Managing the Multinational Enterprise

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Business History

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The multinational enterprise and subsidiary evolution: Scotland since 1945

Pavlos Dimitratos , Ioanna Liouka , Duncan Ross & Stephen Young

To cite this article: Pavlos Dimitratos , Ioanna Liouka , Duncan Ross & Stephen Young (2009) The multinational enterprise and subsidiary evolution: Scotland since 1945, Business History, 51:3, 401-425, DOI: 10.1080/00076790902844013

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The multinational enterprise and subsidiary evolution: Scotland since

1945

Pavlos Dimitratosa, Ioanna Lioukab, Duncan Rossc* and Stephen Youngb

aDepartment of Management Science and Technology, Athens University of Economics and Business, Greece; bCIER, Department of Management, University of Glasgow, UK; cDepartment of Economic and Social History, University of Glasgow, UK

This paper explores the major developments in the multinational enterprise (MNE) literature; along with the research conducted on Scottish-based MNE subsidiaries and the policy changes that have taken place in Scotland aimed at promoting foreign direct investment (FDI). It is suggested that subsidiaries may evolve from the branch plant to the developmental and the entrepreneurial subsidiary type; with each of these three subsidiary types contributing differently to the economic development of the host country. The empirical evidence from an in-depth analysis of IBM, Greenock, Scotland attests to the importance of the entrepreneurial subsidiary activities for the host economy. Implications for research and public policy are discussed.

Keywords: multinational enterprise subsidiary; foreign direct investment; subsidiary evolution; branch plant; developmental subsidiary; entrepreneurial subsidiary; economic development; Scotland

Introduction

This paper aims at providing an understanding of the progression of research on multinational enterprise (MNE) subsidiaries, drawing upon insights and evidence from Scotland since World War II. Towards this objective, the key transformations that have taken place in MNE strategies in Scotland are explored from a historical perspective, along with the main policy changes that have occurred, and the subsequent effects on economic development that MNE subsidiary activities and Scottish policies have triggered.

The literature on MNEs indicates an abundance of research focusing on the subsidiary and its strategies at the host country level in the recent past (Paterson & Brock, 2002). Particularly through the notion of subsidiary initiative (Birkinshaw, 1997), the shift of emphasis has moved towards the innovative and entrepreneurial resources and capabilities that the subsidiary can develop within the MNE system. A more recent suggestion refers to the notion of the entrepreneurial subsidiary (Boojihawon, Dimitratos, & Young, 2007; Dimitratos, Liouka, & Young, 2009), which seeks to accentuate the entrepreneurial culture that should diffuse the MNE

*Corresponding author. Email: [email protected]

Business History

Vol. 51, No. 3, May 2009, 401–425

ISSN 0007-6791 print/ISSN 1743-7938 online

� 2009 Taylor & Francis

DOI: 10.1080/00076790902844013

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subsidiary hierarchy; and which may manifest itself in both strategic and operational entrepreneurial activities. Therefore, the rationale behind this paper is to exemplify this evolution of study in the MNE literature with the objective of informing the future research agenda. Such an investigation also has importance for policy makers inasmuch as they can gain valuable insights on the measures that they may employ in order to release the entrepreneurial potential of MNE subsidiaries, thereby also benefiting the host country economy (Birkinshaw & Hood, 1998).

Scotland represents an interesting case to analyse inasmuch as it has witnessed since 1945 varying motives for foreign direct investment (FDI) by MNEs; experienced a range of MNE subsidiary strategies that have impacted differently on the economy of the country; and supported policy measures aiming at achieving economic objectives that changed over time. It is unsurprising then that research on Scottish-based MNE subsidiaries has a long history in the country, extending that elsewhere in the world and enlightening both theory and public policy.

This paper is structured as follows. The second section discusses the context of FDI in Scotland with a view to providing the necessary background to changing MNE strategies and policy measures over time. The third section reviews the evolution of the literature on MNEs from an international management perspective in an attempt to provide insights into the theoretical background of MNE roles and strategies. The fourth section extends this discussion through incorporating key references from relevant studies conducted in Scotland. The fifth section analyses the notions of subsidiary initiative and entrepreneurial subsidiaries, which may enrich the MNE research agenda; it also outlines how these ideas fit into the wider MNE study and major business history theory developments. The sixth section elaborates on the empirical evidence drawn from case studies undertaken on the Scottish subsidiary of the IBM Corporation, with the intention of illustrating the importance of entrepreneurial subsidiaries; and investigating its potential significance for economic development. The concluding section provides a synopsis; and analyses key research and policy implications stemming from this paper.

The context of FDI in Scotland

In the period after 1945, Scottish manufacturing remained characterised by the old staple sectors of shipbuilding, steel, coalmining and heavy engineering, on which pre- war prosperity had been built (Payne, 1996). Survival in the 1950s and early 1960s was based on continued exploitation of relatively low wages and craft skills rather than productivity-enhancing technology (Johnman & Murphy, 2002; Lee, 1995; Saville, 1985). Scotland largely failed to participate in the ‘Golden Age’ between 1951 and 1973 (Peden, 2005), instead suffering relative decline as growth and investment focused on the consumer goods boom in the rest of the UK (Scott & Hughes, 1980). Knox (1999) has pointed to the irony that deindustrialisation in Scotland was both slower and, in the end, more complete, than in the rest of the UK. GDP per capita, which was at 92% of the UK level in 1951, fell to 87% by 1964; while unemployment in Scotland began to reach levels that brought significant political attention (Buxton, 1985; McCrone, 1965; The Scottish Government, 2006).

