, etc. (Aryee et.al. 2002; Brower et al. 2008; Dirks and Ferrin 2002; Tsui

etal. 1997); Whitener et al. 1998). These studies revealed the positive relationship

between trust and employees’ attitude and behaviour towards routine activities.

However, there has no specific research conducted to investigate the relationship

between trust and subsidiary managers’ attitude and behaviour towards pursuing

entrepreneurial activities. Hence, we still do not know if and how the trust between HQ

and subsidiary managers influences entrepreneurial initiatives at subsidiary level. To

fill this void, the current study identifies the consequences of trust in the HQ-subsidiary

context and investigates the mechanisms through which trust impacts subsidiaries’

entrepreneurial orientation. (iii) extends literature on performance differences due to

different internal organizational environment at subsidiary level (e.g., entrepreneurial

orientation vs. conservative orientation) caused by distinct types of HQ-subsidiary

relationships. Previous studies have often discussed characteristics and influences of

subsidiary entrepreneurship. For example, Boojihawon et al. (2007) identified the key

elements of subsidiary entrepreneurial culture and their related influences and

manifestations, namely subsidiary autonomy, target market servicing and

responsiveness to local environmental conditions. In addition, Birkinshaw et al. (2005)

investigated the determinants and consequences of subsidiary initiative and revealed

that subsidiary initiative impacts subsidiary’s behavioural context (e.g., strong

subsidiary leadership and support). However, none of these two studies investigated the

relationship between subsidiary performance and entrepreneurship. And to the best of

our knowledge, there has no specific research been done to link subsidiary

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entrepreneurship with performance. Hence, the association between these two remain

unanswered. We believe empirically examining the impact of subsidiary

entrepreneurship on performance is important, therefore, the present study investigates

the performance differences between subsidiaries with entrepreneurial orientation and

those with conservative orientation.

Our analysis distinguishes and elaborates on four different types of HQ-

subsidiary relationship, namely relationships characterized by mutual trust,

asymmetrical distrust, asymmetrical trust and mutual distrust (see Figure 4.1). Two of

these four types of relationship are symmetrical (mutual trust/distrust); the other two are

asymmetrical (asymmetrical trust/distrust). According to this taxonomy, when

subsidiary managers trust the HQ and also feel trusted by the HQ, the HQ-subsidiary

relationship is characterized by what we term mutual trust. On the other hand, when

subsidiary managers distrust the HQ and also feel distrusted by the HQ, the relationship

is characterized by mutual distrust. In contrast, when subsidiary managers distrust the

HQ but feel trusted by the HQ, or when they trust the HQ but feel distrusted by the HQ,

managers can be said to be experiencing mixed states of trust asymmetry and perceive

asymmetrical trust/distrust in the HQ-subsidiary relationship. This taxonomy suggests

that relationships characterized by different configurations of trust might have different

effects on the entrepreneurial orientation and related behaviours of subsidiary managers,

which in turn might explain variations in subsidiaries’ local responsiveness and

subsidiary initiative. By considering how these four distinct types of HQ-subsidiary

relationship vary in their influence on subsidiary managers’ willingness to pursue

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entrepreneurial opportunities, we develop a novel integrative framework demonstrating

how the HQ-subsidiary relationship impacts the effectiveness of foreign subsidiaries’

local responsiveness and entrepreneurial initiatives.

Figure 4.1. Types of HQ-Subsidiary Relationship based on Trust Configurations

To explore the nature and effects of trust in more detail, we structured the

present research around the following two research questions:

1. What are the antecedents and consequences of trust/distrust and feeling

trusted/distrusted among subsidiary managers in HQ-subsidiary relationships?

2. How do different types of HQ-subsidiary relationship influence subsidiary local

responsiveness and initiatives, leading to wider benefits for the MNE as a

whole?

In the remainder of this paper, we first discuss briefly the theoretical foundations

of organizational trust and entrepreneurial orientation. Then we outline our sample and

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methods of data collection and analysis, before reporting our findings, which provide

answers to the questions posed.

4.2 Theoretical Background

4.2.1 Organizational Trust

“Every kind of peaceful cooperation among men is primarily based on mutual

trust and only secondarily on institutions such as courts of justice and police”

~ Albert Einstein

Interpersonal trust is an important element of working relationships (Lau, Lam,

and Wen 2014). Empirical research has consistently shown that trust affects work

attitudes and behaviours, including job satisfaction, job performance and organizational

citizenship behaviour (Aryee, Budhwar, and Chen 2002; Dirks and Ferrin 2002; Brower

et al. 2009; Tsui et al. 1997; Whitener et al. 1998). For comprehensive overviews, see

(Tyler 1996; Kramer 1999).

The dominant definition of trust used in organizational research comes from

Rousseau and colleagues (1998, 395), who provided a cross-disciplinary definition of

trust as “a psychological state comprising the intention to accept vulnerability based

upon positive expectations of the intentions or behaviour of another”.

Qin and Healey (2016) also adopted this definition and argued that in the

process of pursuing entrepreneurial opportunities, subsidiary managers are putting

themselves in a vulnerable position because they are conducting activities beyond HQ

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managers’ specific directives, and entrepreneurial activities may have a higher failure

rate than routine tasks. If trust exists between headquarters and subsidiary managers,

bounded rationality constraints may be mitigated (Verbeke and Yuan 2005a), since

headquarters managers and subsidiary managers will be investigating the same facets of

relevant information and arrive at similar interpretations based on the information

(Verbeke and Yuan 2005b). In addition, trust provides an environment for a higher level

of exchange of idiosyncratic resources, which relates to strategic linkages (Tsai 2000).

Subsidiary managers’ trust in the HQ facilitates effective communication with the HQ

on specific entrepreneurial opportunities. Empirical evidence shows that trust facilitates

a shared vision on inward knowledge transfer between the headquarters and subsidiaries

(Li 2005) and can directly predict inter- and intra-organizational cooperation (Smith,

Carroll, and Ashford 1995). In contrast, subordinates who do not trust their managers

may be distracted from performing their work and demotivated to conduct activities

beyond minimum requirements (Mayer and Gavin 2005). In addition, Kostova and Roth

(2002) argued that when the MNEs’ parent mandates a practice, its subsidiaries vary in

adoption response; the authors provided empirical evidence that when subsidiary units

trust their parents more, the level of implementation is higher.

While trust has been studied extensively in organizations, feeling trusted

remains an under-explored construct. With a few exceptions, studies on the effects of

feeling trusted are very limited (Lau and Lam 2008). While trusting and feeling trusted

do share many similarities (e.g. both concern a willingness to be vulnerable) and are

often related (Lau, Lam, and Wen 2014), these two constructs are independent,

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conceptually different, need not be balanced or mutual, and have different effects in a

relationship (Brower et al. 2008). Feeling trusted makes the trusted party feel competent

(Salamon and Robinson 2008); it is a source of self-confidence (Conger and Kanungo

1998) and a form of psychological empowerment (Spreitzer 1995). Building on this

perspective, Qin and Healey (2016) have argued that psychologically empowered

subsidiary managers perceive that HQ managers are willing to assume risk with them,

which is an important antecedent for them to pursue entrepreneurial opportunities at

subsidiary level.

4.2.2 Entrepreneurial Orientation

Entrepreneurial orientation (EO) is widely accepted as a firm-level construct in

the entrepreneurship literature (Wales, Gupta, and Mousa 2013). Miller (1983)

conceptualization identified innovativeness, proactiveness and risk-taking as three

dimensions of EO, and these three dimensions have been consistently used in literature

(Rauch et al. 2009). Lumpkin and Dess (1996) made a distinction between the concepts

of EO and entrepreneurship by treating EO as a process of experimenting with new

technologies, being willing to seize new opportunities through developing new products

or entering new markets, and being willing to pursue risky opportunities. In the MNE

context, many new product development and market entry ideas have originated from

foreign subsidiaries (Rugman, Verbeke, and Yuan 2011). In other words, pursuing

entrepreneurial opportunities instigated at subsidiary level, not resulting from

headquarters level guidance, with resource allocation and the existence of EO at

subsidiary level determines subsidiaries’ willingness to pursue entrepreneurial

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opportunities. Extant literature also links EO to performance (Miller 1983; Lumpkin

and Dess 1996; Ireland, Hitt, and Sirmon 2003).

4.3 Data and Methodology

4.3.1 Research Design

Birkinshaw, Brannen, and Tung (2011) indicated that the relationship between

multicultural units in organizations is a complex phenomenon and should be interpreted

through qualitative studies. However, there have been few studies investigating how

HQ-subsidiary interactions influence the effectiveness of the HQ-subsidiary relationship

and how this relationship, in turn, affects the subsidiary’s local responsiveness and

initiatives. Hence, a qualitative and theory-generating approach seems appropriate for

exploring our research questions (Siggelkow 2007).

To answer our research questions, we sought to compare the relationships and

internal processes of MNE subsidiaries experiencing distinct levels of performance and

demonstrating varying degrees of local responsiveness and subsidiary initiative. We

designed our study to yield rich content based on interview data; from these data, we

derive a series of insights concerning the underlying processes of interest (Mantere and

Ketokivi 2013).

4.3.2 Research Setting

We collected data on the HQ-subsidiary relationship from two Western MNEs

operating in China. One is a US industrial conglomerate, Alpha company; the other is a

European industrial equipment manufacturer, Beta company. Table 4.1 provides an

overview of the two MNEs. We chose these companies because both companies

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represent publicly traded large industrial equipment manufacturers that have similar

global revenue sizes and market leadership positions. In addition, the two companies

established their Chinese subsidiaries in the same year and have similar sized employee

populations. The similarity of the two MNEs provides an important setting for us to

make controlled comparisons between the two companies in relation to their HQ-

subsidiary relationship and how this relationship affects performance.

Our unit of data collection is the individual subsidiary manager. Specifically, we

interviewed a total of 27 subsidiary top managers across seven business units (each a

subsidiary) of the two MNEs. We used these data to examine the antecedents and

consequences of trust and to examine comparative similarities and differences across

the subsidiaries in terms of the nature of the HQ-subsidiary relationship.

Our research questions also required us to identify an MNE that has multiple

business units so that we could investigate different HQ-subsidiary relationships within

one company to illustrate the multiplicity of agency relationships in organizations.

There are important implications when we relax the reductionist assumption of an

Table 4.1. Respondent Company Profile

US MNE (Alpha Company) European MNE (Beta Company)

Global revenue size (approximate) $10 billion $10 billion

Year established 1885 1910

Global market share position Either #1 or #2 position #2 position

Year Chinese subsidiary established 1996 1996

Chinese revenue size (approximate) $1.5 billion $3 billion

Chinese subsidiary population 12,000 11,146

Chinese market share position Mixed #1 position

Ownership status Publicly traded Publicly traded

Stock performance in the last ten years Doubled in the last ten years Quadrupled in the last ten years

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isolated dyadic relationship, where the subsidiary is the sole agent and the HQ is the

sole principal (Doz and Prahalad 1991). We focused on six different subsidiaries of

Alpha company which provided us with six different HQ-subsidiary relationships to

investigate. We focused on these particular subsidiaries because they represent polar

performances (two are high performers and four are poor performers). See Table 4.2 for

performance data provided by respondent companies. These data provided us with an

opportunity to identify subsidiaries with different levels of performance based on

objective data not obtained from interview respondents. With high and low performers

identified, we sought to understand in subsequent analyses how different HQ-subsidiary

relationships impact the performance in local responsiveness and subsidiary initiatives.

Table 4.2. Respondent MNEs’ Chinese Subsidiary Performance Market Position in

China

Export Revenue as %

of Total China Sales

Alpha Company

Chinese

Subsidiary

of BU#1

Market leader (#2

position)

>15%

Chinese

Subsidiary

of BU#2

Very low market share

(less than 2%)

None

Chinese

Subsidiary

of BU#3

Fell short of top 10 in

market share position

None

Chinese

Subsidiary

of BU#4

Fell short of top 10 in

market share position

None

Chinese

Subsidiary

of BU#5

Market leader (#2

position)

>15%

Chinese

Subsidiary

of BU#6

Very low market share

(less than 3%)

None

Beta Company

Chinese

Subsidiary

Market leader

(#1 position)

>15%

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We follow the broader agency literature that proposed mechanisms for team-

based performance evaluation (Alchian and Demsetz 1972). The subsidiaries of the six

business units (BUs) of Alpha Company we interviewed in China are ultimately

responsible for the financial performance of the Chinese subsidiary, while their

respective global headquarters managers in the US actively manage and control all

international subsidiaries, including the Chinese ones. HQ makes the final decisions on

subsidiaries’ annual operating plan, five-year strategic plan and new product

development initiatives. Chinese subsidiaries of Alpha company’s BU#1 and BU#2 are

combined under one management team while having two separate management teams at

the global HQ level. Therefore, each Chinese subsidiary manager of Alpha company’s

BU#1 and BU#2 interacts with two different HQ managers on a daily basis; thus, the

relationship differs although the same people manage the two Chinese subsidiaries.

From an agency perspective, this arrangement provides a unique opportunity to examine

potential cross-unit differences in the HQ-subsidiary relationship, given different

principals interacting with same agents for different contracts.

Alpha company’s BU#3, #4, #5 and #6 have dedicated management teams in

their respective Chinese subsidiaries for each BU, and each of the subsidiary managers

needs only to interact with one HQ manager. In addition, there is a management team

consisting of a group president and functional vice presidents serving as the regional

HQ to manage these six BUs in the Asia Pacific region. This regional HQ management

team reports to the global group HQ CEO and functional vice presidents. The six

Chinese subsidiary BUs’ performance in local responsiveness and subsidiary initiatives

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is mixed. Some are performing better than others. For example, as Table 4.2 illustrates,

Chinese subsidiaries of BU#1 and BU#5 of Alpha company are market leaders in China

(either #1 or #2 market share in China) and their export revenue from Chinese-

developed products contributes more than 15 per cent of their total Chinese revenue.

These two performance indicators serve as proxies of their performance in relation to

local responsiveness and subsidiary initiative. At the other end of the performance

spectrum, Chinese subsidiaries of BU#2 and BU#6 of Alpha company command a very

low market share in China (less than 3%) and have no export revenue generated from

Chinese-developed products. Sitting in the middle are the Alpha company’s Chinese

subsidiaries BU#3 and BU#4. They demonstrate a mediocre performance in terms of

local responsiveness and poor performance in subsidiary initiatives.

All six BUs of Alpha company have a standardized strategic decision-making

process (five-year strategic planning, new product development reviewing process,

annual operating plan reviewing process, etc.). Most of the interviewees felt that their

decision-making process is just, and they have opportunities to present their views to

their HQ managers for them to consider before important decisions are made by HQ. In

other words, our respondents from Alpha company’s six business units reported that all

their respective BUs maintain a prominent level of procedural justice, suggesting that

behavioural factors other than procedural justice (Kim and Mauborgne 1996) might be

responsible for potential variations in the quality of the HQ-subsidiary relationship and

the degree of entrepreneurship, innovation and local responsiveness.

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Beta company is a large European electrical equipment manufacturer

specializing in building equipment products and services and publicly trades on a stock

exchange in Europe. Beta company has leading market positions (#2 in Europe and #1

in China). We find it interesting that its Chinese subsidiary has commanded the #1

market share in China but only #2 in its home markets for the last ten years. Beta

company’s competitors in Europe also compete with it in China. In addition, Beta

company’s Chinese subsidiary faces a considerable number of strong local Chinese

competitors in the Chinese market, which makes the Chinese market more competitive

than global markets for Beta company. Occupying the #1 position in the Chinese market

and #2 in the European market means that Beta company’s Chinese subsidiary is

performing better than its MNE and local Chinese competitors in China, while it has

failed to outperform its competitors in its home markets (Europe). Like Alpha company,

Beta company’s Chinese subsidiary is ultimately responsible for its own financial

performance, while the HQ managers are operationally responsible for the company and

actively manage and control the key strategic decisions of all international subsidiaries,

including the Chinese subsidiary. Similarly, our respondents from Beta company

reported a high level of procedural justice being maintained in the decision-making

process.

