How Do the Normativity of Headquarters and the Knowledge Autonomy of Subsidiaries Co-Evolve? Capability-Upgrading Processes of Chinese Subsidiaries in Belgium.

VerfasserHensmans, Manuel

1 Introduction

The current literature on emerging market multinationals' (EMNEs) capability-upgrading adopts knowledge-based assumptions in its depiction of the relation between headquarters and advanced economy subsidiaries. EMNE headquarter managers decide to provide advanced economy subsidiaries managers with a leading role in capability-upgrading projects as the latter have access to "higher knowledge" (Awate et al. 2012, 2015). In this regard, the main barrier to EMNE capability-upgrading is subsidiary managers' opportunism, i.e. their unwillingness and inability to deliver on promised behaviour or performance (Awate et al. 2015; Verbeke and Greidanus 2009).

The emerging headquarters ignorance perspective in international business challenges this boundedly rational headquarters logic (Bouquet et al. 2016; Ciabuschi et al. 2011), casting doubt on knowledge-based motivations to provide subsidiary managers with capability-upgrading autonomy. Headquarters' subsidiary choices are not motivated primarily by actual knowledge but by the normative role expectations of major stakeholders (Ciabuschi et al. 2012). As such, the main barrier to EMNE capability-upgrading resides in headquarters' normativity standing in the way of knowledge-based priorities.

Process research has the ability to clarify contested international business theories (Meyer 2014), such as those explaining the relation between headquarters and subsidiaries in capability catch-up projects (Awate et al. 2012; Ciabuschi et al. 2011). Hence, this paper adopts a process perspective to inquire how EMNE headquarters 'logic of and subsidiaries' mandate for capability-upgrading co-evolve.

Given our interest in the role of stakeholder expectations, most notably those from government and private owners, we apply this question to different EMNE ownership types: private-owned (POEs), jointly private and state-owned (JOEs) and state-owned enterprises (SOEs). Research on the ownership-influenced diversity of capability-upgrading processes is still in its infancy (Klossek et al. 2012). JOEs in particular have received little attention so far in the international business literature (Cuervo-Cazurra et al. 2014).

To develop a process perspective across these three ownership types, this paper focuses on the case of Chinese multinationals (CMNEs) in Belgium. Belgium functions as an extreme case for our research question, activating the relevant variables in a relatively pure form and revealing a lot of information in the process (Flyvbjerg 2006; Siggelkow 2007). Belgium puts great effort in facilitating foreign firms' capability-upgrading because it depends on their capabilities for its own global competitiveness (Van den Bulcke et al. 2009). CMNEs have belatedly discovered Belgium as the quintessential small, and open economy (Konjunktur-forschungsstelle 2013), or "the little big man of Europe" (Banks 2013). This newfound status explains the recent rise in CMNE subsidiary activity of all three ownership types (MOFCOM 2014), providing us with a window of opportunity to study capability-upgrading processes as a pure and live case (Balogun et al. 2011).

Our findings point to the initial prevalence of normative stakeholder expectations in all EMNEs' headquarters logic of subsidiary establishment, confining subsidiaries to a limited output-upgrading mandate. Subsequently, however, headquarters and subsidiaries of the most entrepreneurial POEs and JOEs engage in a co-evolutionary learning process. Subsidiary managers' ability to challenge normative expectations is a condition to headquarters acting in a knowledge-based and autonomy-delegating manner. The most government-dependent JOE and SOE subsidiaries, by contrast, do not engage in a virtuous knowledge-based negotiation process, limiting themselves to normative expectations of output catch-up.

This research contributes to the literature on EMNE capability-upgrading by developing several propositions on how autonomy negotiation processes between headquarters and subsidiary evolve over time; depending on the historical imprinting of home success values, socialisation in how to respond to failure and the emergence of constructive conflict.

In what follows, we review the literature on EMNE capability-upgrading, contrasting the knowledge-based and normative schools of thought on headquarters-subsidiary relations. Given the importance of the type of owner-stakeholders in capability-upgrading decision-making, we summarize the literature on the relation between ownership type and subsidiary autonomy. Drawing on the extreme case of CMNEs in Belgium we analyse how headquarters' logic of and subsidiaries' mandate for capability-upgrading co-evolve. As a result of our coding, we elaborate a co-evolutionary negotiation mechanism between headquarters and subsidiary managers. This mechanism enables some EMNE subsidiaries to shift towards an innovation-upgrading mandate while keeping others in a limited output-upgrading mandate. In conclusion, we emphasize how capability-upgrading behaviour along the lines of the knowledge-based school of thought is triggered by constructive conflict between headquarters and subsidiary managers.

