Constrained Delegation

Abstract

We examine the influence of competitive spillovers among subsidiaries on the design of headquarters-subsidiary relationships. We focus on multi-industry firms and competitive spillovers across markets, hypothesizing that these firms delegate most business-level decisions to subsidiaries but adapt to multimarket competition by limiting their subsidiaries’ incentive and ability to make resource commitments by constraining the scope of decision rights and the available resources, a phenomenon that we refer to as “constrained delegation.” Accordingly, the extent of multimarket contact in a given market (1) is associated with lower subsidiary discretion in decisions pertaining to resource commitments and (2) counteracts the tendency of internal capital markets to provide financial resources to subsidiaries that have a low market share or operate in high-growth industries. Results of analyses, based on the population of majority-owned subsidiaries of groups operating in France between 1997 and 2004, support the predictions. We also found that multimarket contact is associated with a subsidiary’s being even less competitively aggressive when the organization’s design imposes more constraints on the subsidiary’s resource allocations. This study, one of the first to explore empirically the impact of negative spillovers within the firm on organization design in multiunit firms, suggests that organizational choices are endogenous to the competitive context.