Roles of Subsidiaries to Parent and Motivations Justifying Their Presence in Developing Countries (DCs): Synthesis of Literature

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iBusiness, 2013, 5, 123-127

http://dx.doi.org/10.4236/ib.2013.53B026 Published Online September 2013 (http://www.scirp.org/journal/ib) 123

Roles of Subsidiaries to Parent and Motivations Justifying

Their Presence in Developing Countries (DCs): Synthesis

of Literature

Alexis Abodohoui1, Bolarinwa Osunlalu2, Nie Guihua1

1School of Management, Wuhan University of Technology, Wuhan, China; 2United Nations Economicand Social Commission for

Asia and Pacific.

Email: abodohouialexis@yahoo.fr, [email protected], [email protected]

Received July, 2013

ABSTRACT

This paper reviews different policies and looks in some detail at the factors influencing the choice of development of

subsidiaries in developing countries. It shows also that the subsidiaries play an important role to the MNC units. We

review in this paper some of motives for international transfer, control, coordination, investment, and development of

new capability. This research highlights the peculiarities in African business world and improves the strategies about

the optimization of the investment in developing countries.

Keywords: Subsidiaries; Parent; Motivations; Developing Countries

1. Introduction

The strategic decision of internationalization has been an

undermined subject matter that continues to fuel the field

of knowledge in International Management. Several de-

terminants may be taken into account in the choice of

entry of the company in the international market. These

factors whether order micro or macro-economic partici-

pate in the creation of one or more subsidiaries abroad.

Indeed, for many economic and strategic reasons related

to the development and business management, such as

access to a new markets and growth, companies often

create ramifications of their entity at various points of a

territory or abroad.

The development of these subsidiaries is crucial for

multinationals. At the heart of a period of economic tur-

bulence, globalization and the new division of Labor,

several multinationals companies adopt a plethora of

strategies to operate in the international markets. It is a

fact, on the one hand that many researchers in the field of

International Management, agree to admit that subsidiar-

ies play a crucial role in the development of multina-

tional and can be considered as a center of excellence

[2,3,18]. This idea draws its essence from the various

theories on the chang ing roles of subsid iaries in time and

space. On the other hand, we also identified in the litera-

ture minimal research on the main motivations of multi-

nationals over their implementation in developing coun-

tries [10]. While empirical studies have shown that sub-

sidiaries in developing countries facilitate knowledge

transfer from in dustrialized countries to develo ping ones,

others argue that it is more specifically the use of natural

resources for the benefit of the parent, minimization of

production costs, or the penetration into new markets[10].

Thus, we seek to synthesis and discover the actual roles

and motivations of multinationals in developing coun-

tries. Seemingly, the reality in these theories remains

ambiguous, contested and does not guarantee the role of

subsidiaries in economic growth and sustainable devel-

opment as deemed desirable in developing countries.

To do this, we will first spend the first part about the

relationship between the parent has with its subsidiary

after a broad definition of both concepts. Then we exam-

ine the motivations underlying the establishment of sub-

sidiaries in developing countries for the multinationals

and the host countries in order to generate positive ex-

ternalities. Finally, our last part will allow us to open up

opportunities for future research that will feed this field

untouc hed resear ch.

2. Conceptualization of Multinational and

Subsidiary

To better understand the two concepts it is imperative to

offer a clear definition. Prosaically, the subsidiary is a

company with at least half of the share capital is owned

by another company. This participation enables the par-

ent company to exercise control over the company. The

Roles of Subsidiaries to Parent and Motivations Justifying Their Presence in Developing Countries (DCs):

Synthesis of Literature

124

subsidiary is generally regarded as company with a per-

centage of the share capital belongs to a company called

parent. The subsidiary is above all a company with legal

personality, which can take various legal forms. It is

therefore important to distinguish the subsidiary from

and the branch is "any commercial establishment in the

dependence of a principal business of which he is legally

part, has a sustainable manner, in separate rooms, an ac-

tivity similarly, enjoying a certain autonomy in the eco-

nomic and business world. The branch does not have

legal personality. A multinatio nal, transnational or paren t

is a company established in several countries through

subsidiaries; it owns all or part of the capital. In the re-

cent literature, the multinational is increasingly seen as a

global network of subsidiaries scattered, poorly differen-

tiated and controlled from the parent. Other authors de-

fine it as "a group of geographically dispersed organiza-

tions with different goals and that includes the headquar-

ters and the different national subsidiaries" [15].

A multinational organization is one that operates in a

global environment on the one hand, with a need to co-

ordinate its remote operations. On the other hand, it also

consists of a set of organizations that operate in different

national environments. These definitions lack precision

that can only be perceived by linking the two concepts.

3. Relationship between the Subsidiary and

its Parent

Compared to the relationship parent / subsidiary, the lit-

erature has focused on specific factors such as the level

of autonomy, formalization, control and their impact

performance of the subsidiary. Subsidiaries play very

diverse roles in the multinational. Subsidiaries involved

in the transfer of resources (knowledge, financial and

material). Table 1 allows us to better identify the rela-

tionship or dependency ratio and / or interdependence

between the parent company and its subsidiary. The sub-

sidiary - parent relationships can be viewed from the

perspective of agency theory. Management headquarters

(the principal) implements controls the management of

the foreign subsidiary (the agent) to prevent it takes do

not conform to its own interests decisions.