4.3.3 Data Collection

Our primary mode of data collection was semi-structured interviews with top

subsidiary managers. We conducted all our investigations in subsidiaries located in

China. China is of particular interest because of its status as the largest emerging

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economy, its market complexity and competitiveness, and the recent success of Chinese

companies’ global expansion. Chinese subsidiaries are of increasing significance to

MNEs’ overall performance (Driffield, Love, and Yang 2016). Additionally, the first

author takes advantage of his background in this context. As Morgan and Smircich

(1980) argued, a researcher’s experience and ability to understand the phenomena under

study can be an important advantage in making sense of the data. The first author

speaks Chinese as his mother tongue, worked in the US for nine years, and served as a

business leader for four different Western MNEs’ Chinese subsidiaries for 14 years; he

is therefore very familiar with the Western MNE business culture. This helps him to

make sense of respondents’ accounts collected from interviews (Langley 1999).

We used semi-structured interviews to conduct in-depth interviews with a total

of 27 executives from two MNEs’ Chinese subsidiaries. To inform our sampling efforts,

we reviewed previous qualitative studies of the MNE-subsidiary relationship published

in leading journals from 2010 to 2017.1 As Table 4.3 illustrates, most of these studies

used multiple case studies with a theoretical sampling frame, and the sample sizes

ranged from 14 to 101 (half have a sample size in the high 20s). Following most of the

published qualitative studies on HQ-subsidiary relationships, we used a theoretical

sampling frame and identified two MNEs with the specific purpose of conducting

1 Using Google Scholar, we searched the journals that have published the majority of studies on HQ-

subsidiary relationships over the past seven years (namely, Academy of Management Journal, Global

Strategy Journal, International Business Review, Journal of International Business Studies, Journal of

International Management, Journal of World Business, Management International Review and Strategic

Management Journal). We used a combination of indicative search terms (i.e. ‘“subsidiary’, ‘HQ’,

‘relationship’, “qualitative’, ‘interview’) iteratively to find relevant articles until we had obtained a

sufficient sample. Our searches produced 15 articles, shown in Table 4.3.

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multiple comparative case studies that could help us to answer our research questions.

Conducting comparative case studies with data collected from these two MNEs helped

us to understand further how the HQ-subsidiary relationship impacts subsidiary

performance within the context of Western MNEs and their Chinese subsidiaries, and

how an effective HQ-subsidiary relationship helps MNEs to become market leaders in

China. Our sample size is 27, which is consistent with prior studies. In sum, our

research design, sampling frame and sample size are consistent with prior case-based

studies conducted in the last ten years in international business.

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Table 4.3. Case Studies Published in the International Business Domain (2010–

2017)

Article Authors Journal Published Research Design Sampling Frame Number of

Interviewees

Babel in business: the language barrier and its solutions in

the HQ-subsidiary relationship

Anne-Wil Harzing Kathrin

Köster Ulrike Magner

Journal of World

Business, 2010 Multiple case study

Convenience

sampling 44

Bridging the language gap in multinational companies:

language strategies and the notion of company-speak Nathalie Aichhorn, Jonas Puck

Journal of World

Business, 2017 Multiple case study

Theoretical

sampling 22

Coordination at the edge of the Empire: the delegation of

headquarters’ functions through regional management

mandates

Eva A. Alfoldi, L. Jeremy Clegg,

Sara L. McGaughey

Journal of International

Management, 2012

In-depth single case

study

Theoretical

sampling 20

From dilemmatic struggle to legitimized indifference:

expatriates’ host

country language learning and its impact on the

expatriate-HCE relationship

Ling Eleanor Zhang, Anne-Wil

Harzing

Journal of World

Business, 2016 Multiple case study

Theoretical

sampling 70

“I just don’t feel comfortable speaking English”: Foreign

language anxiety as a catalyst for spoken-language

barriers in MNCs. A comprehensive overview of the role

of

language differences in headquarters–subsidiary

communication

Nathalie Aichhorn, Jonas Puck International Business

Review, 2017 Multiple case study

Theoretical

sampling 22

Language as a lightning rod: power contests,

emotion regulation, and subgroup dynamics in

global teams

Pamela J Hinds,

Tsedal B Neeley,

Catherine Durnell Cramton

Journal of International

Business Studies, 2014 Multiple case study Stratified sampling 96

Performance effects of MNC headquarters–subsidiary

conflict and the role of

boundary spanners: the case of headquarter initiative

rejection

Andreas Schotter, Paul W.

Beamish

Journal of International

Management, 2011

Comparative case

study

Theoretical

sampling 28

Subsidiary managers' knowledge mobilizations:

unpacking emergent knowledge flows

Esther Tippmann, Pamela

Sharkey Scott, Vincent

Mangematin

Journal of World

Business, 2014 Multiple case study

Theoretical

sampling 41

The impact of language barriers on trust formation in

multinational teams

Helene Tenzer

Markus Pudelko

Anne-Wil Harzing

Journal of International

Business Studies, 2013 Multiple case study

Theoretical

sampling 90

The legitimacy of subsidiary issue selling: balancing

positive and negative

attention from corporate headquarters

Kieran M. Conroy, David G.

Collings

Journal of World

Business, 2016 Multiple case study

Theoretical

sampling 30

When global virtual teams share knowledge: media

richness, cultural difference

and language commonality

Anders Klitmøller, Jakob

Lauring

Journal of World

Business, 2013 Single case study Snowball sampling 43

Language policies and practices in

wholly owned foreign subsidiaries:

a recontextualization perspective

Vesa Peltokorpi, Eero Vaara2 Journal of International

Business Studies, 2012 Multiple case study

Theoretical

sampling 101

Englishization in offshore call centers: a postcolonial

perspective

Mehdi Boussebaa, Shuchi Sinha

and Yiannis Gabriel

Journal of International

Business Studies, 2014 Multiple case study

Theoretical

sampling 29

Translation behaviour: an exploratory study within a

service

multinational

Rebecca Piekkari, Denice Ellen

Welch, Lawrence Stephenson

Welch, Jukka-Pekka Peltonen,

Tiina Vesa

International Business

Review, 2013 Single case study

Theoretical

sampling 14

Explaining employees’ reactions towards a cross-border

merger: the role of English language fluency

DP Kroon, JP Cornelissen, E

Vaara

Management

International Review,

2015

Multiple case study Theoretical

sampling 67

4.3.4 Participants and Data

To undertake our comparative case studies, we started by interviewing 23

subsidiary executives from the six BUs of Alpha company and four top subsidiary

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managers from Beta company. The data collected from these 27 interviewees provided

us with a unique opportunity to investigate how the HQ-subsidiary relationship varies in

different Chinese subsidiaries. Table 4.4 provides details of our respondents. We chose

these executives because they are the top decision-makers in their respective Chinese

subsidiaries and they interact with HQ executives regularly.

Table 4.4. Profile of Business Units and Interviewees

Unit Type of Business Interviewees’ Job Title Number of

Respondents

per Unit

Data Collected

Alpha company: US diversified industrial conglomerate

Business Unit #1

and #2

BU#1: commercial

safety business

BU#2: awareness

business

Chinese Subsidiary

General Manager

Finance Director, Strategic Marketing Director

Engineering Director

Customer Support Director

Five top

subsidiary

managers 45-minute interview

with each

interviewee

Business Unit #3 Building services business

Chinese Subsidiary

General Manager

Strategic Marketing Director

Engineering Director

Three top subsidiary

managers

45-minute interview with each

interviewee

Business Unit #4 Pollution-related

business

Chinese Subsidiary

General Manager

Finance Director Strategic Marketing Director

Three top

subsidiary

managers

45-minute interview

with each

interviewee

Business Unit #5 Logistics products

business

Chinese Subsidiary

General Manager Finance Director

Strategic Marketing Director

Business Development Director Engineering Director

Five top

subsidiary managers

45-minute interview

with each interviewee

Business Unit #6 Industrial safety

business

Chinese Subsidiary

General Manager

Finance Director Strategic Marketing Director

Three top

subsidiary

managers

45-minute interview

with each

interviewee

Functional Support

Group

Functional support

for Chinese subsidiaries of the

six BUs

Chinese Subsidiary

VP of Finance VP of Strategic Marketing

VP of Engineering

VP of HR

Four top

subsidiary managers

45-minute interview

with each interviewee

Beta company (European MNE)

Chinese Subsidiary Building

equipment business

Chinese Subsidiary Commercial

Business Director CFO

Strategic Marketing Director

VP of HR

Four top

subsidiary managers

45-minute interview

with each interviewee

Total number of

respondents from

Beta company and

Alpha company

Two MNEs with seven

Business Units

Total 27

Interviews

a: The same managers manage the Chinese subsidiaries BU#1 and BU#2

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Comparing different executives within the same subsidiary helps us to

compensate for potential idiosyncrasies on the part of individual managers. Specifically,

using multiple informants for each subsidiary enabled us to provide a more reliable or

triangulated view of the subsidiary-HQ relationship based on multiple informants

(Kumar, Stern, and Anderson 1993), which was useful when informants agreed on

aspects of this relationship. In contrast, when multiple informants provided differing

interpretations of the HQ-subsidiary relationship, we were able to examine potential

reasons for such differences, providing evidence for the multiplicity of principal-agent

relations in MNEs (Hoenen and Kostova 2015). Moreover, by comparing the

viewpoints of individuals across different subsidiaries, we could examine the presence

or absence of a shared organizational culture (of trust, of entrepreneurship). As Mathieu

et al. (2008) argued, sampling multiple teams across organizational contexts offers a

particularly powerful research design, because it allows the researcher to focus on

relationships that are replicated across most or all of the respondents (Eisenhardt and

Graebner 2007; Welch et al. 2011).

4.3.5 Data Analysis

We conducted our qualitative data analysis by following Miles and Huberman

(1984) interactive approach, which consists of three concurrent activities: data

reduction, data display and conclusion-drawing/verification. First, we transcribed our

recorded interviews and transformed these raw data using Miles and Huberman (1984)

coding techniques. We identified various HQ-subsidiary interactions, with a view to

understanding how they impact the antecedents and consequences of Chinese subsidiary

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managers’ feeling trusted by the HQ, trusting in the HQ and procedural justice.

Following Gioia, Corley, and Hamilton (2013) approach, we identify 12 first- and

second-order categories for antecedents and 12 first- and second-order categories for

consequences, which were aggregated into six overarching concepts.

We then use the framework developed in the previous section that displays four

different types of HQ-subsidiary relationship (asymmetrical distrust, mutual trust,

asymmetrical trust and mutual distrust) to guide our comparative analysis. We focus on

the following comparisons:

1. Two subsidiaries with mutual trust in the HQ-subsidiary relationships, namely

Chinese subsidiary BU#1 of Alpha company and the Chinese subsidiary of Beta

company.

2. Two subsidiaries with mutual distrust in the HQ-subsidiary relationships,

namely Chinese subsidiaries BU#2 and BU#6 of Alpha company.

3. Three subsidiaries with mixed HQ-subsidiary relationships (i.e. trusting in the

HQ but feeling distrusted by the HQ, or distrusting in the HQ but feeling trusted

by the HQ), namely Chinese subsidiaries BU#3, BU#4 and BU#5 of Alpha

company.

These comparisons help us to understand better the factors that lead to different types of

relationship and how these differing relationships affect subsidiary entrepreneurship and

initiative.

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4.4 Findings

We present our findings in four parts. Firstly, we discuss our findings on how

HQ-subsidiary interactions affect Chinese subsidiary managers’ perceptions of feeling

trusted/distrusted by the HQ and having trust/distrust in the HQ through identifying the

antecedents and consequences of these four constructs. Following Eisenhardt (1989)

and Gioia et al. (2013), we adopt established approaches to transcribe and analyse

qualitative data collected from the in-depth interviews and derive a series of

propositions. Secondly, we integrate the consequences of these perceptions and develop

a framework that identifies four types of HQ-subsidiary relationship. Thirdly, we

categorize Chinese subsidiaries of Alpha company’s six BUs and Beta company into

these four types of relationship. Finally, we examine how these subsidiaries in different

relationship categories performed in terms of local responsiveness and subsidiary

initiatives.

4.4.1 Identification of Antecedents and Consequences of Trust in the HQ-

Subsidiary Relationship

Two key elements of our story emerged from the interviews: (1) a framework of

four types of HQ-subsidiary relationship based on the antecedents and consequences of

feeling trusted by the HQ and trusting in the HQ. Figure 4.2 illustrates the

consequences of each type of HQ-subsidiary relationship based on trust configurations.

For example, our data shows that entrepreneurial orientation and organizational

citizenship behaviour can be found in a mutual trust relationship. In contrast, the

implications of a mutual distrust relationship are conservative orientation and

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counterproductive work behaviour. (2) how the four types of HQ-subsidiary

relationship affect Alpha and Beta companies’ Chinese subsidiary managers’

willingness to pursue entrepreneurial opportunities, which in turn impacts their

performance in local responsiveness and subsidiary initiatives.

Figure 4.2. Types of HQ-Subsidiary Relationship and Implications

4.4.2 Identification of Antecedents of Feeling Trusted by the HQ vs. Feeling

Distrusted by the HQ

This section addresses subsidiary managers’ perceptions of whether their HQ

managers are willing to put themselves in vulnerable positions during their interactions

with the subsidiaries. We asked Chinese subsidiary managers from Alpha company and

Beta company what specific behaviours HQ managers demonstrate that make them feel

trusted or distrusted by the HQ. We focused on asking the subsidiary managers to

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describe their interactions with HQ managers during strategic planning and the new

product development process. Based on our analysis, a total of four antecedents of

feeling trusted by the HQ and feeling distrusted by the HQ could be identified, two for

each. See Table 4.5 for illustrative quotations.

Table 4.5. Antecedents of Feeling Trusted and Distrusted by the HQ

Antecedents Illustrative Quotations Feeling trusted by the HQ

Feeling empowered by HQ ‘HQ lets me make key decisions and no need to get global approval all the

time. I feel empowered and willing to consider the whole picture of the business instead of treating my job as pieces of tasks’ (Strategic marketing

leader, Chinese subsidiary BU#3 of Alpha company)

‘HQ’s attitude is that you guys can make your own decisions locally and just

keep them posted is sufficient’ (Finance leader, Chinese subsidiaries BU#1

and BU#2 of Alpha company)

Feeling valued by HQ ‘When I tell HQ something that is subjective in nature, HQ believes in me

without asking me to do millions of slides to back it up’ (VP of Strategic

Marketing, Chinese subsidiary functional support group of Alpha company)

‘I presented a new idea to HQ and requested extra investments outside of the

annual budget; to my surprise, HQ made the decision to fund my project right there and then’ (Business development leader, Chinese subsidiary BU#5 of

Alpha company)

Feeling distrusted by the HQ

Feeling micromanaged by the HQ ‘I feel micromanaged because HQ controls everything—new product development, pricing strategy and even the go-to-market approach. They

believe they know the Chinese market better than I do!’ (General manager,

Chinese subsidiary BU#4 of Alpha company)

‘HQ acts as an examiner that checks our investment payback ratio and

product lead time without really understanding our business environment in China’ (Strategic marketing leader, Chinese subsidiary BU#4 of Alpha

company)

Feeling the HQ’s arrogance ‘I am often challenged by HQ when I try to present my case on how to do

things differently in the Chinese market including different new product development processes and go-to-market approach. HQ just doesn’t want to

hear it and they are only interested in challenging us on everything we tell

them’ (Strategic marketing leader, Chinese subsidiary BU#3 of Alpha company)

‘Sometimes when our global president hears something negative about the

Chinese subsidiary from his functional team, he doesn't check the facts with

me and start losing patience; then he starts making decisions for us which hurt our business’ (General manager, Chinese subsidiary BU#6 of Alpha

company)

4.4.2.1 Antecedents of Feeling Trusted by the HQ

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Feeling empowered by the HQ. More than half of the Chinese subsidiary

managers we interviewed indicated that they observed empowering behaviour from HQ

managers, which made them feel trusted by the HQ. Specifically, when they perceive

that the HQ is authorizing the Chinese subsidiary to make key decisions on new

products and new go-to-market strategy development without interfering or requesting

advanced approval from the HQ, Chinese subsidiary managers feel trusted by the HQ.