2 Advanced Economy Subsidiaries and EMNE Capability-Upgrading

Multinationals set up subsidiaries, i.e. value-adding activities outside a multinational's home country, with different capability mandates (Birkinshaw and Pedersen 2009; Birkinshaw et al. 1998; Luo and Rui 2009; Makino et al. 2002; Rugman et al. 2011). Subsidiaries can be used as conduits to exploit headquarter advantages abroad; or they can receive a mandate for capability-upgrading in more advanced host country contexts (Verbeke 2013). For EMNEs intent on catching up with incumbent AMNE capabilities the latter is the preferred option. Wielding less advanced home capabilities (Cuervo-Cazurra and Gene 2011), EMNEs attempt to close the gap with incumbents AMNEs by acquiring the knowledge necessary to replicate their output (Kumaraswamy et al. 2012).

EMNE subsidiaries in advanced economies typically do not immediately obtain an explorative catch-up mandate, i.e. a mandate geared at innovation capability-upgrading. Instead the typical pattern is for subsidiaries to start with a more exploitative output catch-up and subsequently move towards innovation catch-up (Awate et al. 2012). Output catch-up involves EMNEs producing output at AMNEs' current standards; while innovation catch-up involves the ability to develop innovative products and services beyond the current output frontier (Brandl and Mudambi 2014; Cantwell and Mudambi 2011).

2.1 Knowledge-Based Intentions Versus Knowledge-Ignorant Normativity

To move from output to innovation catch-up, EMNEs have to acquire knowledge beyond the current output frontier so as to "know more than they make" (Brusoni et al. 2001). Advanced economy subsidiaries play a pivotal role in EMNEs' ability to access such higher knowledge (Awate et al. 2015). To play this role subsidiaries require the sufficient autonomy to enter local knowledge networks and initiate capability-upgrading projects (Cantwell and Mudambi 2005). Subsidiary autonomy is a particularly important lever to EMNE capability-upgrading (Wang et al. 2013). An unresolved process question is how the strategic autonomy required to move EMNEs beyond the current output frontier emerges from the interaction between headquarters' intentions and subsidiary managers' initiative.

There are two competing schools of thought on the relation between headquarter and subsidiary managers in capability-upgrading projects. The first school of thought embraces an intentional, boundedly rational perspective on headquarters' conferral of subsidiary autonomy in advanced economies. In its role of managerial apex (Barner-Rasmussen et al. 2010), EMNE headquarters adhere to the primacy of capability-upgrading knowledge by granting advanced economy subsidiaries considerable catch-up autonomy (Awate et al. 2015).

Faced with the trade-off between rapid output success and long-term innovation investments (Awate et al. 2012), headquarter managers often privilege fast output catch-up over innovation leadership (Cantwell and Mudambi 2011). Yet, from a learning perspective their progression from stages of output to innovation catch-up is perfectly rational (Mathews 2002). Hence, the main culprit of EMNEs' incapacity to move beyond the current output catch-up frontier is to be found at the subsidiary level. Realising that they hold superior knowledge, subsidiary managers often use their stronger bargaining power (Mudambi and Navarra 2004) to engage in opportunistic behaviour beyond headquarters' control (Awate et al. 2015).

The normative "headquarters ignorance" perspective adopts a socio-political lens that casts doubt on headquarters' role as an apex of managerial rationality (Forsgren and Holm 2010) that delegates catch-up autonomy to subsidiaries based on knowledge-accruing priorities (Ciabuschi et al. 2012). Headquarter managers are motivated by normative stakeholder expectations rather than knowledge rationalities in capability-upgrading projects (Ciabuschi et al. 2011). Rather than as the apex of managerial rationality, headquarters tend to act in a knowledge-ignorant but politically opportunistic way (Morgan and Kristensen 2006) to satisfy powerful stakeholder expectations (Ciabuschi et al. 2012).

Only further empirical research can resolve the question of what perspective--boundedly rational or normative--best explains the evolution of subsidiary mandates in different EMNE catch-up contexts. In this regard, one potentially crucial socio-political factor that has not been explored in empirical research is the influence of different types of owners--arguably the most important stakeholders. How does ownership type impact the ability of an EMNE subsidiary to enjoy strategic autonomy, a prerequisite to develop the learning functions necessary for capability-upgrading...

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