Control mechanisms employed between headquarters and subsidiaries in Multinational Enterprises (MNEs)

Abstract

Purpose This study aims to investigated the control mechanisms of headquarters exercised over their subsidiaries and is conducted with the help of primary data. Design/methodology/approach The headquarters–subsidiary model used in this study has four components of control in it: personal centralised control (PCC), bureaucratic formalised control (BFC), output control (OUT) and informal control (INFO). These controls (as an agency mechanism) provide a solid platform on which other mechanisms can be built. Using a data collected from 147 multinational enterprises (MNEs) operating in the Kingdom of Saudi Arabia, the influence of each of these factors on this selection is empirically tested with the help of primary data. Findings The study found that Anglo-Saxon countries heavily use impersonal types of control mechanisms, specifically bureaucratic formalised control and output control. Compared to the USA, the level of control in Oriental subsidiaries is less; or, put differently, the latter enjoy a greater degree of autonomy than US subsidiaries. The complementarities of these control mechanisms may be linked to earlier studies that show that successful organisations combine tight control with more open, informal and flexible information and communication exchanges. A focus that bends too much towards formal control or too much towards informal control may threaten a company’s existence. This research provides an empirical explanation on this premise. Research limitations/implications The methodology adopted for this study can be extended for similar studies in the Middle East or in Gulf Council Cooperation countries. Practical implications The study show that MNEs from different countries often have different dominant control mechanisms and organisational models. This is partly due to different industry distributions, but it is also related to cultural/societal differences between countries. These differences should be considered when searching for a partner in cross-national mergers and acquisitions. Failure to do so could hinder the successful operation of a merger that seems to be perfect from a financial and competitive point of view. Originality/value The study explored variations in the extent of control mechanisms, according to country of origin and organisational characteristics, in a challenging country of domicile. This empirical work not only replicates earlier studies, retesting propositions encountered in the existing literature, but also sheds new light on the challenges of doing business in the Gulf region, and the consequences of the large scale usage of expatriates.