For example, the finance leader of the Chinese subsidiary of BU#1 of Alpha company

told us that the pricing strategy is developed and executed by the local team and all

discount approvals are managed locally without any interference by HQ. He felt that

this pricing authority is a prime example of the HQ’s trust in the Chinese subsidiary,

and the team felt empowered and motivated to be accountable for prudent decisions

which made them even more disciplined in awarding discounts. He believed that if the

HQ does not delegate discount approval authority to the Chinese subsidiary, the

Chinese team will just blindly send over discount requests without much initial scrutiny

and wait for the HQ’s decision, because they will not feel any ownership and

accountability for those decisions. This finding supports and extends extant literature on

the relationship between empowerment and trust. Previous studies argued that

managerial trust influences employees’ perception of empowerment (Gomez and Rosen

2001) and some argued that managers’ trust is a necessary prerequisite for employee

empowerment (Mishra and Spreitzer 1994). These prior studies focused on the

relationship between empowerment and trust from managers’ perspective and argued

that for managers to empower employees, they need to trust them first. Our findings

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support and extend this point by illustrating how empowerment affects trust from

employees’ perspective (in this case, the subsidiary manager’s perspective). Our

interviewees believed that if they are empowered by HQ managers, they must be trusted

by them. This supports the argument that managerial trust is a prerequisite for

empowerment from employees’ perspective, which is an extension of the managers’

perspective.

Feeling valued by the HQ. Some of our subsidiary managers felt trusted by the

HQ because they felt that the HQ is genuinely interested in listening to their views on

strategic issues and appreciates their suggestions, especially when the HQ values their

point of view without asking for a lot of data to justify their conclusions. For instance,

the Vice President of Strategic Marketing for one of the subsidiaries of Alpha company

expressed his appreciation that HQ accepted his interpretation of some competitor

activities and developing market trends “without asking me to do millions of slides to

back it up”. Similarly, the business development leader of the Chinese subsidiary of

BU#5 of Alpha company recalled an incident where the HQ decided to accept his

request for extra investment outside the annual budget cycle without further scrutiny of

the project proposal. Chinese subsidiary managers particularly appreciate such levels of

trust in their subjective judgements, because market intelligence data is less available in

emerging markets than in mature markets. HQ managers who reside in mature markets

are used to crystal clear information being available to them and have a strong tendency

to ask for the same level of detail from their subsidiaries. Chinese subsidiary managers,

on the other hand, often need to deal with uncertainties.

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Having viewpoints that are subjective in nature accepted and taken seriously by

the HQ is a strong indicator of trust from Chinese subsidiary managers’ perspective,

because they feel that HQ managers truly recognize their capabilities and value their

expertise in the local market. This promotes subsidiary managers’ sense of competence

and worth in their organization, and hence their self-esteem (Gecas 1982; McAllister

and Bigley 2002). Lau, Lam, and Wen (2014) provided empirical evidence that feeling

trusted by supervisors is positively related to employees’ organizational based self-

esteem (OBSE). Hence, our findings are consistent with extant literature, because

feeling valued by the HQ evokes subsidiary managers’ OBSE, which positively affects

their perception of being trusted by the HQ. As Figure 4.3 illustrates, feeling

empowered and valued by HQ result in subsidiary manager’s feeling trusted by HQ.

Hence, we propose the following:

Proposition 1. In the context of Western MNEs, Chinese subsidiary top

managers feel trusted by the HQ through two independent perceptions: feeling

empowered by the HQ and feeling valued by the HQ. Each one of these two

perceptions strengthens Chinese subsidiary managers’ feeling of being trusted

by the HQ independently.

4.4.2.2 Antecedents of Feeling Distrusted by the HQ

Feeling micromanaged by the HQ. In contrast to feeling empowered, some of

the subsidiary managers we interviewed felt micromanaged by the HQ because they are

told to seek HQ approval for all key decisions in the name of following global standard

process. Specifically, the HQ would scrutinize every investment in new product

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developments and market promotion activities. The subsidiary managers we

interviewed felt that if the HQ managers keep telling them how do their jobs and keep

interfering with their decisions, it shows that the HQ does not trust them as capable

managers who are competent to make independent decisions. As the general manager of

Chinese subsidiary BU#4 of Alpha company passionately put it, “I cannot even

effectively make an independent decision on go-to-market strategy without HQ’s

interference. When I try to develop some new distributors, HQ asks to review tons of

background information of the potentially interested partners. When I try to sell direct

into a large project, HQ questions me on our ability to collect accounts receivables!”

The frustration of a general manager being micromanaged is apparent, and he attributes

the HQ’s behaviour to a lack of trust. This finding is consistent with extant literature.

For example, as Tschannen-Moran (2009) stated, micromanagement of subordinates is

one way that distrust plays out in management practice.

Feeling HQ’s arrogance. In contrast to feeling valued by the HQ, some Chinese

subsidiary managers detect HQ managers’ arrogance, which makes them feel distrusted

by the HQ. Several of our interviewees stated that their HQ managers have a ‘we know

better than you’ attitude and always challenge subsidiary managers based on their

limited knowledge of the Chinese market, which sets up unrealistic and sometimes

conflicting goals. For instance, the general manager of the Chinese subsidiary BU#6 of

Alpha company revealed that the global president of the business unit sometimes

accepts negative information about the Chinese subsidiary from one of his executive

leadership team members and fails to check this information with local managers. When

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decisions are made based on such potentially misleading information, subsidiary

managers unsurprisingly feel aggrieved.

The overall effect of HQ managers conducting themselves as if they know best

is to potentially undermine the company’s ability to understand remote markets and

adapt to these emerging markets (Bouquet, Birkinshaw, and Barsoux 2016). While the

‘HQ knows best’ syndrome has been identified in previous studies (Bouquet,

Birkinshaw, and Barsoux 2016), our study is the first to link this with feeling distrusted

by the HQ. As Figure 4.3 illustrates, feeling micromanaged by HQ and feeling HQ’s

arrogance result in subsidiary manager’s feeling distrusted by HQ. Hence, we propose

the following:

Proposition 2. In the context of Western MNEs, Chinese subsidiary top

managers feel distrusted by the HQ through two independent perceptions:

feeling micromanaged by the HQ and feeling HQ’s arrogance. Each of these two

perceptions independently strengthens Chinese subsidiary managers’ feeling of

being distrusted by the HQ.

Figure 4.3. Data Structure (Antecedents of Feeling Trusted/Distrusted by the HQ)

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4.4.3 Identification of Antecedents of Trusting the HQ vs. Distrusting the HQ

Trusting the HQ involves subsidiary managers’ willingness to put themselves in

a vulnerable position during their dealings with HQ managers. We asked Chinese

subsidiary managers from Alpha company and Beta company what specific behaviours

demonstrated by HQ managers make them trust or distrust the HQ managers. We

focused on the context of subsidiary managers’ interactions with HQ managers during

strategic planning and new product development processes. Based on our analysis, we

identified four antecedents of trust in the HQ and four antecedents of distrust in the HQ.

See Table 4.6 for illustrative quotations.

Table 4.6. Antecedents of Trusting and Distrusting the HQ Antecedents Illustrative Quotations

Trusting in the HQ

Perceiving HQ’s competence ‘I trust my HQ managers because they have great experience in the industry and always

share their experience and product knowledge with me’ (Customer support director,

Chinese subsidiaries BU#1 and BU#2 of Alpha company)

‘I have known my HQ manager for many years and we have worked well together. She

is very knowledgeable in our business and I feel that she has influenced me a lot over

these years’ (Finance leader, Chinese subsidiary BU#5 of Alpha company)

Perceiving HQ’s reliability ‘I really trust my HQ manager because I feel our relationship is not like a superior-

subordinate relationship, it is more like a coaching relationship. Every time I need

someone to help me think through something, he is always there’ (Commercial business

director, Chinese subsidiary of Beta company)

‘I believe I can trust the HQ because they follow through on their promised support.

Last year, I made my pitch to start a new business development effort and HQ agreed to

fund that initiative; one month later I got access to the funds I requested’ (Business

development director, Chinese subsidiary BU#5 of Alpha company)

Perceiving HQ’s openness ‘I and my HQ manager have good communication and we are transparent with each

other. I especially appreciate the fact that she always shares insights with me so that I

can fully understand the reasons behind those key decisions HQ made’ (Finance leader,

Chinese subsidiary of BU#5 of Alpha company)

‘When my HQ manager wants to make an important corporate decision, he always

provide details of the background of the situation to all five key regional leaders and

collects feedback from them. I trust those decisions are made from sound judgement

because he is very open to all of us’ (CFO, Chinese subsidiary of Beta company)

Perceiving HQ’s aligned interests ‘We started the process of business transformation last year and every HQ manager

from different functions is aligned with our priorities. We are very clear on both short-

term and long-term goals to be achieved and we all agreed on certain compromises

needed in the short-term financial results’ (VP of human resources, Chinese subsidiary

of Beta company)

‘I really appreciate the fact that HQ and our Chinese subsidiary’s strategic vision is

fully aligned. I had to present to our global CEO to reduce revenue commitment in my

annual operating plan because we believe we need to focus on quickly acquiring active

users on our platform instead of short-term revenue. As you may be aware, lowering

revenue commitment in the middle of the year is nearly impossible. But after

understanding the implications of the new revenue model, HQ supported our decision’

(Business development director, Chinese subsidiary BU#5 of Alpha company)

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Table 4.6. Antecedents of Trusting and Distrusting the HQ - Continue Distrusting in the HQ

Perceiving HQ’s incompetence ‘I find it hard to trust my HQ managers because some of the HQ managers do not

understand the Chinese market at all and some of them just recently came from another

business unit, which makes them lack specific business knowledge even on their home

markets’ (VP of strategic marketing, Chinese subsidiary functional support group of

Alpha company)

‘Some of the HQ functional managers, whom I deal with regularly, do not have much

global experience and show total ignorance during business review meetings. I really

don’t trust they have the capability to give me any sound advice’ (General manager,

Chinese subsidiary BU#6 of Alpha company)

Perceiving HQ’s unreliability ‘BU#2’s HQ managers leave us hanging there on our own and don’t even return my

emails. I certainly do not trust them’ (Engineering director, Chinese subsidiaries BU#1

and BU#2 of Alpha company)

‘I really doubt some of the HQ’s managers’ intentions. I even feel that they don’t want

the Chinese team to be successful. Specifically, I don’t trust the HQ engineering leader

because he never follows through on the support we requested’ (Strategic marketing

leader, Chinese subsidiary BU#6 of Alpha company)

Perceiving HQ’s vagueness ‘HQ always pushes through their initiatives without letting us know the reason behind

those and there is no full communication of the benefits of these initiatives, only telling

us that implementing the initiative will help our productivity. Sometimes I have to just

ignore them because I don’t believe that these initiatives can benefit our business in

China’ (General manager, Chinese subsidiary BU#6 of Alpha company)

‘When HQ was looking for product outsourcing vendors last year, we helped them to

identify a few candidates from China, but they finally decided to choose one from

Germany! We really couldn’t figure out what kind of cost reduction goal they can

achieve through this decision and HQ never shared any analysis with us, only told us

that from a total supply chain management perspective, they decided to choose the one

in Germany. Even though this seems to be a global decision, product costs impact our

business here in China as well’ (Strategic marketing leader, Chinese subsidiary BU#6 of

Alpha company)

Perceiving HQ’s misaligned interests ‘Some of the BU#2 HQ functional managers only care about the key performance

indicators (KPIs) they are responsible for so that they can show their bosses on their

achievements. Some of these KPIs were developed without considering the holistic

benefits of the subsidiary business; this therefore creates a disconnection between the

HQ and Chinese subsidiary’s priorities. So, I often have doubts about HQ’s push down

initiatives’ (Customer support director, Chinese subsidiaries BU#1 and BU#2 of Alpha

company)

‘Last year, our global business had very slow growth and faced profitability pressure;

therefore, they started to focus on cost savings and cutting down investments. On the

other hand, the Chinese subsidiary achieved double digit growth last year and our focus

should be on expanding the market share and investing more. However, to my surprise,

HQ asked all subsidiaries (including China) to reduce investments! I do not believe HQ

has made the right decision because this will only hurt our growth two years down the

road’ (VP of strategic marketing, Chinese subsidiary functional support group of Alpha

company)

4.4.3.1 Antecedents of Trusting in the HQ

Perceiving HQ’s competence. Our findings show that the most frequently

mentioned factor that makes subsidiary managers trust in the HQ managers is their

perception of HQ managers’ competence. Our interviewees tend to trust their HQ

managers when they believe their HQ managers possess a certain level of industry

experience, functional expertise or domain knowledge. For example, Alpha company’s

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strategic marketing leader of Chinese subsidiaries BU#1 and BU#2 revealed: “My HQ

manager of BU#1 has a long tenure with the company and great industry knowledge. I

learned a lot from him and I trust him a lot. On the other hand, my HQ manager from

BU#2 is very new to the industry and still learning the business, and I find it is hard for

me to really trust his ability to lead a global team”. Perception of competence as a pre-

requisite of trust is consistent with extant literature on trust, because a number of

theorists have discussed competence as an essential element of trust (e.g., Kee and

Knox 1970; Lieberman 1981; Butler Jr 1991; Mayer, Davis, and Schoorman 1995).

Perceiving HQ’s reliability. Another factor we found that affects subsidiary

managers’ trust in the HQ managers is how reliable the HQ managers are, whether in

terms of HQ managers following through their promised support to the subsidiary, or

HQ executives’ consistency between words and actions. For instance, the Commercial

Business Director of the Chinese subsidiary of Beta company likened his relationship

with his executive at headquarters to a coaching relationship, where “every time I need

someone to help me think through something he is always there”. The observed effects

of reliability are consistent with extant literature that has identified reliability as an

antecedent of trust (e.g. (Mishra 1996; Johnson-George and Swap 1982). Previous

studies have also discussed similar constructs as affecting trust. Butler Jr (1991) used

promise fulfilment as one of the antecedents of trust, and Dasgupta (2000) examined

how credibility of promises impacts trust. Our findings illustrate the importance of

reliability in the HQ-subsidiary context.

