Parenting Advantage in the MNC: An Embeddedness Perspective on the Value Added by Headquarters

Phillip C. Nell on his article in Strategic Management Journal

What determines the value a headquarters of a Multinational Corporation (MNC) adds to its own affiliates? In a recent article published in Strategic Management Journal, SMG faculty member Phillip C. Nell, together with Björn Ambos of the University of St. Gallen, shed light on this issue.

Phillip C. NellThe question of headquarters value added is not trivial. Multibusiness firms often struggle with the challenge of organizing their headquarters in an effective and efficient way. Headquarters can add substantial value to their subunits, for example, by sharing knowledge with subunits, creating synergies, or challenging subunit strategies. In such cases, headquarters create what is called “parenting advantage”. On the other hand, large overheads and misguided headquarters initiatives can destroy value. Obviously, such problems expand in situations where headquarters attempt to manage an increasingly complex network of subunits.

The authors are studying the issue of headquarters value added specifically in the MNC … “because MNCs can be considered one of the most complex organizations which makes headquarters value added such a difficult undertaking”, Phillip Nell says. In fact, headquarters in MNCs are challenged by geographic separation from their dispersed subsidiaries as well as cultural, administrative, and economic differences. MNC subsidiaries also often “embed” themselves in their local environments, that is, they develop close, intense relationships with local partners, such as local customers and suppliers. But how does such complexity relate to the ability of headquarters to add value? Does the local embeddedness of subsidiaries help explain headquarters value added? And what can MNC headquarters do? Does it help if headquarters create their own linkages to the subsidiaries’ local partners (called “headquarters local embeddedness”) to increase the headquarters knowledge and understanding of the subsidiary’s context?

Based on a dataset of MNC subsidiaries in Europe, the authors find support of the view that subsidiaries’ local embeddedness poses a problem for value-creation attempts by headquarters. Furthermore, they find that headquarters own linkages to the subsidiary’s network is positively associated with headquarters value added and that the strength of this relationship increases as the level of subsidiary embeddedness rises. They also report that headquarters refrain from embedding themselves locally in situations when doing so seems too costly.

Two practical implications

First, the study emphasizes that headquarters still play an important role even within very complex and geographically dispersed organizations as MNCs. MNC headquarters can add value to their subsidiaries under such challenging conditions by taking on an active role, dispersing their locus of activity, and embedding themselves in their subsidiaries’ networks. This generates the necessary greater feel for the local operations which, in turn, enables the headquarters to channel the most relevant know-how to the subsidiaries or to avoid misguided synergy initiatives. “Knowledge and understanding of the operating context of their subsidiaries is key for creating value” says Phillip Nell.

Second, while the study confirms that complexity does make parenting more difficult, it shows that mechanisms exist to overcome these difficulties. As these mechanisms are costly, parents use them selectively. Phillip explains “Managers need to realize the difference between the value that they can create for a particular subsidiary and the net value added that also takes into account the costs of the headquarters’ operations and activities. We show that headquarters can add substantial value even for distant and locally embedded subsidiaries. But in order to do so the very costly mechanism of building up knowledge and understanding of the subsidiary’s operating context is required. In the end, headquarters might be better off when they accept that they don’t add value to some of their subsidiaries instead of trying hard to create value for all of them“.

Nell, P. C., Ambos, B. (2013): “Parenting Advantage in the MNC: An Embeddedness Perspective on the Value Added by Headquarters”. Strategic Management Journal. DOI: 10.1002/smj.2058

View more research and discussions by Phillip C. Nell here:

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