4. Summary Evolution of Internal and

External Roles of Subsidiaries

Until recently, multinational innovations come from the

North to the South and in tu rn the parent company to the

subsidiary. However, business development and interna-

tionalization unprecedented firms today allow us to say

or assert that this innovation is multidimensional and

multi-platform. They also emanate from the affiliate of

the multinational and even the external environment of

the production units or services. In support of this idea,

several authors have argued that the existence of the

house depends on its ability to internal knowledge man-

agement and external market mechanisms [11]. The sub-

sidiary is seen as a center of excellence for its place in

the development of activities within the multinational.

This pole is defined as an organizational unit that in-

cludes a set of capabilities explicitly recognized by the

company as an import source of value creation, with the

intention that the supreme capabilities can be exploited

and / or broadcast by the other parties of firm [14]. The

following table allows us to understand and identify the

different roles of the subsidiary in the capacity of the

parent company.

Table 1. Degree of relationship between parent and subsidiary.

Perspective Definition Relationship

Competitive Advantage The multinational is a competitive advantage by locating and

coordinating overseas activities of its value chain [22]. Coordination

Logic of Production A multinational is company with production units of goods and services in more than one

country abroa d [17]. Ownership

Cultural and

Sectorial diversity A multinational works in more environments and responds to a complex set of factors:

multiculturalism, geographical dispersion of its units and the disparity of its objectives [1]. Dispersion cultural,

geographic and strategic

Turnover Multi-nationality is based on the percentage of foreign sales to total sales of the entity, the

percentage of foreign assets to total subsidiaries Productivity

Organization and

Management

For [21], multinational may be ethnocentric (now turned to his country), polycentric

(the company implements its subsidiaries in many countries) or geocentric (the implements

business-orien ted gl oba l m ark et considers s ub si di a ri es as a whole). Multinationals are

characterized by a distribution of resources and delegation of responsibilities to

subsidiaries in the host country [17].

Degree of process ing and

distribution of resources

Foreign Direct

Investment (FDI)

Multinational company is holding any direct investments in at least two foreign countries,

actively managing the international operations and consi der s t hem an integral part of all its

operations [15

Management and control

of international operations

Knowledge Transfer The company has been presented as a vehicle for organizational learning and organizational

knowledge accumulation [13]. Mutual transfer of

organizational practices

Roles of Subsidiaries to Parent and Motivations Justifying Their Presence in Developing Countries (DCs):

Synthesis of Literature 125

They also emanate from the affiliate of the multina-

tional and even the external environment of the produc-

tion units or services. In support of this idea, several au-

thors have argued that the existence of the house depends

on its ability to internal knowledge management and ex-

ternal market mechanisms [6-11]. The subsidiary is seen

as a center of excellence for its place in the development

of activities within the multinational. Th is pole is defined

as an organizational unit that in cludes a set of capabilities

explicitly recognized by the company as an import

source of value creation, with the intention that the su-

preme capabilities can be exploited and / or broadcast by

the other parties of firm [14].

The Table 2 allows us to understand and identify the

different roles of the subsidiary in the capacity of the

parent company.

5. Paradoxical Motivations in Developing

and Emerging Countries and Emerging

In the country as a whole is generally a foreign invest-

ment component of strategic development. This means

that foreign investment in a country generate cash flow

and can act as an economic catalyst. It is obvious that

investment promotes the transfer of technology and sk ills

and also participates in the formation of human capital.

The subsidiary of a multinational can be a facilitator for

the introduction of new forms of dynamic management.

These investments therefore encourage many benefits

or externalities (spillovers) to the host country. External-

ities are mainly indirect effects that benefit local busi-

nesses when they are not fully captured by the foreign

investor.

Recent studies by the United Nations (Table 3) and

specifically specialized institutions such as the United

Nations Development Program (UNDP, 2011) and the

United Nations Conference on Trade and Development

[26] have shown that FDI has increased in developing

countries but show that the main driver of these invest-

ments is the research or the need for natural resources.

Table 3 above gives an overview on the distribution of

FDI in developing countries. These improvements are the

results from the regulations in the country of origin of

investment, the liberalization of the capital account,

signing agreements on trade, investment and taxation and

various incentives.

Table 2.

Roles Determinants Theoretical Perspectives and Visions

Absorptive capacity of knowledge, transfer of good

practices between the subsidiary and the parent to

stimulate innovation

Theories based on resources[23-18 -28]. Economic transaction costs [27]

Transfer of Knowledge and Skills [16-3-14-28]

Exploitation of existing advanta ges and seeking the

acquisition of new benefits and new capabilities Prospecting and Performance [20-24].

Internal

Communication (in all forms) inter-subsidiary and the

parent company, determination and goals set by the

parent company to the subsidiary Achievement of the main objectives of the subsidiary [5-6].