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Perceiving HQ’s openness. We found that HQ managers who are perceived to

be willing to share insights behind key decisions tend to be trusted by subsidiary

managers. Our interviewees stated that they appreciate the openness and transparency

HQ managers exhibit and it affects their trust in the HQ. For instance, the Chinese

subsidiary’s engineering leader of BU#1 and BU#2 of Alpha company told us that he

appreciates the fact that BU#1’s HQ engineering leader is very open about sharing with

him planned global initiatives and, more importantly, the rationale behind those

initiatives. He felt that it is important to understand the rationale behind global decisions

because those decisions might impact the Chinese product development roadmap in a

significant way. Openness has been identified as one of the factors of trust in extant

literature. Gabarro (1978) conducted clinical interviews where openness (levelling and

expressing ideas freely) was identified as one of the nine bases of trust by the

interviewees. and Butler Jr (1991) empirical study also identified openness as one of the

attendant factors of trust. Both defined openness as freely giving ideas. Our findings in

the HQ-subsidiary context demonstrate that perceived openness means HQ managers

are sharing insights behind the key decisions made by the HQ.

Perceiving HQ’s aligned interest. As extended agency theory suggests, internal

politics at headquarters level may motivate HQ managers to conduct inappropriate self-

interested activities which compromise subsidiary managers’ wellbeing (Foss, Foss, and

Nell 2012). During our interviews, we found that subsidiary managers are sensitive to

detecting if HQ managers’ interests and priorities are aligned with the interests of the

Chinese subsidiaries. Aligned interests facilitate subsidiary managers’ trust in the HQ.

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Value congruence is a similar construct that has been identified as a factor that impacts

organizational trust (Sitkin and Roth 1993; Hart et al. 1986). We argue that in the

context of the HQ-subsidiary relationship, aligned interest is a context-specific task

performance manifestation of a more generalized value congruence. Hence, our findings

support and extend extant literature on extended agency theory and trust factors. As

illustrated in Figure 4.4, subsidiary manager’s perception of HQ manager’s competence,

reliability, openness, and aligned interests result in their trusting in HQ. Hence, we

propose the following:

Proposition 3. In the context of Western MNEs, Chinese subsidiary top

managers trust in the HQ involves four independent perceptions: perceiving

HQ’s competence, perceiving HQ’s reliability, perceiving HQ’s openness, and

perceiving HQ’s aligned interests. Each of these four perceptions independently

strengthens Chinese subsidiary managers’ trust in the HQ.

Figure 4.4. Data Structure (Antecedents of Trusting the HQ)

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4.4.3.2 Antecedents of Distrusting the HQ

McKnight and Chervany (2001) summary of literature on trust and distrust

concluded that most trust theorists agree that trust and distrust are opposites. Our

findings confirmed this statement. As illustrated below, the antecedents of distrust

tended to be the mirror image of those of trust.

Perceiving HQ’s incompetence. In contrast to subsidiary managers’ perception

of HQ managers’ competence, some of our interviewees regarded their HQ managers as

incompetent (either lack of domain knowledge about the business or lack of sound

judgement on important issues), which makes them distrust these HQ managers.

Perceiving HQ’s unreliability. As reliability to trust, unreliability is a factor that

makes subsidiary managers distrust their HQ. Our interviewees tend to distrust their HQ

managers when they see a lack of follow-up on promised support (e.g. resources,

technology transfer, transfer price, etc.).

Perceiving HQ’s vagueness. In contrast to openness, the subsidiary managers we

interviewed stated that they distrust their HQ managers when they detect vagueness or

an unwillingness to share insights. Specifically, when the HQ managers just pushed

through decisions without making any effort to explain the rationale behind those

decisions, or gave a general and unconvincing explanation instead of real insight, the

subsidiary managers tended to distrust those HQ managers.

Perceiving HQ’s misaligned interests. As extended agency theory argues, self-

interested behaviour also applies to HQ managers (Foss, Foss, and Nell 2012). Our

findings confirmed that the subsidiary managers did detect self-interested behaviour,

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which made them distrust those managers from the HQ. Specifically, some of the

subsidiary managers observed that their HQ managers put their own personal job

performance perception before the interests of the subsidiary’s business results, while

some of the HQ managers tried to achieve short-term objectives at the expenses of the

subsidiary’s long-term growth. As illustrated in Figure 4.5, subsidiary manager’s

perception of HQ manager’s incompetence, unreliability, vagueness, and misaligned

interests result in their distrusting in HQ. Hence, we propose the following:

Proposition 4. In the context of Western MNEs, Chinese subsidiary top

managers distrust the HQ managers due to four independent perceptions:

perceiving HQ’s incompetence, perceiving HQ’s unreliability, perceiving HQ’s

vagueness, and perceiving HQ’s misaligned interests. Each of these four

perceptions independently strengthens Chinese subsidiary managers’ distrust in

the HQ.

Figure 4.5. Data Structure (Antecedents of Distrusting the HQ)

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4.4.4 Consequences of Feeling Trusted and Distrusted by the HQ

Our findings demonstrate that feeling trusted or distrusted by the HQ influences

subsidiary managers’ behaviour in complex and hitherto underexplored ways. We asked

Chinese subsidiary managers from Alpha and Beta companies how feeling trusted or

distrusted by the HQ specifically impacts their strategic decisions to pursue

entrepreneurial opportunities through new product development and go-to-market

activities. Our analysis shows that the consequences of feeling trusted by the HQ

managers are to facilitate subsidiary managers’ proactiveness, innovativeness and risk

taking. These behaviours are key components of entrepreneurial orientation (EO)

(Anderson, Covin, and Slevin 2009; Lumpkin and Dess 1996). Feeling distrusted by the

HQ managers, on the other hand, facilitates subsidiary managers’ passiveness,

conservativeness and risk aversion, which represents the other end of the EO

continuum. Hence, we argue that these are three key components of a mirror image

construct of EO, which we call conservative orientation (CO). See Table 4.7 for

illustrative quotations.

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Table 4.7. Consequences of Feeling Trusted and Distrusted by the HQ Consequences Illustrative quotations

Feeling Trusted by the HQ – Entrepreneurial Orientation

Proactiveness ‘When I am trusted by the HQ, I feel I am held accountable for the overall

business results and I am motivated to work harder to contribute as much as I can

to grow the business. At the same time, I feel it is all worth it because I believe

that my efforts are valued by the HQ’ (Engineering leader, Chinese subsidiaries

BU#1 and BU#2 of Alpha company)

‘I feel more responsible for the overall performance of the company. Not just

worrying about the Chinese subsidiary’s benefits, but also the company as a

whole. I would never hesitate to stop HQ doing stupid things because I feel I have

the responsibility to do so’ (CFO, Chinese subsidiary of Beta company)

Innovativeness ‘I feel encouraged and motivated to attend conferences related to our industry

and always look for new ideas that help the company to stay ahead of the industry

trend’ (CFO, Chinese subsidiary of Beta company)

‘HQ has developed a service offering and it has been very successful in many

European countries. But after reviewing the detailed service process, we believe it

wouldn’t work in the Chinese market. We then developed our own service offering

using some creative ideas that are more acceptable to the Chinese market instead

of just trying to copy the global offering developed by HQ’ (Commercial business

director, Chinese subsidiary of Beta company)

Risk taking ‘I often face situations where a decision needs to be made without enough

information to ensure certain outcomes, and I have no problem making those

decisions. I always tell myself that no decision is worse than a wrong one’ (CFO,

Chinese subsidiary of Beta company)

‘I am developing a new business model for the company and there are a lot of assumptions built in that model. I feel comfortable to explore these uncertainties

and validate them along the way, because I feel trusted by the HQ and even if I

fail I will learn a lot’ (Business development director, Chinese subsidiary BU#5

of Alpha company)

Feeling Distrusted by the HQ – Conservative Orientation

Passiveness ‘Since I feel untrusted and micromanaged by HQ, I just follow their directions

and execute without much feeling of ownership of the results’ (General manager, Chinese subsidiary BU#3 of Alpha company)

‘I had been asked to present a lot of data (which is never enough for HQ)

whenever I try to propose some new ideas. I now limit my communication with

HQ and just mechanically follow their strategy even though I know it doesn’t

work for the Chinese market’ (General manager, Chinese subsidiaries BU#1 and

BU#2 of Alpha company)

Uncreativeness ‘I decided not to pursue new ideas for BU#2’s business because I have a strong

feeling that HQ doesn’t trust me. I still do my job though, but most of my activities

are limited to executing existing plans and selling existing products developed by

HQ’ (General manager, Chinese subsidiaries BU#1 and BU#2 of Alpha company)

‘I don’t feel motivated to come up with new creative ideas for developing new products for this business unit because HQ doesn’t recognize my efforts anyway. I

don’t feel trusted by the HQ and only feel their arrogance during business

reviews’ (Engineering director, Chinese subsidiaries BU#1 and BU#2 of Alpha

company)

Risk aversion ‘Instead of developing a completely new product that might satisfy the Chinese

market needs better, we just made some modifications to the imported product to

take some costs out, because we don’t know how it would be perceived by HQ if we proposed not to sell a globally proven product and came up with new

products’ (General manager, Chinese subsidiary BU#6 of Alpha company)

‘Due to the lack of trust from HQ, I am not motivated to develop new products

because not every product is a hit in the market. I feel that the more I do, the more

chances I am giving HQ to criticize me’ (Strategic marketing leader, Chinese

subsidiary BU#6 of Alpha company)

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4.4.4.1 Consequences of Feeling Trusted by the HQ: Entrepreneurial Orientation

Proactiveness. Our interviewees who felt trusted by the HQ managers stated that

they felt more willing to actively pursue new product development and market

expansion activities because they believed HQ managers valued their efforts. Therefore,

our findings support the supposition of Venkatraman (1989a); Venkatraman (1989b),

who suggested that proactiveness refers to processes of anticipating future needs,

seeking new opportunities and the introduction of new products. In addition, our finding

links feeling trusted by the HQ managers with subsidiary managers’ proactiveness.

Innovativeness. The subsidiary managers we interviewed told us that when they

felt trusted by the HQ managers they were motivated to work on technological

breakthroughs and actively seek novel business models so that they could stay ahead of

their peers in the industry. As Lumpkin and Dess (1996) stated, innovativeness reflects

the tendency to engage in new ideas, novelty, experiments and creative technological

processes. Our findings link subsidiary managers’ feeling of being trusted by the HQ

managers with a basic willingness to venture beyond existing technology and practices,

which is Kimberly (1981) definition of innovativeness.

Risk taking. Shapira (1986) study stated that managers exhibit different risk

preferences under different conditions. The subsidiary managers we interviewed

confirmed this statement by telling us that they had more tolerance for uncertainty when

they felt trusted by the HQ managers. Dealing with ambiguity is a norm in emerging

markets (e.g. China and India) due to the lack of available market intelligence.

Therefore, it is important for subsidiary managers working in these markets to be

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willing to tolerate uncertainties and make decisions based on a certain level of risk. Our

findings show that subsidiary managers’ feeling of being trusted by the HQ managers

facilitates risk taking.

A substantial body of EO research has identified proactiveness, innovativeness

and risk taking as key dimensions of EO (Covin and Lumpkin 2011; Anderson et al.

2015; Miller 1983), but we are the first to identify that subsidiary managers’ feeling of

being trusted by the HQ managers facilitates these three dimensions of EO in the MNE

context. As Figure 4.6 below illustrates, three dimensions of EO, namely,

proactiveness, innovativeness, and risk taking resulted from subsidiary manager’s

feeling trusted by HQ. Hence, we propose the following:

Proposition 5. In the context of Western MNEs, the consequence of Chinese

subsidiary top managers’ feeling of being trusted by the HQ is entrepreneurial

orientation (EO) at subsidiary level. EO is formed by three dimensions:

proactiveness, innovativeness and risk taking.

Figure 4.6. Data Structure (Consequences of Feeling Trusted by the HQ)

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4.4.4.2 Consequences of Feeling Distrusted by the HQ: Conservative Orientation

Passiveness. Lumpkin and Dess (1996) suggested that the conceptual opposite

of proactiveness is passiveness, which represents the inability to seize opportunities.

The subsidiary managers we interviewed who felt distrusted by their HQ managers told

us that they had lost their passion for the work they do and only mechanically follow the

routines. In other words, they were passively managing the activities in their subsidiary.

This shows that subsidiary managers’ feeling distrusted by the HQ managers puts them

at the opposite end of the proactiveness continuum, which is passiveness.

Uncreativeness. Our interviewees told us that when they felt distrusted by their

HQ managers, they lost interest in being creative and refused to come up with new

ideas. This is the opposite of innovativeness, because the subsidiary managers just stick

to old technology, existing processes and the current state of the art. The term

‘uncreative’ is defined in the Merriam-Webster dictionary as “lacking originality of

thought: not productive of new ideas” (Merriam-Webster n.d.). As such, we find

that subsidiary managers’ feeling distrusted by the HQ managers facilitates

uncreativeness.

Risk aversion. Our interview results show that when the subsidiary managers

feel distrusted by the HQ, they try to avoid uncertainties, both internal and external.

Internally, subsidiary managers try to avoid unpredictable reactions from HQ managers

when they propose new ideas; externally, they try to avoid unpredictable acceptance of

new products by the market. Therefore, subsidiary managers who felted distrusted by

their HQ managers only conducted activities that produced acceptable outcomes with a

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high level of certainty, or at least perceived certainty. An illustration of this effect

comes from BU#6 of Alpha company. The Chinese subsidiary’s general manager of this

business unit revealed an instance where, rather than develop a new product that might

serve Chinese customers more effectively, he and his team focused instead on

incremental cost-based modifications to an existing imported product because they

expected that HQ would reject an unproven product and would prefer a product already

accepted in the international market. Other managers stated that taking less risky

options because they felt distrusted by the HQ was a way to avoid potential punishment

by corporate executives. Such actions demonstrate that subsidiary managers’ feeling

distrusted by the HQ can lead to risk-averse behaviour in the desire to avoid a negative

impact on their performance evaluation, which ultimately may diminish their

employment prospects.

Our findings concerning the effects of distrust on risk aversion extend the

general literature on managerial attitude towards risk (Wiseman and Gomez-Mejia

1998; March and Shapira 1987; Anderson et al. 2015). Because we have illustrated that

the consequences of feeling distrusted are the opposite consequences of feeling trusted

and the consequences of feeling trusted are three key components of EO, we feel secure

in proposing that the consequences of feeling distrusted are the three key components of

a construct that is a mirror image of the EO, which we call conservative orientation

(CO). As Figure 4.7 below illustrates, three dimensions of CO, namely, pasiveness,

uncreativeness, and risk aversion resulted from subsidiary manager’s feeling distrusted

by HQ. Hence, we propose the following:

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Proposition 6. In the context of Western MNEs, the consequence of Chinese

subsidiary top managers’ feeling distrusted by the HQ manager is conservative

orientation (CO) at subsidiary level. The CO is formed by three dimensions:

passiveness, uncreativeness and risk aversion.

Figure 4.7. Data Structure (Consequences of Feeling Distrusted by the HQ)

4.4.5 Consequences of Trusting the HQ and Distrusting the HQ

This section focuses on how subsidiary managers’ trusting or distrusting the HQ

impacts their behaviour and strategic decisions. We have asked Chinese subsidiary

managers from Alpha and Beta companies how trusting or distrusting the HQ managers

specifically impacts their behaviour and daily decisions. Our analysis shows that the

consequences of trusting/distrusting the HQ directly affect Chinese subsidiary

managers’ commitment to support HQ’s strategic direction, willingness to make

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constructive suggestions to the HQ and transparency with the HQ. See Table 4.8 for

illustrative quotations.

