The influence of coordination mechanisms on new product development in MNC subsidiaries.
| Autor | Boehe, Dirk Michael |
| Cargo | Multinational Corporation - Report |
Introduction
Many Product Development Units [PDUs] of Multinational Corporation [MNC] subsidiaries find themselves in a situation of survival pressure. As headquarters strive to enhance the cost efficiency of their global network of product development sites, minor, duplicated or less well performing PDUs face the risk of being eliminated (Birkinshaw & Hood, 1998). In response, PDUs may attempt to claim their stake exploiting new market opportunities, both within the MNC, i.e. selling technological services and product development projects to peer subsidiaries, and developing products for external clients beyond the subsidiary's host country market. However, exploiting such market opportunities requires that the MNC use coordination mechanisms which permit and motivate subsidiaries to carry out product development for internal and external global clients.
This paper focuses on such coordination mechanisms, defined as the process of integrating activities dispersed across subsidiaries (Martinez & Jarillo, 1991); more specifically, focus is on how MNC coordination mechanisms influence subsidiaries' new product development [NPD] activities. Accordingly, this study hypothesizes and tests a model that examines the combined effect of autonomy and internal markets on a subsidiary's new product development activities. Nevertheless, host country related factors that may also influence subsidiaries' NPD activities such as government incentives, local market demand, and the like, are not considered here, due to reasons of space and scope. Accordingly, this study is concerned with the corporate environment, i.e. the headquarter-subsidiary and subsidiary-subsidiary relationships, and its potential effect on a focal subsidiary's NPD activities.
Literature on headquarter-subsidiary and subsidiary-subsidiary relationships has primarily examined formal coordination mechanisms, such as centralization of decision-making at main or divisional headquarters, formalization, planning, performance control, and informal mechanisms, such as informal communication, socialization, normative integration, particularly transfer of knowledge, intra-company technology transfer, people, goods and services among MNC units, R&D co-practice, inter-unit networking, headquarters attention and subsidiary entrepreneurship (Bartlett & Ghoshal, 1989; Bouquet & Birkinshaw, 2008; Bouquet, Morrison, & Birkinshaw, 2009; Fischer & Behrman, 1979; Foss & Pedersen, 2002; Frost & Zhou, 2005; Ghoshal & Nohria, 1993; Gupta & Govindarajan, 1991, 1994; Kurokawa, Iwata, & Roberts, 2007; Martinez & Jarillo, 1991; Monteiro, Arvidsson, & Birkinshaw, 2008; Nobel & Birkinshaw, 1998; Sanna-Randaccio & Veugelers, 2007; Venaik, Midgley, & Devinney, 2005). This stream of literature has been mainly concerned with conciliating strong globalization and localization pressures, with decision-making control (autonomy) being the most researched coordination mechanism. However, it does not reflect on competitive or market-like relationships among MNC units as a coordination mechanism.
A second stream of literature directly focuses on such competitive or market-like relationships also known as internal markets (Birkinshaw, 2001; Birkinshaw & Fey, 2000; Birkinshaw & Lingblad, 2001, 2005); however, their arguments have rarely been submitted to empirical tests. Moreover, to our knowledge, research has not explicitly addressed the combined influence of different coordination mechanisms on subsidiaries' new product development [NPD] activities.
Thus, by hypothesizing and testing a model which examines the combined effect of autonomy and internal markets on a subsidiary's new product development activities, we attempt to extend theory on coordination mechanisms.
While existing research has focused either on coordination mechanisms in MNCs or on the configuration (in-house vs. outsourcing) of NPD activities, the original contribution of the present study consists in assessing the proposed link between coordination mechanisms (internal and external market pressures) and the configuration (in-house vs. outsourcing) of subsidiary NPD activities.
In the following section, we review the literature and develop our conceptual model exploring the question of how global decision-making autonomy and internal markets may influence subsidiaries' new product development [NPD] activities via the exposure to global market forces. The model consists of several testable hypotheses regarding the relationships between the decision-making autonomy construct and the internal market construct on the one hand and in-house and outsourced new product development on the other. After the method section, results from structural equations modeling are presented. Finally, we discuss the contributions of the results to the literature on MNC coordination mechanisms and subsidiary development.
