Headquarter-subsidiary relationship : an empirical study in the country of Kingdom of Saudi Arabia

This thesis is an empirical investigation into the control mechanisms of headquarters (HQ) exercised over their subsidiaries and is conducted with the help of primary data collected from 147 Multinational Enterprises (MNEs) operating in the kingdom of Saudi Arabia (KSA). Following on from the literature review, this study proposed that the headquarters-subsidiary mechanisms could be linked to agency theory (with the 'classical' principal-agent relationship as its core) and to resource dependency theory (implying relations between the subsidiary and other partners based on interdependence). Our results show that the agency and resource dependency mechanisms are indeed used side by side and complementary to each other to exercise control. The Headquarters-subsidiary model used in this study has four components of control in it: personal centralised control (PCC), bureaucratic formalised control (BFC), output control (OUT) and informal control (INFO). These controls (as an agency mechanism) provide a solid platform on which other mechanisms can be built. The complementarities of these control mechanisms may be linked to earlier studies that show that successful organisations combine tight control with more open, informal and flexible information and communication exchanges. A focus that bends too much towards formal control or too much towards informal control may threaten a company's existence. Our research provides an empirical explanation on this premise. The study found that Anglo-Saxon countries heavily use impersonal types of control mechanisms, specifically bureaucratic formalised control and output control. Compared to the US, the level of control in Oriental subsidiaries is less; or, put differently, the latter enjoy a greater degree of autonomy than US subsidiaries. Once a unit is operational, Oriental parent companies grant many more degrees of freedom than US parent companies. When we deconstructed the results for Europe, comparing German and British MNEs as a group to Oriental MNEs, we found that the latter exercised greater overall control. With regard to output and bureaucratic control, we found that both US MNEs and those from the Middle East exercised greater control than Oriental MNEs. The study drew the aspect of international transfers into the picture and investigated the role of expatriates in controlling subsidiaries. It has been recognised that expatriates can form both direct and indirect means of control. In executing direct types of control, expatriates directly supervised decisions taken at subsidiaries. The study found that this role is particularly strong in MNEs from Asia-Pacific countries and German MNEs, and is much less important in subsidiaries of Anglo-Saxon MNEs. We found that subsidiaries of German MNEs experienced a very high level of control; indeed, the only control mechanism that German MNEs did not implement among subsidiaries was control by socialisation and networks. German and Japanese MNEs are perhaps more rooted in business systems concerned with the management of issues internationally than American or British companies. The second group reflected that Anglo-Saxon countries heavily used impersonal types of control mechanisms, specifically bureaucratic formalised control and output control. When we deconstructed the results for Europe, comparing German and British as a group to Oriental MNEs, reveals the latter as possessing greater overall control. With regard to output and bureaucratic control, we found that both US MNEs and those from the Middle East exercised greater control than Oriental MNEs. Headquarters can strategize to implement control by the informal and social means method by positioning a sizeable number of managers from the home country within the subsidiary. Indeed, our results revealed this as true. It seems that their presence has positive and significant effects on most levels of control: personal, output, bureaucratic and informal. Contrary to this, however, we found that the presence of a sizeable number of expatriates (as opposed to headquarters managers) leaded to greater autonomy in subsidiaries. In terms of strategy and structure, we indicated that the three distinct organisational models identified for MNEs could be recognised in our study. Control INFO was significantly, positively related to global strategy, multi-domestic and transnational strategy compared with PCC, BFC, and OUT control mechanism. Conversely, BFC had a significant, negative and weak relationship with global strategy and transnational strategy, and no relationship with multi-domestic strategy. In general however, we can deduce the existence of a tendency for global, transnational and multi-domestic MNEs to use indirect control mechanisms and informal control suited to their integrated organisational models to a larger extent. Our results confirmed previous studies in the field of organisation theory, in the sense that size is an important explanatory factor for differences in control mechanisms. In contrast to these studies, however, a dominant effect was found only for the indirect control mechanisms. Few detailed studies that have investigated the effect of size on the two indirect control mechanisms; in actuality, most previous studies have focused on the direct control mechanisms (personal centralised control and bureaucratic formalised control) only. As such, our study reconfirmed the importance of the variable size, but concluded that it is mainly associated with higher levels of indirect control. The age of the subsidiary does not seem to have a significant influence on the type of control mechanism that is exercised by headquarters towards a particular subsidiary. Our study investigated the importance of various MNE characteristics in an attempt to explain performance differences between MNEs. The advantage of this study is that many of the characteristics that have been identified in previous literature as being important factors influencing performance were included in our research design, in order for us to be able to answer the other research questions. This therefore allowed us to assess the relative importance levels of different variables in explaining performance differences between companies, such as: country of origin, industry, size, interdependence, local responsiveness, knowledge flows, and the strategy and structure of the MNEs.