Table 4.8 - Consequences of Trusting and Distrusting the HQ Consequences Illustrative Quotations

Trusting the HQ

Commitment to support HQ ‘HQ was trying a new business model last year and both myself and my team felt that we should try a freemium approach. But after laying out all the facts

with HQ, my HQ manager still believed it was feasible to execute the new initiative in China without the freemium approach. Because I have a lot of

trust in my HQ manager and believed he must have thoroughly considered

all facts, I also trust his judgements; therefore, I convinced myself and my team to try hard on the new model and it was successful’ (Commercial

business director, Chinese subsidiary of Beta company)

‘I have a lot of trust in the HQ and believe their intention and capabilities.

So, I always follow HQ's control requirements and make sure our subsidiary is complying with company rules and procedures all the time’ (Finance

director, Chinese subsidiary of BU #5 of Alpha company)

Constructive suggestion to HQ ‘When our BU#1 HQ was developing the third generation of our XX panel, I made a lot of suggestions to HQ on the functionalities because I trust the

people from HQ who were developing the product and believe they are

genuinely interested in knowing the market needs here in China’ (Engineering director, Chinese subsidiary BU#1 and BU#2 of Alpha

company)

Transparency with HQ ‘I fully trust in the HQ and I never hesitate to tell them everything that is

going on here in China. Last year we had some pretty sensitive local HR issues and I shared the complete details with HQ even though I know I didn’t

have to, but I did because I trust my HQ manager would not misuse that

information’ (VP of human resources, Chinese subsidiary of Beta company)

Distrusting the HQ

Irresponsibility of HQ directives ‘In our last strategic planning session, the BU#2’s HQ managers presented a totally irrelevant global strategy. Because I don’t trust these HQ managers’

capabilities, instead of wasting my time arguing with them, I just follow

whatever strategic initiatives they want us to implement in China without caring about the results’ (VP of strategic marketing, Chinese subsidiary

functional support group of Alpha company)

‘As I mentioned before, some of the BU#2’s HQ managers only care about their own isolated key performance indicators (KPIs) and force us to only

focus on these KPIs which sometimes conflict with local subsidiary business

priorities. I have to choose to ignore these requests and just make up the KPI numbers during the review session. Since these KPIs do not really impact our

local business, I don’t even feel guilty about it’ (Customer support director,

Chinese subsidiaries BU#1 and BU#2 of Alpha company)

Avoiding discussion of issues ‘I don’t believe the HQ managers can or are even willing to help me to solve my issues. Therefore, I always find a solution locally and try not to mention

my issues to HQ’ (Strategic marketing director, Chinese subsidiary BU#3 of

Alpha company)

Selective disclosure ‘For those HQ people that I don’t trust, I first put them low on the priority

list of whom I spend my time communicating with; and then I only share

limited information with them in terms of what we are working on in China because the more they know, they either interfere or take unjust credit’

(Strategic marketing director, Chinese subsidiary BU#5 of Alpha company)

4.4.5.1 Consequences of Trusting the HQ

Commitment to support HQ. Subsidiary managers we interviewed who trusted

their HQ managers reported that they were committed to supporting the HQ’s strategic

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initiatives despite some initial doubts about those initiatives. The data shown in Table

4.8 illustrate that subsidiary managers’ support of trusted HQ managers comes in the

form of putting in additional effort to support initially struggling new HQ initiatives,

such as new business models, and ensuring compliance with new HQ procedures,

including procedures for risk management. In other words, when the subsidiary

managers trust their HQ managers, they are willing to follow the visions of their leaders

and comply with organizational rules and procedures, which positively impacts the

execution of the HQ’s initiatives (Turnipseed and Rassuli 2005). This finding is

consistent with Dirks and Ferrin (2002) empirical evidence that trust in leadership has a

significant relationship with individuals’ commitment to leaders’ decisions.

Constructive suggestion to HQ. The significance of knowledge sharing for an

organization’s competitiveness is growing, and effective communication positively

impacts knowledge sharing (Riege 2005). Subsidiary managers provide important

inputs to MNEs’ overall strategy (Birkinshaw, Hood, and Jonsson 1998b). Therefore,

knowledge sharing between the subsidiary and the HQ is critical for a firm’s success.

The Chinese subsidiary managers we interviewed reported that they felt more

comfortable making suggestions to HQ, which we believe is a form of knowledge

sharing, when they have trust in their HQ managers. This finding is consistent with

George and Jones (1997) suggestion that positive interpersonal relationships facilitate

constructive suggestions between the parties.

Transparency with HQ. Our interview also showed that subsidiary managers

were more willing to open themselves up to HQ when they trusted their HQ managers.

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Specifically, when subsidiary managers trust their HQ managers, they do not hesitate to

share sensitive information or disclose difficult issues with HQ, and believe that HQ

will not misuse the information in a way to harm their subsidiary. This is easily

understandable, because the most frequently used definition of trust involves one party

putting itself in a vulnerable position to the actions of another party (Mayer, Davis, and

Schoorman 1995). As Figure 4.8 below illustrates, some elements that contribute to

OCB, namely, commitment to support HQ, constructive suggestions to HQ, and

transparency with HQ resulted from subsidiary manager’s trusting in HQ. Hence, we

propose the following:

Proposition 7. In the context of Western MNEs, the consequences of Chinese

subsidiaries’ top managers trusting in the HQ are commitment to support HQ,

constructive suggestion to HQ and transparency with HQ, which facilitates

subsidiary-HQ knowledge transfer and the effectiveness of executing HQ

directives, which in turn contribute to OCB.

Figure 4.8. Data Structure (Consequences of Trusting the HQ)

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4.4.5.2 Consequences of Distrusting the HQ

Irresponsibility to HQ directive. In contrast to trusting in the HQ, our

interviewees stated that they either mechanically follow HQ’s directive without

ensuring positive results for the company or just simply ignore HQ when they distrust

their HQ managers. As shown in Table 4.8, subsidiary managers who distrusted their

HQ described global strategic initiatives launched by the HQ as “totally irrelevant”.

Other distrusting subsidiary managers revealed that they fabricated data for key

performance indicators when those indicators conflicted with local business priorities.

Other apparent consequences of distrusting in the HQ included ignoring information

requests from HQ and following corporate strategic initiatives with minimal effort.

Ignoring HQ demonstrates a lack of cooperation, which is a typical outcome of distrust

in the wider literature on trust in organizations (Bromiley and Cummings 1989; Dirks

and Ferrin 2002; Kramer 1999). Our finding that subsidiary managers’ distrust in the

HQ leads managers to merely follow HQ’s directives mechanically—i.e. to do the bare

minimum to ensure compliance—is an important one, because such forms of resistance

are potentially damaging to the organization but harder to spot. It is easier for the HQ to

detect subsidiary managers’ active resistance (e.g. ignoring behaviour) than their

mechanically following behaviour. Control measurement and corrective actions can be

put in place when the HQ detects non-cooperation from subsidiary managers, while

mechanically following HQ’s directions could be perceived as cooperating behaviour

even though it may be insufficient to guarantee the success of new initiatives.

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Avoiding discussion of issues with HQ. Selling issues to top management is

significant to both individuals and organizations (Dutton and Ashford 1993), but lack of

organizational support hinders issue selling (Simsarian Webber, Bishop, and O'Neill

2012). The Chinese subsidiary managers we interviewed reported that they avoided

discussing issues with HQ when they felt they could not trust their HQ managers. Even

though the subsidiary managers found solutions locally, avoiding communication issues

with HQ presented a loss of opportunities for the HQ to get a complete picture of the

local markets.

Selective disclosure. In contrast, the Chinese subsidiary managers we

interviewed who distrusted their HQ managers told us that they would intentionally

withhold information and only share partial facts with the HQ because they wanted to

avoid unnecessary interference from the HQ or giving the HQ managers undue credit.

Partial disclosure of facts also prevented the HQ from having a better understanding of

the business in local markets, because avoiding communication with the HQ in general

and selectively disclosing information is a barrier to knowledge sharing (Riege 2005).

As Figure 4.9 below illustrates, some elements that contribute to counterproductive

work behaviour, namely, irresponsibility to HQ directives, avoiding discussion of

issues, and selective disclosure resulted from subsidiary manager’s distrusting in HQ.

Hence, we propose the following:

Proposition 8. In the context of Western MNEs, the consequences of Chinese

subsidiary top managers’ distrusting the HQ are irresponsibility to HQ’s

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directive, avoiding discussion of issues and selective disclosure, which hinders

subsidiary-HQ knowledge sharing and the effectiveness of execution of HQ

directives, which in turn contribute to conterproductive work behaviour.

Figure 4.9. Data Structure (Consequences of Distrusting the HQ)

4.5 Integrating Consequences of Feeling Trusted/Distrusted by the HQ and

Trusting/Distrusting in the HQ into Four Types of HQ-Subsidiary Relationship

As discussed earlier, there are four types of HQ-subsidiary relationship based on

the consequences of feeling trusted/distrusted by the HQ and trusting/distrusting in the

HQ. The first type is subsidiary managers’ feeling trusted by the HQ but distrusting in

the HQ (asymmetrical distrusting). In this type of relationship, subsidiary managers

demonstrated entrepreneurial orientation. “I am developing a new business model for

the company and there are a lot of assumptions built in that model. I feel comfortable

exploring these uncertainties and validating them along the way because I feel trusted

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by the HQ, and even if I fail I will learn a lot” (Business development director, Chinese

subsidiary BU#5 of Alpha company). This statement demonstrates a subsidiary

manager’s proactiveness, innovativeness and risk taking behaviour, which are the three

key elements of entrepreneurial orientation (Rauch et al. 2009).

The second type of HQ-subsidiary relationship is the mutually trusting. In this

type of relationship, subsidiary managers feel trusted by the HQ and trust in the HQ

(mutual trust). Hence, in addition to entrepreneurial orientation, subsidiary managers

effectively execute HQ initiatives and share knowledge with the HQ. “Because I have

trust in the HQ, I believe they must have thoroughly considered all the facts I presented.

In the end, I convinced myself and my team to follow HQ’s new model and it was

successful” (Chinese subsidiary commercial business director of Beta company). This

exemplifies subsidiary managers’ commitment to support the HQ’s direction, which

facilitates effective HQ initiative execution (Podsakoff et al. 2000).

The third type is the mutually distrusting relationship. In this type of

relationship, subsidiary managers feel distrusted by the HQ and they distrust in the HQ

at the same time, resulting in passiveness, uncreativeness and risk aversion. “I had been

asked to present a lot of data (which is never enough for HQ) whenever I tried to

propose some new ideas. I now limit my communication with HQ and just mechanically

follow their instruction, even though I know it doesn’t work for the Chinese market”

(Chinese subsidiary general manager, BU#2 of Alpha company). We identified an

overarching concept for these three constructs and called it a conservative orientation,

since each is the opposite of the elements of entrepreneurial orientation. In addition to

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conservative orientation, subsidiaries with a mutually distrusting relationship execute

HQ initiatives ineffectively and prevent knowledge sharing between HQ and the

subsidiary. “I just choose to ignore these requests and just make up the KPI numbers

during the review session. Since these KPIs do not really impact our local business, I

don’t even feel guilty about it” (Chinese subsidiary customer support director, BU#2 of

Alpha company). Our evidence of the consequences of a mutually distrusting

relationship is similar to that in previous studies (Kramer 1999; Kramer and Cook 2004;

Lewicki, McAllister, and Bies 1998).

The fourth type of relationship is trusting in the HQ without feeling trusted by

the HQ (asymmetrical trust). In this type of relationship, subsidiary managers execute

HQ initiatives effectively and knowledge transfer is visible. However, one interesting

observation is that none of the Chinese subsidiary managers we interviewed fell into

this category of relationship with HQ. In other words, there were no subsidiary

managers trusting in the HQ without feeling trusted by the HQ. This implies that feeling

trusted by the HQ is a pre-requisite for trusting in the HQ. There is no previous

empirical evidence to support this; however, our interviews have shed some light on this

insight. “I believe for me to trust in the HQ manager, I need to feel trusted by her first.

Even though I don’t necessarily trust her back when I feel trusted, if I don’t feel trusted,

I certainly will not trust her” (CFO of Chinese subsidiary functional support group of

Alpha company). “HQ acts as my superior and controls the relationship to some degree,

which makes me vulnerable already. I don’t want to feel more vulnerable by trusting in

the HQ without knowing I am trusted by the HQ” (Chinese subsidiary business

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development director, BU#5 of Alpha company). These subsidiary managers’

statements are important to our understanding of the reason that feeling trusted by the

HQ is a prerequisite for trusting in the HQ. Vulnerability and risk are inherent in leader-

member exchange relationships in an organization (Whitener et al. 1998). HQ managers

were perceived to have the authority to make or influence decisions that have

significant impacts on subsidiary managers (e.g. performance evaluation, salary

increases, promotions, work alignments, layoffs); hence, subsidiary managers naturally

felt vulnerable and less powerful in the HQ-subsidiary relationship. We have

established previously that feeling trusted by the HQ managers relates to subsidiary

managers’ perception of empowerment (Gomez and Rosen 2001). According to Lau,

Lam, and Wen (2014), trusting represents the trustor’s willingness to assume risk based

on positive expectations. Therefore, only when subsidiary managers felt trusted would

they have positive expectations of their HQ managers, which evoked their willingness

to assume additional vulnerability by trusting the HQ managers. On the other hand,

when they felt distrusted by the HQ managers, they became more risk averse and

unwilling to assume additional risk by trusting in the HQ.

4.6 The Subsidiary Performance Comparison

We categorized each subsidiary manager we interviewed based on the type of

HQ-subsidiary relationship they perceived, namely feeling trusted by the HQ, mutually

trusting, mutually distrusting or trusting in the HQ. Figure 4.10 shows the findings.

Overall, there was considerable agreement across managers concerning the nature of the

HQ-subsidiary relationship in terms of the type and extent of trust. However, there were

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some important points of difference. More specifically, this categorization led to three

noteworthy observations. Firstly, every Chinese subsidiary manager we interviewed

from Beta company and BU#1 of Alpha company perceived a mutually trusting

relationship with their HQ. Secondly, every Chinese subsidiary manager we interviewed

from BU#2 and BU#6 of Alpha company perceived a mutually distrusting relationship.

Thirdly, Chinese subsidiary managers from other BUs of Alpha company we

interviewed demonstrated mixed perceptions (e.g. some of them have a mutually

trusting perception; others only feel trusted by the HQ).

Figure 4.10. Integrating the Four Types of HQ-Subsidiary Relationship

Below, we describe the performance of these three categories of subsidiaries in

terms of their local responsiveness and subsidiary initiatives. We use publicly available

information, internal documents and interview data to understand the subsidiaries’

Chinese market share position and export revenue as a percentage of total revenue to

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gauge the subsidiary performance in local responsiveness and subsidiary initiatives. See

Table 4.9 for an overview of the performance comparisons.

Table 4.9. Performance Comparison Self-Reported Performance Company Data

Local Responsiveness

Subsidiary Initiative

Market

Position in

China

Export

Revenue

as of %

Total

Sales

Subsidiaries with a Mutually Trusting Relationship

Mutually

Trusting

Subsidiary

BU#1 of Alpha

Company

‘We react very quickly to the market change in China

for our safety business and we use that as our

advantage to gain competitive advantage over our

competitors. For example, there was a regulation code

change a few years ago: we responded very quickly

with local R&D efforts and became the first to meet

the new standard in the industry, and we used that as

a weapon to grab market share from our competitors’

(Strategic marketing director, BU#1 of Alpha

company)

‘We have continuously contributed to overseas

markets with our new product development

capabilities. Our recent success is the new series of

our safety product line. After initiating a discussion

with our North American colleagues, we developed

the second generation of safety product that

satisfies both China and North American markets.