External

Recruitment of qualified personnel, access to foreign

talent and differentiated technologies, increasing

proximity to customers, d e v el o pment of new products,

legal incentive

Market factors [8-9].Technological factors [14]. Institutional factors [7].

Table 3. Share of FDI projects by BRIC countries, by host region, average 2005–2007 (pre-crisis period) and 2011 (Per cent).

Source: UNCTAD, FDI / TNC database.

Roles of Subsidiaries to Parent and Motivations Justifying Their Presence in Developing Countries (DCs):

Synthesis of Literature

126

The real paradox is that these investments are accom-

panied by a real economic development of countries.

There are other incentives factors that lead firms to locate

developing countries are summarized in Table 4 below.

It is clear that developing countries put in a great deal of

efforts in order to promote the development of subsidiar-

ies in the country but the real motivations of investors are

often far from reconciled with those of national hosting

subsidiaries

6. Discussions and Future Research

Since the 80s, several strategies have been undertaken to

conquer the international market. Sometimes it may be

from the same subsidy policy from the country of origin

of the company or incentive on the part of host country

policies in order to attract the investment. The general

finding for understanding the subsidiaries in developing

countries are more driven by the creation of competitive

advantage and provide centers of excellence for the eco-

nomic development of the parent company. Many re-

searches have proved undoubted ly that the su bsidiar ies in

developing countries contribute to the likely reduction in

the unemployment rate but nevertheless, they do not play

a major role in the economic dynamics. Further research

allows us to analyze the relationships between the enti-

ties required to maintain them. The parent maintains in-

tra-organizational relationships with its subsidiaries. As it

is shown that both the subsidia ry is a center of excellence

for the development activities of the multinational, it is

unclear that this division continues in this spirit. The

center of excellence provides to the subsidiary many

household activities and other subsidiaries. This may be

detrimental to the control power of the parent company.

Research in this direction should be developed in order to

promote the control of the dyadic relationship between

these entities. It should be adde d that the center of excel-

lence for which it qualifies also depends on the degree of

local competition. De facto, it is not a confirmed case but

depends on several factors and parameters that need to be

clarified.

In relation to the transfer of knowledge and technolog y

between the parent and the subsidiary, studies have

shown that the parent usually transfer older technologies

and especially when there is a threat of the latter at the

country level Home. This fact contributes to the balanced

development of the understanding of the technology in

the country of origin or those who receive. Other re-

search analyzes the development of the subsidiary in the

developing countries participate in the industrialization

of the country but th en forgets the po sitive feed b acks that

should raise Foreign Direct Investment in these countries.

Other factors are not conducive to the development of

local subsidiaries. We can cite among others, government

corruption in developing countries, the administrative

difficulties, problems of insecu rity, crisis emanatin g from

poor governance at a national and global level,, expro-

priations are bottlenecks for the development of eco-

nomic activities. These factors are studied carefully in

order to showcase sustainable development in developing

countries and not to mention a fight against tax evasion.

While existing institutional agreements are positioned

to strengthen key natio nal policies to maximize the b ene-

fits of FD, It is important to seek to preserve a national

discretion to allow developing countries, within their

international obligations, to pursue policies that contrib-

ute to their development. This is how and to what extent

international investment agreements can be designed to

foster development. This is an issue that deserves atten-

tion especially at a time when each host country means to

attract FDI and benefit from it. Analyzes can be gone in

the direction of how developed countries can help de-

veloping countries and countries in transition in their

efforts to attract FDI. This analysis in this direction can

be very frui t f ul.

The internationalization and development subsidiaries

also assume the management of diversity and recognition

of subcultures. Any country or region must implement

strategies for creating a unique culture of "global citi-

zenship" cosmopolitan entrepreneurs and executives.

Cultural tolerance, and recognition of their flexibility

allows operation in various uninhibited environment or

frustrations. Effects must also be taken in this field of

research that is becoming more and more complex

rhythm of many theories and paradigms developed in

order to apprehend it.

It is an international technology transfer internalized

and externalized transfer, it is important for the host

country to determine which of the two modes can have a

positive impact on its economy. For multinationals

choose the mode of transfer to a non-trivial inclination

Table 4. Analysis of factors related to the actual establishment of subsidiaries in developing countries.

Incentives factors Attraction factors Management factors

Sources of creating

subsidiaries in the

host country

Narrowness of the domestic market;

Internationalization policy of the com pany;

Development of commercial synergies;

Imitation of competitors; Technologies transfer

Low production costs;

Access to natural resources;

Institutional incentives authorities

of the host country

Access to skills and local knowledge;

Sharing a consulting firm;

Successful internationalization and

assembling alliances (joint venture,

acquisition, Greenfield, Fusion ...)

Roles of Subsidiaries to Parent and Motivations Justifying Their Presence in Developing Countries (DCs):

Synthesis of Literature 127

but are based specifically on certain variables such as

nature and pace of technological change, the nature of

the subsidiary, the in dustry and certain features and poli-

cies host country. It can also be no question local com-

petitive environment in which the subsidiary operates.

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