SUBSIDIARY COORDINATION MODEL
This article is based on the assumption that subsidiary roles may change over time (Birkinshaw, 1996; Birkinshaw & Hood, 1998). Although many different role typologies have been put forward (e.g. Gupta & Govindarajan, 1991; Jarillo & Martinez, 1990; Roth & Morrison, 1992), a basic characteristic of these typologies is that they differentiate subsidiaries with more important from less important roles in their MNC's global strategy. Examples are the strategic leader or implementer role in Bartlett and Ghoshal's (1986) typology. Having said this, a key concern is how these roles may change: coordination mechanisms determined by headquarters constitute a major instrument of subsidiary role changes (Birkinshaw & Hood, 1998). As mentioned in the introduction, this study focuses on coordination mechanisms implemented by headquarters, specifically the degree of headquarter control, which is inversely related to subsidiary autonomy, and the extent to which competitive, market-like resource allocation mechanisms are used.
Thus, the basic idea of the model is that headquarters may use two different coordination mechanisms in order to expose its subsidiaries to internal and external market forces which, in turn, will create incentives for different organizational configurations in NPD. Figure 1 below identifies two coordination mechanisms (on the left), internal markets and global autonomy, which are hypothesized to influence two organizational configurations in NPD (on the right), in-house NPD and NPD outsourcing.
[FIGURE 1 OMITTED]
In the next subsection, we describe the two elements of NPD configuration, in-house and outsourcing of NPD, and the relationship between them. Then, we concentrate on the two coordination mechanisms, i.e. the mechanisms which headquarters applies (whether consciously or not) to manage its R&D network and to expose their units to more or less competition. Finally, all four elements will be integrated into a conceptual model which will be tested subsequently.
NPD Configuration in Foreign Subsidiaries
In-house NPD. While there are different concepts of product development processes, operations researchers seem to agree that its heart constitutes the design-build-test cycle (Clark & Fujimoto, 1991; Wheelwright & Clark, 1992). During this cycle--which may be repeated until a satisfactory solution is found or until it is abandoned--physical or virtual prototypes are built from a new product design. The prototypes are tested and results fed back into the design stage. This cycle can be complemented by additional stages such as concept development and product planning, process development or applied research. Management may choose to carry out all or only some stages in-house and to complement in-house activities with externally contracted product development services.
NPD outsourcing. Outsourcing refers to short-term, arms-length relationships between a customer and a supplier, in which the customer passes design, prototype or test specifications to a technical service supplier. Outsourcing has been found to be more common than cooperation in R&D and is generally carried out under the following conditions: (a) it has to be cost effective, (b) it must not threaten the firm's competitive advantage and (c) various substitutable sources of outsourcing must be available (Narula, 2001).
Whether outsourcing and in-house product development activities are related is questionable from a theoretical point of view: whereas a transaction cost economics perspective would suggest that in-house NPD (hierarchy) and NPD outsourcing (market transaction) are discrete structural alternatives (Williamson, 1991), they may be seen as complementary from a resource-based perspective (Veugelers & Cassiman, 1999).
Outsourcing may be undertaken due to a lack of qualified internal resources and capabilities in areas that complement the firm's in-house core activities. Firms focussing on their core competences limit their in-house NPD to what they know how to do best and outsource what third parties can do more efficiently and at a lower cost. Based on the corporate technology profile framework proposed by Granstrand, Patel and Pavitt (1997), firms tend to opt for outsourcing of NPD in areas where their technological competences are low (called background or marginal competences). Conversely, they carry out in-house product development in areas where their competences are high (called distinctive and niche competences) (Narula, 2001).
Similarly, outsourcing may be used for complementary routine-like activities, i.e. for activities requiring resources and capabilities that are not valuable or rare. The resource-based view [RBV] is particularly useful for identifying resource and capability gaps as well as for distinguishing between core and non core activities; thus the RBV may help to identify outsourcing needs and opportunities (Espino-Rodriguez & Padron-Robaina, 2006). Therefore, complementarity of resources is a key motivation for outsourcing: drawing on a literature review on outsourcing from the...
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