More than 50% of the revenue came from outside

China for this specific product line’ (Engineering

director, BU#1 of Alpha company)

Market

leader (#2

position)

>15%

Mutually

Trusting

Subsidiary of

Beta Company

‘I believe one of the reasons we have been successful

in China is that we were empowered by HQ to design

a different structure and incentive plan for our

Chinese sales organization. Our structure is very

effective, and our incentive plan is very competitive

compared to our local competitors. Therefore, we

were able to attract and retain the top talents in our

industry’ (VP of HR of Chinese subsidiary of Beta

company)

‘We have developed a couple of new business

models in China and our global CEO is evaluating

the feasibility of adopting these models in European

markets’ (Strategic marketing director of Chinese

subsidiary of Beta company)

Market

leader

(#1

position)

>15%

Subsidiaries with a Mutually Distrusting Relationship

Mutually

Distrusting

Subsidiary BU#2

of Alpha

Company

‘To be honest, our awareness business has become

irrelevant in the Chinese market because our market

share is in low single digits! We have not been able to

develop any new products that are competitive in the

Chinese market for the last ten years’ (Chinese

subsidiary GM, BU#2 of Alpha company)

‘I have not seen any export revenue from our

awareness business. In fact, we are struggling to

develop new products for Chinese markets, let

alone develop products that are suitable for

markets outside China’ (Chinese subsidiary finance

director, BU#2 of Alpha company)

Very low

market

share (less

than 2%)

None

Mutually

Distrusting

Subsidiary BU#6

of Alpha

Company

‘We have very slow local responsiveness regarding

meeting the local requirements from a product-

offering perspective. This is because everyone is

following a standard new product development

process developed by HQ which has a much longer

cycle time than our local competitors’ (Strategic

marketing director, BU#6 of Alpha company)

‘We don’t have many initiatives that support our

global business. We had to hide some of our own

local product development initiatives from HQ’s

scrutiny because HQ’s interference with our

activities are detrimental to our efforts’ (Chinese

subsidiary GM, BU#6 of Alpha company)

Very low

market

share (less

than 3%)

None

Subsidiaries with a Mixed Relationship – Feeling Trusted and Mutually Trusting

Feeling Trusted

and Mutually

Trusting

Subsidiary BU#5

of Alpha

Company

‘Among MNE competitors in China, we are #1, but

compared to a few local competitors, we are slower

than them to respond to local market changes’

(Business development director, BU#5 of Alpha

company)

‘We have developed a hand-held unit for China’s

mid-segment market and now they are not only

selling to other emerging markets, but also the US

market’ (Product development director, BU#5 of

Alpha company)

Market

leader (#2

position)

>15%

Subsidiaries with a Mixed Relationship – Feeling Trusted and Feeling Distrusted by the HQ

Feeling Trusted

and Feeling

Distrusted by the

HQ Subsidiary

BU#3 of Alpha

Company

‘In terms of responding to local market needs, we are

faster than most of our European peers in China, but

there is room to improve compared to US and local

Chinese companies’ (Strategic marketing director,

BU#3 of Alpha company)

‘We have no successful case of developing a new

product for the Chinese market and then selling it

to other countries yet. But I am sure we will have

some soon’ (Chinese general manager, BU#3 of

Alpha company)

Fell short

of top 10 in

market

share

position

None

Feeling Trusted

and Feeling

Distrusted by the

HQ Subsidiary

BU#4 of Alpha

Company

‘We respond to our local product requirements pretty

quickly because we are empowered to use a 100%

local supply chain. But I think we need to improve our

responsiveness to the overall market trend change and

expand our portfolio quicker’ (Chinese general

manager, BU#4 of Alpha company)

‘We have sold some products to India because I

have a small Indian team reporting to me and

dedicated to selling these products. Not much of

anything else’ (Chinese general manager of BU#4

of Alpha company)

Fell short

of top 10 in

market

share

position

None

4.6.1 Performance of Chinese Subsidiaries with Mutually Trusting Relationships:

Beta Company and BU#1 of Alpha Company

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Local responsiveness. According to the publicly available information, Beta

company has the #1 market share position in China. In other words, it outperforms all

its MNE and Chinese domestic competitors in the Chinese market. This is quite an

achievement, because in this industry there are a lot more competitors in China than in

any other countries: “we compete with less than five competitors in European and North

American markets, but we are facing more than 200 competitors in the Chinese market”

(CFO, Chinese subsidiary of Beta company). Similarly, Chinese subsidiary BU#1 of

Alpha company is a market leader (#2 market share position) in China and faces more

than 100 competitors in the industry.

In order to win the market share in China, subsidiary managers must be able to

respond quickly to specific diverse customer requirements, different business cultures

and different governmental regulations in the Chinese market (Golden 1992; Luo 2001).

The top managers of the Chinese subsidiary we interviewed from Beta company and

BU#1 of Alpha company, who characterized their relationship with HQ as one of

mutual trust, stated that they were able to adopt local strategies and policies that deviate

from the so-called global standard to achieve fast local responsiveness. Subsidiary

managers from Beta company believe that they maintain a high level of local

responsiveness because their Chinese subsidiary is managed as a local Chinese

company instead of following some MNEs’ widespread practice. For example, hiring

local employees with good English communication capabilities is a common

requirement for many MNEs, because many believe that the ability to communicate in

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the same language helps to improve subsidiary absorptive capacity (Minbaeva et al.

2003) and horizontal communication (Charles and Marschan-Piekkari 2002).

Beta company seems to recognize the drawbacks of sticking to fluent English-

speaking employees more than its benefits, because the criterion of fluency in English

may compromise the subsidiary’s ability to recruit local talents who do not speak

English well but who are most familiar with the local markets in China. “Unlike other

MNEs, speaking English is not one of the criteria when we recruit talents. Our Chinese

CEO speaks Chinese during the meetings even when there are HQ visitors present. He

explains to the HQ visitors that he doesn’t want to compromise the quality of our

meetings by speaking English, because some of local meeting participants are not fluent

in English, but they are the key decision makers for local business. Our HQ visitors are

very receptive to this argument and they just get some brief translation from the person

sitting next to them” (Chinese subsidiary CFO of Beta company).

Convincing HQ that hiring local employees who do not speak fluent English

might in theory be difficult due to potential concerns at HQ that subsidiary managers

could be setting a language-based communication barrier between the employees and

the HQ, thereby augmenting agent power and mitigating against principal control (Luo

& Shenkar, 2006). But the Chinese subsidiary managers of Beta company believe that it

is critical to do so because they recognize that the misconception of China as a

homogeneous market leads to slow local responsiveness in China (Cui and Liu 2000).

“We are completely local. We don’t even believe in sending Shanghai employees to

manage the business in Chengdu, for instance. We always hire the locals to conduct our

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business in their own provinces. They have the best knowledge and the network in their

local markets” (Chinese subsidiary CFO of Beta company).

Chinese subsidiary managers of BU#1 of Alpha company also reported high

local responsiveness and this is reflected in fast responses to local regulation code

changes and satisfying local customer needs. The ability to customize products to meet

local customers’ requirements helped Alpha company’s Chinese subsidiary to pursue

new opportunities that assisted them in penetrating new vertical markets which, in turn,

expanded their market share in China. “For our safety business, we are able to respond

to local customers’ customization needs very quickly. For example, when we were

pursuing our first airport project in China, we quickly developed quite a few innovative

solutions locally to satisfy the special requirements that Chinese airport operators have,

because our standard global offerings do not have these features” (Engineering director

of Chinese subsidiary BU#1 of Alpha company).

Subsidiary initiatives. According to our interviewees and relevant company

internal data we were given access to, both Beta company and BU#1 of Alpha

company’s Chinese subsidiary have a high level of subsidiary initiative. Also, in

addition to exporting products from China, Beta company’s Chinese subsidiary has

developed service applications and business models that have not only brought success

in the Chinese market but also benefited global markets, because their peer subsidiaries

are adopting these initiatives developed in China for their own markets. “The Chinese

subsidiary has contributed to global business in many ways. For example, we have

developed a killer application that serviced the customers in China initially. But after

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evaluating the success of the application, HQ is now replacing its home market solution

with our application. Not only have we had product and service initiatives adopted by

the global business, but our Chinese team developed a performance management

practice that is now adopted by global business units” (Chinese subsidiary commercial

business director of Beta company).

Similarly, Chinese subsidiary managers of BU#1 of Alpha company reported

that they have a high level of subsidiary initiative activities, and this claim is supported

by internal data we obtained. The products of BU#1 of Alpha company are heavily

regulated, which means that each country has its own regulation code and developing a

new product that satisfies these codes is a complex process. Alpha company’s Chinese

subsidiary has taken the initiative of developing some products that satisfy North

American, European and Japanese regulation codes separately and increased the

competitiveness of the subsidiaries in those regions. “We have continuously contributed

to overseas markets with our new product development capabilities. Our recent success

is the new series of our safety product line. After initiating a discussion with our North

American colleagues, we developed the second generation of a safety product that

satisfies both Chinese and North American markets. More than 50% of the revenue

comes from outside China for this specific product line” (Engineering director of

Chinese subsidiary BU#1 of Alpha company).

4.6.2 Performance of Chinese Subsidiaries with Mutually Distrusting

Relationships: BU#2 and BU#6 of Alpha Company

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Local responsiveness. In contrast to the subsidiaries with mutually trusting

relationships, Chinese subsidiaries BU#2 and BU#6 of Alpha company experience a

mutually distrusting relationship with the HQ. The interviewees from these two

subsidiaries reported that their subsidiaries maintain very low levels of local

responsiveness, which resulted in their low market share in China. See Table 4.9 for

performance details.

Respondents from Chinese subsidiaries BU#2 and BU#6 of Alpha company

expressed their disappointment over their performance in China for the last ten years.

Alpha company’s BU#2 Chinese subsidiary occupied a market leadership position in

the awareness products industry ten years ago, but the industry dynamic has

significantly changed over the last decade in China and its awareness products revenue

has significantly dropped, making it an irrelevant player in China today, with a less than

2% market share. Similarly, Alpha company’s BU#6 Chinese subsidiary has suffered

slow growth in the last ten years and its market share is less than 3% in China today.

Managers attributed the poor performance of the two business units to responding

slowly to local customer requirements: “We have not been able to develop any new

products that are competitive in the Chinese market for the last ten years” (Chinese

subsidiary GM, BU#2 of Alpha company). “We have very slow processes to develop

new products to meet local customer needs, which change very fast in China” (Chinese

subsidiary strategic marketing director, BU#6 of Alpha company). The market is

changing very fast in China and companies have to cope with rapid changes in

emerging markets (Hoskisson et al. 2000).

250

Subsidiary initiative. Not surprisingly, the top Chinese subsidiary managers

from both BU#2 and BU#6 of Alpha company reported low subsidiary initiative

activities. This is verified by the internal data we obtained. Because of the mutually

distrusting relationship with HQ, respondents from BU#2 and BU#6 of Alpha company

felt discouraged about conducting entrepreneurial initiatives that may benefit the

company as a whole. Even when they pursue some local initiatives to stay alive in the

local market, they need to hide their efforts due to fear of HQ interference. “We don’t

have many initiatives that support our global business. We have to hide some of our

own local product development initiatives from HQ’s scrutiny because HQ’s

interference with our activities are detrimental to our efforts” (Chinese subsidiary GM,

BU#6 of Alpha company). According to Birkinshaw (1997b), there are three types of

subsidiary initiative: local market initiative, global market initiative and internal market

initiative. Chinese subsidiaries of Alpha company’s BU#2 and BU#6 offer very limited

initiatives in any of these three categories because the mutually distrusting relationship

with HQ is suppressing them from taking the risks necessary to conduct subsidiary

initiatives.

4.6.3 Performance of Chinese Subsidiaries with Mixed Relationship (Asymmetrical

Distrust + Mutual Trust): BU#5 of Alpha Company

Three of the five top Chinese subsidiary managers of BU#5 of Alpha company

perceived being trusted by the HQ but did not reciprocate with trust in the HQ; the other

two perceived mutually trusting relationships with the HQ. We consider subsidiaries

whose top managers do not all perceive the same type of relationship with HQ as

251

subsidiaries with a mixed HQ-subsidiary relationship. Interestingly, our analysis

revealed that the Chinese subsidiary BU#5 of Alpha company, which has a mixed HQ-

subsidiary relationship, achieved the same level of performance (in local responsiveness

and subsidiary initiatives) as the Chinese subsidiary BU#1 of Alpha company. BU#5

has managed to obtain a market leadership position even though—unlike BU#1, where

all managers perceived a mutually trusting relationship—only two of its subsidiary

managers experienced mutual trust, while the other three only felt trusted by the HQ

and did not feel high levels of trust in the HQ. These findings suggest that having a

majority of managers who feel trusted by the HQ may in some circumstances be

sufficient to foster local responsiveness and subsidiary initiative.

Local responsiveness. Both BU#1 and BU#5 of Alpha company are market

leaders in their respective industries in China (#2 market share position) and both

outperformed their MNE peers in China while lagging behind a couple of local Chinese

competitors in local responsiveness. “Among MNE competitors in China, we are #1,

but compared to a few local competitors, we are slower than them to respond to the

local market changes” (Chinese subsidiary business development director, BU#5 of

Alpha company). The finance director of BU#1 of Alpha company explained that, “For

[the] safety business, we are clearly a market leader among MNE players and respond

especially fast to new regulation code changes, but we might be behind one or two local

players”. These data show that even though the Chinese subsidiary BU#1 of Alpha

company has a perceived mutually trusting HQ-subsidiary relationship while Chinese

subsidiary BU#1 of Alpha company reported a mixed HQ-subsidiary relationship (three

252

Chinese subsidiary managers felt trusted by the HQ without trusting in the HQ; two had

a mutually trusting relationship with the HQ), there is no significant performance

difference in local responsiveness between these two subsidiaries. These observations

are supported by the internal data we obtained.

Subsidiary initiative. In addition to local responsiveness, both Chinese

subsidiaries BU#1 and BU#5 of Alpha company performed well in terms of subsidiary

initiatives. Both subsidiaries developed products that not only serviced the Chinese

market well but also the helped company to be more competitive in global markets. As

shown in Table 4.9, the two BUs were equally high performers in subsidiary initiatives

among all six BUs of Alpha company. The subsidiary managers also had high perceived

performance in this area. The product development director of BU#5 of Alpha company

stated that: “We have developed a hand-held unit for China’s mid-segment market and

now they are not only selling to other emerging markets, but also the US market”.

Similarly, the strategic marketing director of BU#1 of Alpha company noted that: “Yes,

we have quite a few products developed in China for the Chinese market and now

selling into global markets. For example, more than 45% of our voice alarm products

have been selling outside China”.

4.6.4 Performance of Chinese Subsidiaries with Mixed Relationship (Asymmetrical

Distrust + Mutual Distrust): BU#3 and BU#4 of Alpha Company

Two of the three top Chinese subsidiary managers of BU#3 of Alpha company

felt trusted by the HQ without trusting in the HQ; the other perceived a mutually

distrusting relationship with the HQ. This is the same situation for the Chinese

253

subsidiary BU#4 of Alpha company. In other words, top Chinese subsidiary managers

in BU#3 and BU#4 of Alpha company had a mixed relationship with their respective

HQ managers: some felt trusted by the HQ while others felt distrusted, and none of

them trust in the HQ.

