The article Subsidiary responses to institutional duality: Collective representation practices of USmultinationals in Brit...
Because the service sector is a less heavily unionized sector, the two subsidiaries chosen for thissection have not seen m...
might be restricting laws in a country prohibiting specific compensation schemes. Certainly, MNCswould want to pursue a gl...
tacit knowledge, sometimes seen in non-verbal communications. Because of that fact, a globalperspective on business or cro...
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Institutional Duality


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Subsidiaries reaction to institutional duality

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Institutional Duality

  1. 1. The article Subsidiary responses to institutional duality: Collective representation practices of USmultinationals in Britain and Germany describes a case study led by Tempel, Edwards, Ferner,Muller-Camen and Wächter which considers pressures for internal and external legitimacy. Thisresearch was intended to show how subsidiary management responds to parent company demandand host country pressures and was based on case studies conducted looking at US subsidiaries inBritain and Germany, namely the manufacturing companies Itco and CPGco; and the servicecompanies Business Services and Logistico. It is important to mention that the employmentrelations in the US firms are considered to be anti-unionism which can be explained by the fact thatAmerica is said to be an individualistic country. Additionally, American MNCs most of the timesuse a more ethnocentric approach to HRM which is why they especially try to exert pressure onsubsidiary managers to introduce home country practices. Comparing the US MNCs anti-unionismmindset to the ones in the countries where the U.S. MNC has placed its subsidiaries, unionism is farmore present in Britain and Germany. In the former, subsidiary management is largely independenton the collective representation institutions, whereas in the latter the interference of labor unionsand works councils often presents an obstacle for companies who try to operate a business in theGerman market.Since parent companies are dependent on their subsidiaries in some way, for example due to theirknowledge of the local institutional environment or their development of strategic resources, theytry to exert control over those subsidiaries and keep the local influence on them in check. On theother hand, subsidiaries also feel the pressure from the local environment, especially from localstakeholders like trade unions and works councils.The study starts by looking at the two manufacturing companies: The founding fathers of ITco havedecided that their anti-union philosophy should be applied on a global scale, which is an approachthat has been adopted in its British subsidiary. CPGco subsidiary management, on the other hand,has recognized unions since the 1970s, diverging from its parent companys intentions. Subsidiarymanagement has come to recognize the benefits of collective representation and thus tries tocooperate with trade unions.In Germany, collective representation structures have long been important in the subsidiaries ofboth of the companies but are still not very welcomed by corporate management. As a result ofstrong resentment of the ITcos parent company towards Germany, works councillors tried tointerfere which lead to management preferring to make a deal with another service sector union.CPGco decided to go in a similar direction and changed the legal status of the subsidiary from apublic to a private limited company. This action led to the election of a new works council whichfreed the company from some old restrictions imposed on them.
  2. 2. Because the service sector is a less heavily unionized sector, the two subsidiaries chosen for thissection have not seen major problems regarding union recognition. Although the British subsidiaryof Business Service adopts a welfare capitalist style like its parent company, it also introducedchannels of communication common throughout the company to prevent its employees fromseeking other means of representation. Logistico, on the other hand, recognizes trade unions and isthe only company that has a written policy regarding collective representation in their foreignsubsidiaries. Their British subsidiary management has used its relationship with trade unions to freeitself from corporate pressure.In Germany, Logistico and Business Services have good collective bargaining arrangements, andhave therefore neither been faced with union pressure for that matter and have used similarincentives and approaches like their British counter-parts to free themselves from local restrictions.This study showed no significant defiance of corporate expectations by subsidiary management.Compared to Germany, there has been less total compliance with corporate expectations and lessdefiance of local expectations in 3 out of 4 subsidiaries in Britain. Additionally, one could see moreof a cherry-picking approach in British subsidiaries, successfully using their local knowledge tofind favorable conditions in terms of dealing with parent company control and local restrictions.German subsidiary managers on the other hand seemed to be more dependent on corporatemanagement, always trying to respond to local pressures as well as to corporate demands, butfollowing corporate pressure in most of the times. These findings stand in contrast to previous ones.Still, this study has showed