A Strategy for Subsidiaries: Centres of Excellences to Build Subsidiary Specific Advantages (1)

Abstract * This paper discusses the construct of subsidiary specific advantages (SSAs), which are central to how a subsidiary captures international mandates. SSAs constitute an extension of the eclectic paradigm. * It suggests centres of excellence (CoE) as a potentially important mechanism for a subsidiary to develop SSAs. An analysis of a survey of 203 subsidiaries of foreign multinationals demonstrates support for the contention. Key Results * This paper presents evidence of a new level of MNE advantage, subsidiary specific advantage, an extension of the eclectic paradigm. Introduction How do non-dominant economies prosper within a globalising world? Multinational Enterprises often play significant roles in these economies, one strategy is for subsidiaries in these countries to earn global or international mandates, whereby their subsidiary takes a broader and more strategic role within the global network of the multinational national enterprise. According to recent research, a growing number of the foreign subsidiaries of multinational enterprises (MNEs) are expanding their role beyond traditional downstream activities, such as sales, service and assembly, to encompass upstream activities such as research and development (R&D), component production, strategic marketing and support activities (Bartlett/Ghoshal 1989, Jarillo/Matinez 1990, Gupta/Govindarajan 1991, Forsgren/Holm/Johanson 1992, Moore 1995, Birkinshaw/Hood 1997, Gupta/Govindarajan 2000). This activity has grown alongside the increasing adoption of global strategies by parent MNEs, both as a deliberate action on the part of the parent, as well as the subsidiaries themselves (Birkinshaw/Fry 1998). It is also consistent with the movement from exploitation of home-based firm-specific advantages (FSAs) to a global strategy for the creation and dissemination of knowledge within the network of the MNE, as innovation and knowledge become central reasons for being a global MNE (Kogut/Zander 1993). The most advanced case of this expansion of the subsidiary role is a Global Subsidiary Mandate (GSM). This occurs when the local subsidiary of an MNE acts as the worldwide centre for R&D, manufacturing, marketing and sales of a product (Rugman/Bennett 1982, Roth/Morrison 1993, Moore/Heeler 1998). Following Etemad and Dulude's view (1996) this does not suggest that the subsidiary perform all these activities but it is the strategic decision-making which they do control and they would generally delegate the vast majority of the realisation to sister units within the MNE. At a level below GSMs are International Subsidiary Mandates (ISMs), where the local subsidiary of an MNE acts as an international centre for R&D and/or manufacturing and/or marketing and sales of a product. The key difference between a GSM and an ISM is the scope of the mandate, the key dimensions being the geographic and functional area breadth of the mandate. Figure 1 presents a typology of six subsidiary missions. [FIGURE 1 OMITTED] The ways of measuring where an MNE subsidiary falls on this Subsidiary Mission Grid is based on the proportion of activities, such as R&D, product development, production, international market development, international markets served, and strategic marketing responsibilities, carried out by the subsidiary. In area 3 of the grid is a subsidiary which only imports. Its mandate is limited to its national boundaries and it has little decision-making authority. In area 6 is a subsidiary which again has only national responsibilities. However, subsidiaries in this cell do have some decision-making authority, as they provide some local content to the value chain allowing a degree of localisation for the product/service provided by the subsidiary in its home country. In areas 2 and 5 are subsidiaries with regional responsibilities. With the growth of regionally integrated areas of the global economy (Rugman 2000) a growing number of subsidiaries have begun to have mandates that span national borders (i. …