Local responsiveness. According to industry reports, the Chinese subsidiaries of

both BU#3 and BU#4 of Alpha company fell a little short of the top ten in terms of

market share in China. Respondents from these two subsidiaries reported that they

underperformed compared to some of their peers due to slower response to changes in

market trends and customer needs. For example, the Chinese subsidiary’s strategic

marketing director of BU#3 of Alpha company told us: “In terms of responding to local

market needs, we are faster than most of our European peers in China, but there is room

to improve compared to US and local Chinese companies”. Similarly, the Chinese

subsidiary general manager of BU#4 of Alpha company stated that: “We respond to our

local product requirements pretty quickly because we are empowered to use a 100%

local supply chain. But I think we need to improve our responsiveness to the overall

market trend change and expand our portfolio quicker”. Alpha company’s internal

documents (competitive analysis report) also showed that their Chinese subsidiaries

BU#3 and BU#4 had mediocre performance.

Subsidiary initiative. Chinese subsidiary managers from both BU#3 and BU#4

of Alpha company reported that they did not contribute much to global markets. “We

have no successful case of developing a new product for the Chinese market and then

selling it to other countries yet. But I am sure we will have some soon” (Chinese

254

subsidiary general manager, BU#3 of Alpha company). “We have sold some products to

India, because I have a small Indian team reporting to me and dedicated to selling these

products. Not much of anything else” (Chinese subsidiary general manager, BU#4 of

Alpha company). Alpha company’s internal document also revealed that Chinese

subsidiaries BU#3 and BU#4 did not conduct many initiatives that benefited global

markets.

In summary, as Figure 4.11 illustrates below, subsidiaries with a mutually

trusting relationship with the HQ were identified as high performers in both local

responsiveness and subsidiary initiatives, while subsidiaries with a mutually distrusting

relationship with the HQ performed poorly in both. We find it particularly interesting

that even though Alpha company’s BU#5 Chinese subsidiary managers did not have a

unanimous mutually trusting relationship with the HQ (only two had such a

relationship; the other three distrusted the HQ but felt trusted by the HQ), the level of

performance in local responsiveness and subsidiary initiatives was not different from

that of its Chinese subsidiary BU#1 of Alpha company, whose top managers had a

unanimous mutually trusting relationship with the HQ. These findings suggest that

subsidiary managers’ feeling of being trusted by the HQ plays a prominent role in

impacting the subsidiary’s performance, which is in line with the survey-based findings

of Qin and Healey (2017; Chapter Two this thesis). It seems that, in this case at least,

mutual trust is not necessary for a subsidiary to achieve high performance, whereas

feeling trusted by the HQ is more instrumental.

255

Figure 4.11. Performance Summary

4.7 Discussion

4.7.1 Implications for Theory and Research

Our results clearly showed that feeling trusted by the HQ was an important

antecedent of an effective HQ-subsidiary relationship that facilitates entrepreneurial

orientation in Chinese subsidiaries. Some of our respondents explicitly stated that

feeling trusted by the HQ was the most crucial factor impacting their decisions. It is a

necessary but not sufficient condition for the subsidiary managers to trust the HQ. It

was evident that none of our interviewees reported trusting in the HQ without feeling

trusted by the HQ first. The non-reciprocal nature of feeling trusted and trusting is

consistent with extant literature: our study provides empirical evidence to support that a

trusting relationship is neither mutual nor reciprocal (Brower, Schoorman, and Tan

2000; Brower et al. 2009). In addition to feeling trusted by the HQ as a prerequisite of

trusting in the HQ, we found strong support for the relationship between subsidiary

managers’ perception of being trusted by the HQ and entrepreneurial orientation. These

findings are an important extension to the trust literature, because prior research has

256

focused on the importance of trusting in managers (Dirks and Ferrin 2002), but an

empirical examination of feeling trusted by the HQ and trusting in the HQ in an HQ-

subsidiary context has been lacking to date.

Furthermore, our study shows that subsidiaries with a mutually trusting

relationship with their HQ demonstrated knowledge sharing between HQ and Chinese

subsidiaries, effective execution of HQ initiatives and an entrepreneurial orientation.

Entrepreneurial orientation is the most important aspect, because it improves

subsidiaries’ performance in terms of local responsiveness and subsidiary initiatives that

benefit the MNE as a whole. In contrast, subsidiaries with a mutually distrusting

relationship with their HQ suffered from barriers to knowledge sharing between the HQ

and Chinese subsidiaries, ineffective execution of HQ initiatives and a conservative

orientation. Conservative orientation manifested in subsidiary managers’ reactiveness,

non-innovativeness and risk-averse behaviour. The mutually distrusting relationship

caused Chinese subsidiaries’ poor performance in terms of local responsiveness and

subsidiary initiatives, resulting in low market share in China and a lack of contribution

to the overall MNE performance. These findings extend the subsidiary initiatives

literature and deepen our understanding of the determinants of subsidiary initiatives that

impact subsidiaries’ local responsiveness and MNEs’ overall performance. Prior

research has identified organizational contexts that prevent subsidiary initiatives

(Birkinshaw 1999, 1997b; Ambos, Andersson, and Birkinshaw 2010), but these studies

focused on HQs’ preferences without regard to subsidiary managers’ resistance to

pursuing entrepreneurial initiatives. Our results extend prior research on subsidiary

257

initiatives by demonstrating how the HQ-subsidiary relationship perceived by

subsidiary managers impacts their decision to pursue initiatives that benefit subsidiary

local responsiveness and the MNE’s overall performance.

4.7.2 Managerial Implications

In addition to theoretical contributions mentioned above, our findings suggest an

important implication for the management of MNEs. This study reinforces the

importance of considering subsidiary managers’ perception of being trusted by the HQ.

If the subsidiary managers do not feel trusted by the HQ executives, the potential

outcome of the HQ-subsidiary relationship cannot be maximized. Our results strongly

suggest that HQ executives learn to make their foreign subsidiary managers feel they

are trusted instead of trying to gain trust from them. Specifically, if Western MNEs

expect their Chinese subsidiaries to become more innovative, making their Chinese

subsidiary managers feel trusted by the HQ facilitates subsidiary entrepreneurial

orientation, which motivates fast local responsiveness and initiatives that also benefit

global markets. The benefit of making subsidiary managers feel trusted is evidenced by

the performance of BU#5, which achieved the same level of performance as

subsidiaries who had a mutually trusting relationship with their HQ. Another important

implication from the study is that a trusting relationship is interpersonal and is clearly

based on individual interactions. The same individuals can have completely opposite

relationships with their HQ managers. In our study, five of our interviewees managed

Alpha company’s two Chinese subsidiaries (BU#1 and BU#2) simultaneously. They

held the same positions in both BUs but managed two completely different HQ-

258

subsidiary relationships because their HQ managers for the two BUs were different. As

evidenced in our study, the performance of subsidiaries can vary significantly even if

they are managed by the same individuals. Hence, we feel secure in stating that, ceteris

paribus, trust plays a critical role in the HQ-subsidiary relationship. Furthermore, the

quality of this relationship significantly impacts the subsidiary’s performance in local

responsiveness and subsidiary initiatives, at least in the context of Western MNEs’

Chinese subsidiaries.

4.7.3 Limitations

While our multiple case studies advance our knowledge of the HQ-subsidiary

relationship through a detailed description of our respondents’ cognitive and symbolic

action, the data we have collected are all from managers of Western MNEs’ Chinese

subsidiaries in the diversified industrial manufacturing industry. This limits the

generalizability of our study in a traditional sense. While we believe our findings are

generalizable in similar contexts pertaining to the HQ-subsidiary relationship, further

exploration of MNEs’ subsidiaries hosted in different countries and different industries

is recommended for future studies.

In addition, our study focuses on revealing the process through which trust or

factors associated with trust express themselves in HQ and subsidiary interactions. Our

analysis indicates that differences in trust relationships create differences in

entrepreneurial orientation and subsidiary performance. However, this causality

inference could be challenged, because one may argue that high performance might lead

to better HQ-subsidiary relationships and subsidiary entrepreneurial orientation.

259

Therefore, we recommend longitudinal studies in future research to explore further the

causality of the relationships between these constructs.

4.8 Conclusion

In this article, we have provided the first qualitative analysis of the processes

revolving around trust in the HQ-subsidiary relationship. Specifically, we have

examined explanatory mechanisms of mutually trusting and mutually distrusting

relationship and their impacts on subsidiary performance in terms of local

responsiveness and subsidiary initiatives that benefit the MNE as a whole.

260

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Chapter 5

Discussion and Implications

In this research, I investigated the key factors underpinning the relationship

between the headquarters and subsidiaries of contemporary MNEs from the perspective

of subsidiary managers and how this perceived relationship influences the local

responsiveness and entrepreneurial initiative of subsidiaries. Understanding how this

relationship contributes to entrepreneurial activity at the subsidiary level has become an

important focus for practitioners and scholars, because MNEs increasingly rely on their

local market subsidiaries not only for revenue but also for learning and innovation

(Mudambi, Piscitello, and Rabbiosi 2014; Ambos, Andersson, and Birkinshaw 2010;

Ambos, Ambos, and Schlegelmilch 2006; Birkinshaw 1997b; Birkinshaw, Hood, and

Jonsson 1998b). In the present research, I sought to confront some of the traditional

assumptions of MNE theory by first reconceptualizing the HQ-subsidiary relationship

from a behavioural agency perspective and then gathering empirical evidence from the

field on the nature and consequences of the HQ-relationship. My overriding aim was to

provide new theory and research that extends current understanding of the HQ-

subsidiary relationship in contemporary MNEs.

In this chapter, I look across the three substantive articles reported in the thesis

and summarize the main findings and conclusions relative to my initial research

questions. I draw out the major implications for research and for practice, and consider

some limitations of the research.

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5.1 Summary of Findings and Contributions of the Research

My research began with the following research questions:

1. What types of HQ-subsidiary relationship facilitate the pursuit of

entrepreneurial initiatives by subsidiary managers?

2. What are the antecedents and consequences of an HQ-subsidiary

relationship that facilitates subsidiary entrepreneurial initiative, from

subsidiary managers’ perspective?

3. How does the HQ-subsidiary relationship influence local responsiveness

and subsidiary initiative that benefit MNEs’ global activities?

The three substantive articles reported in this thesis go some way towards

answering these questions. These chapters respectively: propose a new framework to

identify the key elements of the HQ-subsidiary relationship (Chapter 2); present

empirical evidence from Chinese subsidiaries of MNEs headquartered in the US and

Europe to test a series of hypotheses concerning the antecedents, manifestations and

consequences of subsidiary managers’ perceived HQ-subsidiary relationship (Chapter

3); and investigate in more detail the mechanisms through which trust—specifically

feeling trusted/distrusted by the HQ and trusting/distrusting in the HQ—influences

subsidiary managers’ perception of the HQ-subsidiary relationship, which in turn

shapes their decisions to pursue entrepreneurial initiatives that benefit both local

responsiveness and the MNE’s global markets (Chapter 4).

In the effort to answer the first research question, Chapter 2 theorizes from a

behavioural agency perspective, arguing that the ideal basis for an HQ-subsidiary

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relationship that facilitates subsidiary entrepreneurship and initiative is subsidiary

managers’ perception of a mutual trust. However, the survey findings from Chapter 3

highlight the importance of subsidiary managers feeling trusted over their trust in the

HQ, while the insights generated from high performing subsidiary respondents through

in-depth elite interviews reported in Chapter 4 seem to corroborate that the absence of

trust in the HQ is not as important as feeling trusted.

Building on the reconceptualized HQ-subsidiary relationship framework

developed in Chapter 2, the survey results reported in Chapter 3 support most of the

hypotheses developed and tested, but unexpectedly fail to support the proposed

relationship between trust in the HQ and subsidiary entrepreneurial culture. The detailed

qualitative data analysis reported in Chapter 4 sheds some light on how trust in the HQ

significantly influences OCB without playing a key role in facilitating EO at subsidiary

level. This insight complements the survey results reported in Chapter 3.

The findings from detailed interviews with the senior managers of high and low

performing subsidiaries reported in Chapter 4 show that the mechanisms through which

trust/distrust in the HQ-subsidiary relationship influence local responsiveness and

subsidiary initiative include entrepreneurial orientation, conservative orientation,

organizational citizenship behaviour and counterproductive work behaviour.

5.2 Implications for Research

The main implications for research concern the need for a greater emphasis on

the role of trust in the HQ-subsidiary relationship, the factors that lead to a subsidiary

entrepreneurial culture that facilitates local responsiveness and subsidiary initiative, and

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the mechanism and processes through which relational trust influences subsidiary

entrepreneurship and initiative. I also briefly consider the implications for research on

procedural justice in this context and highlight limitations of the research.

5.2.1 The Role of Trust in the HQ-Subsidiary Relationship

Our analysis of the HQ-subsidiary relationship sheds new light on the challenge

of effective MNE-subsidiary relationships for the twin imperative of achieving growth

in local markets and benefiting the MNE as a whole, enhancing the MNE’s resources

and capabilities and providing a mechanism for bottom-up knowledge creation and

transfer. Specifically, our analysis highlights the role of systems and practices that

support the development of trust in and trust of HQs, thereby fostering an

entrepreneurial culture and facilitating the development of an innovation-friendly

relationship. Our research suggests that MNE managers should pay greater attention to

relationship-building practices that might support the development of trust in the HQ

and feeling trusted by the HQ. Moreover, there is a clear need to understand better the

specific types of structure and practice that best support the development of a culture of

autonomous innovation among subsidiary managers, ranging from acceptance of risk

taking to rewarding innovative actions, creativity training, and management

development programmes focused on supporting innovation in others (Cooke 2013). In

addition, future research should examine which specific HR practices are most effective

for developing skills in explicitly managing the types of HQ-subsidiary relationship we

have identified.

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In Chapter 3, I provide empirical evidence focusing on the antecedents,

manifestations and consequences of the HQ-subsidiary relationship using a second-

generation multivariate technique, PLS-SEM. I find that procedural justice has a strong

predictive power of subsidiary entrepreneurial culture, which indicates that the higher

the perceived level of procedural justice by subsidiary managers, the higher the level of

subsidiary entrepreneurial culture. Previous empirical evidence shows that procedural

justice positively affects subsidiary managers’ commitment, trust and outcome

satisfaction (Kim and Mauborgne 1991). Hence, my new evidence extends our

understanding of the positive impacts of procedural justice on the HQ-subsidiary

relationship. Surprisingly, my results do not show a statistically significant relationship

between trust in the HQ and subsidiary entrepreneurial culture. This result is

counterintuitive, because there was ample previous empirical evidence supporting

positive outcomes of trust in international business and HQ-subsidiary contexts (Dirks

1999; Brower et al. 2008; Hewett and Bearden 2001; Harvey et al. 2005).

However, I find evidence that subsidiary managers’ perception of being trusted

by the HQ plays an important role in influencing subsidiary entrepreneurial culture.

Feeling trusted is an under-studied but similar construct (often confused with trust).

Baer et al. (2015) argued that feeling trusted is a double-edged sword, providing

empirical evidence that it had a negative impact on job performance. While Baer et al.

(2015) empirical evidence shows that feeling trusted negatively impacts routine job

performance, my results indicate that the risk-fostering nature of feeling trusted plays a

more important role in facilitating subsidiary entrepreneurial culture. This implies that

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feeling trusted plays different roles in different contexts, and the positive side of this

construct prevails in an environment that demands unscripted and creative actions.

Further post-hoc analysis on subsidiaries with world mandates provides stronger

evidence that subsidiary managers’ perception of feeling trusted by the HQ fosters

subsidiary entrepreneurial culture.

5.2.2 Subsidiary Entrepreneurial Culture, Local Responsiveness and Subsidiary

Initiative

Chapter 3 provides empirical evidence that subsidiary entrepreneurial culture

has a strong influence on local responsiveness and subsidiary initiatives that benefit the

MNE as a whole. This study is the first to examine the relationship between the internal

contextual environment and local responsiveness. Birkinshaw, Hood, and Jonsson

(1998b) study examined the predictive relationship between entrepreneurial culture and

subsidiary initiative, and their empirical evidence moderately supports this relationship.