that there are differences in the behavior of subsidiary managers inmanufacturing and services sectors and that the dependencies at a country-, sectoral- and micro-level created by host country institutions cannot be explained by the concept of institutionaldistance only. As a result, the authors suggest that there has yet more research to be done in thisparticular field.Regarding Scotts (1995) definition of institutions as cognitive, normative, and regulative structuresand activities that provide stability and meaning to social behavior, one could imply thatorganizations share a common philosophy and that those within the same environment have similarstructures and implement similar policies. Therefore, when thinking about MNCs, placingsubsidiaries in different countries implies institutional distance. This concept describes the degree ofsimilarity or difference between home country and host country institutions occurring due todifferent environmental settings.Apparently, when institutional distance is greater, practicing a global integration strategy becomesmore problematic because transferring strategic routines between the parent firm and its subsidiariesbecomes more difficult as for example, employees also adapt to local contexts. Additionally, there
  3. 3. might be restricting laws in a country prohibiting specific compensation schemes. Certainly, MNCswould want to pursue a globally standardized compensation program. This practice would result ineconomies of scale, encouragement of workforce alignment and the development of unique firmcapacity. On the other side, MNCs that want to implement a global corporate identity shownthrough common compensational incentives, might face problems in countries where people feeloffended by these kinds of incentives or where they actually do not feel the need for workersbenefits in order to achieve a companys objectives, whereas in another country more cashincentives would be needed. Governments themselves in many countries also provide or guaranteecertain benefits, such as retirement pensions and basic health care, and thus remove from MNCs theoption and need to consider whether to provide these benefits. This argument also applies to thestrong mindset about providing special social benefits in Europe compared to other countries. Byneglecting such constraints in the host country, MNCs could face lawsuits and therefore a loss oftheir reputation in this country.Concerning recruitment, institutional distance could also pose some challenges for MNCs whentrying to find suitable persons for positions in the host country. First, the company has to decideupon internal or external candidates. Internal recruitment surely provides the parent company toexert control over a subsidiary within the host country, bringing company knowledge andexpectations right to the table. However, they would not dispose of the local knowledge and usefulnetworks within the host country which would rather be the case for an external (host country)candidate. Still, the potential workforce in every country needs to be approached differently,especially due to cultural differences, e.g. when directly advertising to reach the external public in ahost country, a MNC must be careful with the choice of his words in their job descriptions: directadvertising for an employee that must not be a female would infringe anti-discrimination law insome countries. That being said, MNCs have to inform themselves properly about the environmentthey are working with when recruiting either in the host or the home country to avoid assignmentfailure and comply with expectations, for example about the recruiting process itself, HCNs mighthave. The greater the institutional distance, the greater the difference in peoples perceptions of howrecruitment should be conducted.The leadership competencies of MNCs are particularly important in order to transfer knowledge orcritical capabilities across borders effectively. To achieve that goal, managers need to be cross-functionally educated and be able to communicate effectively with people with different culturalbackgrounds. These beliefs and values are deeply rooted in people and determine whether or notparticular behaviors are appropriate or not followed by positive or negative sanctions. Most of thetimes these thoughts are not directly communicated from one culture to the other, they represent
  4. 4. tacit knowledge, sometimes seen in non-verbal communications. Because of that fact, a globalperspective on business or cross-cultural knowledge cannot be attained within the headquarters butby working in the actual host country environment. However, culture-specific leadership often tendsto overemphasize the role of culture limiting expatriates in their actions. Also there is no proof thatthe host country workforce always prefers a culturally-adapted leadership-style rather than theoriginal one, which could probably help them to identify better with the company.Contrary to that, sometimes institutional distance is underestimated like in the case of Austria andGermany. Although the language is the same, and the people tend to be similar in some ways, legalrestrictions and mind-sets of people still differ and not considering that could lead to the conductionof unsuccessful business. In conclusion, it can be said that institutional distance presents an crucialfactor for MNCs to look at without neglecting the special importance of the cognitive andnormative component of it, since they are the less apparent or visible than the regulations.