Management control systems in subsidiaries of multinationals in the emerging market of Central Eastern Europe.

Publication: Journal of Comparative International Management

Publication Date: 01-DEC-05

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Using transaction cost theory and the theory of multinational enterprise, this study examines the extent of the degree to which management of multinational companies can control over its subsidiaries' configuration and coordination abilities. Empirical results showed that the subsidiaries enjoyed a significant freedom when decentralized standards were used in operational and the production activities. In the long-run, however, the centralized standards worked better--thegreater the coordination activities between the multinational companies and their subsidiaries the lesser the control needed.

Introduction

This paper presents some empirical findings of an exploratory study into the governance relationships between multinationals and their Polish subsidiaries. The emerging markets of Central Asia and Eastern Europe (CEE) have become very attractive for setting up a subsidiary. Many multinational companies have established operations in new locations, or have expanded existing operations. New key strategy drivers such as first-mover advantage, scale economies, and serving local markets through the local companies are supplementing traditional investment incentives such as cheap labour and raw materials. These new factors have contributed a significant change in the global positioning of multinational corporations. As a result, the Eastern European and Central Asian countries accounted for more than 60% of "First-time" investments in 2002.

In order to compete and be successful in foreign markets, one needs to pay special attention to organisational structure and the corporate governance issues. Recently, a number of real life cases have provided some insights such that too much freedom provided by headquarters can have disastrous consequences on all parts of a multinational. For example, the Dutch retailers' (Ahold) insufficient supervision over its subsidiaries in the United States led to a serious financial and management crisis in 2003 (Smit 2004). Consequently, the management of the multinational company recognizes the need to change the governance structure to accommodate a wider dispersion of activities and the need to coordinate these activities.

Against this backdrop and building on existing studies on management control and coordination between headquarters and subsidiaries (Chow, Kato, et al. 1994; Andersson and Forsgren, 1996; Langfield-Smith, 1997; Harzing, Sorge et al., 2001; Chenhall, 2003), this study explores an intriguing research domain at the subsidiary level in one of the emerging economies of Central Eastern Europe, namely Poland. More concretely, we attempt to answer three general research questions:

1. What is the configuration of the management control system (MCS) in the subsidiaries in Poland?

2. Does the subsidiary's role influence the intensity and design of MCS?

3. Does the configuration and intensity of the MCS contrast between best and the average performing subsidiaries? If so, how?

Using transaction costs theory and the theory of multinational enterprise, this study explores the degree and configuration of control and coordination activities embraced by management control systems used by international headquarters on their Polish subsidiaries.

Theoretical Framework

Transaction cost economics (TCE) originates from microeconomics (Hennart 1993; Hart 1995; Williamson 1998). It has been used to explain the trade-off between generic modes of governance. Transaction costs economics (TCE) literature makes a distinction between methods of organising these transactions (hierarchy and price system) and institutions (firms and markets) (Hennart 1993). These transactions delegate to a central party the fight to constrain their behaviour. The full delegation organisation-mode is called hierarchical. Under hierarchy, one party has a right to make all decisions concerning allocation of the resources of other party (e.g. employee); the evaluation system here is based on the obedience to the supervisors' directives. Markets (in the absence of transaction costs) rely on prices to convey information necessary to reach optimal joint decision (Meyer 1998; Williamson 1999). Although its application has been confined to issues at the level of generic forms, the TCE explanatory structure is highly micro-analytical in its orientation with the (individual) transaction as a unit of analysis.

TCE suggests that management control structures can usefully be analysed as (implicit or explicit, formal or informal) contracts between the organisation and its members that serve to govern these contributions (Spekle 2001). Covaleski et al. (2003) completed the Spekle's efficiency-seeking approach with legitimacy seeking facets for management control and described the influence of societal and regulatory environment. Network approach presented by Powell (1990) added that some forms of economic exchange are embedded in a particular social context and that some relationships are more dependent on social contacts, mutual interests and are less guided by the formal structure of authority. He described a third mode of exchange that cannot be placed on the market hierarchy continuum. It is characterised by high interdependencies among parties--a network of companies. A similar approach has been developed for international management by Bartlett and Goshal (1998). They observed that companies with governance structures tailored for competing whether on local (decentralised governance) or global (centralised) markets do not succeed in sourcing from the opportunities of current economic developments. Companies focusing on local markets, and therefore decentralising their governance could not acquire sufficient information about their foreign operations and hence lost control. This narrow focus would impede the development of the whole company or even would threat their profits. On the other hand, global centralisation restrains from incorporating ideas and signals from the subsidiaries, which makes the governance too rigid and can result in conflicts. In this research we attempt to integrate both the transactional and relational (societal) issues and develop a model for management control.

Conceptualisation of Management Control Systems

Table 1 presents a general overview of the Management Control System variables used in the study.

The broad definition of control described by Omta (1995) and De Leeuw (1994) has embraced that any activities that aim at goal directed influence, both those facilitating centralisation and decentralisation, is control. Anthony and Govindarajan (2001) added word "system" to the management control, for the activities of the management control are prescribed and have a repetitive character.

Control can include devices to influence interpersonal behaviour, limiting opportunism and creating transaction costs. On the other hand, not all coordination is control, since not all co-ordinated activities limit behavioural alternatives. Otherwise stated, the power element in co-ordination is more 'implicit' sometimes. According to Anthony and Govindarajan (2001), co-ordination establishes...

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