The empirical evidence provided in Chapter ,3 however, indicates significantly stronger

support for this proposed predictive relationship. Hence, this study extends our

knowledge of the extant literature on subsidiary entrepreneurial culture through new

empirical evidence.

An important insight from our findings in Chapter 3 is that subsidiary

entrepreneurial culture facilitates subsidiaries’ local responsiveness. Previous studies of

local responsiveness focused on the influence of the host country’s environmental

complexity, industry structural factors and firms’ established network (Birkinshaw,

Morrison, and Hulland 1995; Luo 2001). This thesis provides empirical evidence to

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illustrate how internal contextual factors like subsidiary entrepreneurship influence

local responsiveness. Willingness to take risk has been identified in Chapter 4 as one of

the consequences of feeling trusted by the HQ, and previous study has shown that risk

taking is an important element of entrepreneurial culture (Kuratko et al. 1990). This

thesis therefore links feeling trusted by the HQ with subsidiary entrepreneurial culture.

Extant literature has widely acknowledged that subsidiary entrepreneurship

promotes subsidiary initiatives (Birkinshaw and Hood 1998; Rugman and Verbeke

2003; O'Brien et al. 2018; Scott, Gibbons, and Coughlan 2010). However, the empirical

evidence supporting a direct relationship between subsidiary entrepreneurship and

subsidiary initiative has been lacking. This thesis provides strong empirical evidence to

illustrate the mechanism through which subsidiary entrepreneurial culture facilitates

subsidiary initiative.

5.2.3 Mechanism and Processes of Relational Trust

In Chapter 4, I examine how HQ-subsidiary interactions affect subsidiary

managers’ perceptions of feeling trusted/distrusted by the HQ and trust/distrust in the

HQ through identifying the antecedents and consequences of these four constructs using

data collected by in-depth interviews and following Miles and Huberman (1984)

interactive approach for data analysis. The analysis identifies that four types of

relationship should conceptually exist between subsidiaries and HQ managers, namely

feeling trusted by the HQ without trusting the HQ back; trust in the HQ (without feeling

trusted by the HQ); mutual trust; and mutual distrust. However, the data indicate that

there are only three types of HQ-subsidiary relationship (based on subsidiary managers’

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perception of the trust/feeling trusted dimensions) in the MNEs I interviewed, and not

one interviewee trusted in the HQ without feeling trusted by the HQ. In addition, my

data indicate that in a relationship where the subsidiary manager feels trusted by the

HQ, subsidiary managers demonstrate EO, while both EO and organizational

citizenship behaviour exist in the mutually trusting relationship, and both CO and

counterproductive work behaviour exist in the mutually distrusting relationship.

Consistent with previous empirical evidence that a trusting relationship is

neither mutual nor reciprocal (Brower, Schoorman, and Tan 2000; Brower et al. 2009),

my analysis provides further evidence and detailed mechanisms of how trust motivates

subsidiary managers to pursue entrepreneurial opportunities. In addition, the interview

data also indicate that feeling trusted by the HQ is a prerequisite of trusting in the HQ,

which extends our knowledge on the trust literature. I suggest further research to focus

on this topic to understand if this is a culture-related issue.

Further analysis shows that mutually trusting subsidiaries perform well in terms

of local responsiveness and subsidiary initiatives, while mutually distrusting

subsidiaries have significantly lower performance in both. Prior research has identified

organizational contexts that prevent subsidiary initiatives (Birkinshaw 1999, 1997b;

Ambos, Andersson, and Birkinshaw 2010), but these studies focused on HQs’

preference without regard to subsidiary managers’ resistance to pursuing

entrepreneurial initiatives. Chapter 4 extends the understanding of subsidiary initiatives

by illustrating how subsidiary managers’ perceived HQ-subsidiary relationship impacts

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their decision to pursue initiatives that benefit local responsiveness and the MNE’s

overall performance.

5.2.4 The Role of Procedural Justice

Chapter 2 has conceptually identified procedural justice as one of the key

elements of the HQ-subsidiary relationship, and Chapter 3 has provided empirical

evidence to support this hypothesis. However, Chapter 4 did not focus on the

mechanisms through which procedural justice might influence subsidiary

entrepreneurship or how it might affect performance, since the standardized processes

of the business studied minimized variations in procedural justice. Therefore, I suggest

future studies should focus on exploring the influence of procedural justice in contexts

where there is greater latitude for variations in procedural justice to affect subsidiary

innovation and performance.

5.3 Limitations

This study has some important limitations. Firstly, all data were collected from

subsidiary managers. While subsidiary managers’ perceptions are more important for

some constructs, this might have created some bias in others. Collecting the HQ

perspective in future studies is recommended. Secondly, focusing on Chinese

subsidiaries limits generalizability. While examining evidence from the largest

emerging market makes a significant contribution for the practitioners, different

dynamics of the HQ-subsidiary relationship should be expected if the HQ and

subsidiaries reside in countries with less cultural distance, and this should be a focus of

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future studies. Thirdly, this study does not examine the antecedents of procedural justice

in the HQ-subsidiary relationship; nor does it reveal the mechanisms through which

procedural justice influences subsidiary entrepreneurship. Finally, this thesis has

identified the key elements and mechanisms that facilitate an effective HQ-subsidiary

relationship that motivates subsidiary managers to pursue entrepreneurial opportunities

when they are encouraged by their HQ managers to do so. The encouragement of

subsidiary initiative could be viewed as a type of subsidiary autonomy because HQs are

intentionally providing subsidiaries with a certain level of freedom to conduct proactive

activities beyond their formally assigned authority (Sandvik 2010). However, the

current study has not considered the influence of different types of subsidiary autonomy

might have on HQ-subsidiary relationship. Specifically, are there different levels of

autonomy that HQ assign to subsidiaries? How do different types of subsidiary

autonomy influence subsidiary managers’ perception of the HQ-subsidiary relationship?

How does that perception influence subsidiary managers’ attitude and behaviour

towards the development of subsidiary initiatives? I therefore recommend that future

studies focus on these areas to further our understanding of this topic.

5.4 Implications for Practice

As a practitioner, I have been working as an executive in Chinese subsidiaries of

Western MNEs for the last 15 years and have witnessed the evolution of MNEs in this

emerging economy. China started as an attractive market place with a large demand for

advanced technological products developed by foreign MNEs. During this period,

MNEs could easily serve the unmet needs through establishing Chinese subsidiaries and

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selling imported products developed and made outside China. The main competition

was among MNEs’ Chinese subsidiaries without much threat from local competitors,

and the subsidiaries’ top management positions were mostly occupied by expatriates

due to a lack of local Chinese management talent in the early stage of an emerging

market. Therefore, in an environment of high demand for foreign products and lack of

local management talents, MNEs’ Chinese subsidiaries’ role was somewhat limited to

executing HQ directives while HQ managers focused on control to ensure subsidiary

compliance. Hence, in that period of time, the HQ-subsidiary relationship represented

an HQ-controlled relationship: subsidiary managers did not pursue many

entrepreneurial initiatives and HQs’ encouragement of those initiatives was low.

5.4.1 Implications for subsidiary managers

As the Chinese market economy matured over the years, many local competitors

started to surface and compete with MNEs’ Chinese subsidiaries. They became a

disruptive force in the Chinese market by offering low cost but good enough products

and solutions to satisfy Chinese customers’ fast-changing needs. At the same time,

MNEs’ Chinese subsidiaries were maturing, with increased local management talent

and experience in the world’s largest emerging market. In response to the increased

competitive pressure from local Chinese companies, MNEs’ subsidiaries in China tried

to pursue initiatives beyond the HQ’s directive. For example, some of them started to

seek alternative sources for non-critical parts of the imported products locally; others

tried to develop Chinese versions of the imported products and convince HQ to move

some of the production lines to China. These localization efforts represented early

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stages of subsidiary initiatives in China. However, most of these initiatives were

perceived negatively by MNEs’ HQs. Some of them perceived these initiatives as their

subsidiaries trying to build an empire and worried about their subsidiaries getting out of

corporate control. Specifically, they were concerned about intellectual property being

stolen, product quality being compromised, company brand image being damaged, core

business being cannibalized, etc. In short, in a maturing Chinese market economy, local

competition intensified, and MNEs’ Chinese subsidiaries started to pursue initiatives in

order to respond quickly to the fast-changing market dynamics; MNEs’ HQs did not

recognize the necessity for these subsidiary initiatives and, instead of encouraging them,

they suppressed them. Therefore, in that era for MNEs in China, the HQ and

subsidiaries exhibited an explicitly conflicting relationship: subsidiaries were eager to

pursue entrepreneurial initiatives, but the HQ’s encouragement of that was low.

As Chinese companies have grown over time, they have become not only strong

competitors for MNEs’ subsidiaries in China but also a serious threat to MNEs’ global

markets. There is no lack of examples of Chinese companies becoming global market

leaders in their specific industries in the modern era. MNEs have come to the realization

that HQs do not dominate great new ideas and have no monopoly on knowledge

(Birkinshaw and Hood 2001). After HQs realized that they could not compete

effectively with Chinese companies using global offerings developed in their home

countries, they started to encourage and expect their Chinese subsidiaries to innovate in

the areas of new product development and business model change. However, this thesis

has shown that it might not be a good idea to assume subsidiary managers’ willingness

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to pursue entrepreneurial initiatives based only on HQs’ encouragement or expectation.

In addition to a mindset change, HQ executives need to demonstrate a set of new

behaviours that truly motivate their Chinese subsidiary managers to form a bilateral

initiative HQ-subsidiary relationship, so that subsidiary managers pursue

entrepreneurial opportunities when HQ encourages them to do so. Otherwise, without

HQ managers implementing motivating practices, HQs and subsidiary managers enter

upon an implicitly conflicting relationship, where subsidiary managers disregard HQs’

expectations and refuse to pursue subsidiary initiative without being noticed.

Taken together, in an era in which modern MNEs’ headquarters expect creative

and genuinely innovative ideas emerging from foreign subsidiaries, the findings from

this thesis highlight the prominent role that trust in the HQ-subsidiary relationship plays

in motivating subsidiary managers to generate these ideas, turn these ideas into

executable business opportunities, and pursue these opportunities in an entrepreneurial

way. As Birkinshaw and Hood (2001) stated and the evidence from this thesis

illustrates, it is not enough simply to ask subsidiary managers to be innovative. HQ

managers need to behave in a way that motivates and facilitates subsidiary managers to

pursue entrepreneurial initiatives. This thesis demonstrates that when subsidiary

managers (subordinates) believe they are trusted by their HQ managers (managers),

they are more proactive, more willing to take risk and more innovative in their jobs.

Therefore, while previous literature recommends that managers make efforts to gain

trust from subordinates (e.g., Mayer and Gavin 2005), I suggest that it is in the best

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interest of HQ managers to improve subsidiary managers’ perception of being trusted

through empowering and explicitly recognizing their values in the organization.

Figure 5.1 illustrates a virtuous cycle that HQ managers can establish through

acting in a trusting manner, and empowering and valuing subsidiary managers. The

evidence from this thesis shows that when HQ managers demonstrate behaviours that

empower and value subsidiary managers, it stimulates subsidiary managers’ proactive,

innovative and risk-taking behaviours because they feel trusted by the HQ.

Figure 5.1. Virtuous Cycle of HQ-Subsidiary Relationship

When the key subsidiary managers behave in a manner that is proactive,

innovative and risk-taking, the subsidiary becomes an innovation-motivated subsidiary

which performs well in local responsiveness and conducts initiatives that benefit the

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global markets the MNE serves. HQ managers will then perceive this subsidiary as high

performing and trustworthy. This positive perception then allows HQ managers to

continue to empower individual subsidiary managers and value their contributions. This

process repeats itself to become a virtuous cycle in which HQ managers’ motivating

behaviour leads to subsidiary managers’ perception of being trusted, which encourages

them to behave in an entrepreneurial manner that results in subsidiaries’ high

performance, which, in turn, increases HQ managers’ perception of these subsidiary

managers’ trustworthiness and makes them more comfortable about continuing to

behave in a way that encourages subsidiary managers to pursue entrepreneurial

initiatives at the subsidiary level.

5.4.2 Implications for HQ Executives

The necessity of innovating at subsidiary level has been widely recognized

today, but successfully achieving it requires HQ managers to act in a trusting way with

their respective subsidiary managers. Firstly, it is suggested that HQ executives lead

through empowering, not managing through controlling processes. Instead of tightening

the internal system, delegating more authority to local subsidiaries is recommended to

motivate subsidiary managers to pursue initiatives beyond specific corporate directives

and to feel accountable for the results. This is especially important in large emerging

economies (e.g. China) due to the complexities of the market. HQ executives must

strike a balance between process control and granting sufficient local decision-making

power. When executives focus on managing the process instead of the results from

headquarters, which is distant from the local market in both the physical and the cultural

292

sense, the subsidiary managers may choose simply to tell HQ whatever they want to

hear, because some of the real issues might be too difficult to explain due to their

complexity and lack of concrete supporting data. Entrepreneurial initiative, by

definition, has a great deal of uncertainty, especially in the early stages. Requiring

subsidiary managers to project and sometimes even commit to certain progress at each

stage of an initiative, which is what the reporting process demands, suppresses

subsidiary managers’ willingness to pursue subsidiary initiative because it makes

subsidiary managers feel micro-managed and distrusted. In contrast, when HQ

managers delegate more decision-making authority to subsidiaries, subsidiary managers

feel trusted and have a sense of ownership, which motivates them to explore and pursue

more initiatives in new product development and business model innovation.

Secondly, it is recommended that HQ executives show their appreciation of

subsidiary managers’ judgement and agree with them explicitly whenever appropriate.

It encourages more creative ideas when subsidiary managers feel their judgements are

valued without a need to back up their initial proposals with hard evidence of success,

because that evidence simply does not exist. HQ managers need to feel comfortable

living with ambiguity when managing subsidiaries in China, because that is what

Chinese subsidiary managers have to deal with every day. Well-structured market data

are usually available in mature markets but are not so common in a fast-changing

emerging economy. Subsidiary managers may hesitate to propose new initiatives if they

know their HQ executives demand high certainty by asking for back-up data that do not

exist.

293

Developing an informal communication channel with subsidiary managers could

be an effective way to gain more insights into subsidiary initiatives without being

perceived as distrusting. Subsidiary managers might be more willing to communicate

difficult issues in an informal setting than in formal business reviews. During these

informal conversations, HQ managers should try to encourage subsidiary managers to

talk about the uncertainties of the new opportunities they are currently pursuing and

should not hesitate to let the subsidiary managers know that HQ is willing to assume the

same risk and support these initiatives in a trial and error fashion. Again, it is important

to make subsidiary managers feel trusted by the HQ before they will be willing to take

necessary risks in pursuing initiatives.

In sum, instead of making efforts to gain subsidiary managers’ trust, HQ

managers should focus on empowering and valuing subsidiary managers. I make this

recommendation for two main reasons. Firstly, the evidence of this thesis shows that

subsidiary managers will not trust in the HQ managers if they do not feel trusted by the

HQ. Secondly, some factors that impact subsidiary managers’ trust in the HQ are out of

the HQ manager’s control. For example, a new HQ executive who comes from a

different industry might be perceived as having a lack of domain knowledge and might

not be trusted by subsidiary managers. However, empowering and valuing subsidiary

managers is within the control of the HQ managers and is an effective way to establish a

virtuous HQ-subsidiary relationship cycle.

294

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