Attraction of newly-mobile production units was a key policy in UK governments’ attempts to deal with worsening regional problems from the 1950s onwards (Dunning, 1958; Jones & Bostock, 1996). Regional policy incentives to induce manufacturing plants to locate in the assisted areas were introduced, with

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considerable success (Ashcroft & Taylor, 1977). In Scotland, the post-war difficulties were considerable, and the benefits of multinational investment, notably technology and knowledge transfer, productivity improvements, supply-chain demand and spin- off firms were all seen as potentially transformative (Buxton, 1985; Payne, 1996; Peters, Hood, & Young, 2000; UNIDO, 2005).

Scotland was extremely successful in attracting overseas-owned enterprises. There were six US-owned firms operating in the country in 1945. By 1964 there were 73 and by 1969 there were 124. In the period between 1945 and 1955, of those American plants established in the UK, 70% were in Scotland. Between 1966 and 1971, Scotland attracted about 20% of all foreign openings in the UK, rising to 25% between 1972 and 1975 (Forsyth, 1972; Hood & Young, 1982; Lee, 1971; Mckinlay & Knox, 1999). Over the longer period from 1950 to 1994, the number of overseas-owned manufacturing units in Scotland rose from 65 to 357, accounting by the latter date for 12% of Scottish manufacturing plants and 28% of manufacturing employment.

There are three aspects of this FDI that need to be noted. First, inward investment in this period was entirely about manufacturing. This is important because it implies much about the attraction policy, as well as about attitudes towards the relative value of manufacturing and services activity. Second, another important aspect here is the dominance of the USA. In UK terms, Scotland attracted a disproportionately large share of US investment. By 1968, one estimate is that US direct investment in Scotland was at $106.8 per capita, while the figure for the UK was $77. By 1972, 12.9% of total manufacturing employment in Scotland was in US firms (Forsyth, 1972; Scottish Council Research Institute, 1973).

Third, the predominance of electronic and instrument engineering in overseas investment in Scotland is perhaps the most interesting aspect. Firms such as IBM, NCR,Motorola, Burroughs, Honeywell and Hewlett Packard came to Scotland in the 1950s and 1960s, and earned the soubriquet ‘Silicon Glen’ in homage to Silicon Valley in California. In 1972, 39.4% of the entire Scottish workforce in electrical engineering, 26.4% in mechanical engineering and 44.6% in instrument engineering were employed by US-based firms (Scottish Council Research Institute, 1973). Striking also is the longevity of this cluster of electronics manufacturing. By 1983, almost 300 firms in Scotland were engaged in electronics output of some kind; and Scotland’s US-owned plants accounted for 79% of the UK, and 21% of Western European output of integrated circuits (Firn & Roberts, 1984; Payne, 1996). Brown (2002) has noted that between 1993 and 1997, output in Scotland’s electronics industry was still growing at 20% a year. In 1996 the electronics sector in Scotland produced 35% of Europe’s PCs and 12% of the world’s semi-conductors, and directly employed 55,000 people. In 1990, the sector provided 42% of Scotland’s manufactured exports; by the end of the decade, the figure was 58%, worth around £11bn (Brown, 2002; Payne, 1996; Turok, 1993).

This foreign investment, much of it attracted by central government incentives, was designed to assist the process of renewal and transformation in the Scottish economy (Toothill Committee, 1961; The Scottish Office, 1976). Efficiency improvement and technological development were the main foci of industrial policy in the 1950s and 1960s, and policy towards foreign investment was, on the whole, no different (Young &Hood, 1984). Direct job creation was a ‘secondary issue for public policy’ (Mckinlay & Knox, 1999, p. 1; also see Dunning, 1958). The hopes for Scotland in the post-war years were, therefore, closely aligned with the general expectations of other countries in Europe, including Ireland, which became a major competitor for Scotland, seeking

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to attract FDI in a rapidly internationalising economy. In doing so, Scotland sought to benefit from demonstration effects, spillover and supply-chain benefits, technology transfer and human capital improvements (UNIDO, 2005). The boost to macro- economic performance would be welcome also (Committee on Scottish Affairs, 1980).

There is, however, considerable debate about the long-term benefits that have accrued to the Scottish economy from these investments. As in other countries that have sought to use multinational investment as a means of leveraging their own capabilities (Dicken, 2003; UNCTAD, 2000), the expected impact of FDI has not been transformative to the extent hoped for. Scottish industrial structure has remained slow to change, and the conventional measurements of economic well- being, namely new firm formation, productivity growth, growth in per capita GDP, remain lower than in the rest of the UK; while manufacturing activity continues to shrink (Alexander, Armstrong, Ashcroft, Coyle, & McLaren, 2005; Ashcroft, 2002).

Explanations for the failure of FDI to bring the expected benefits to many host countries have centred on the difficulties in developing deep linkages and supply chains in host economies (Alfaro & Rodriguez-Clare, 2004; Linden, 2000; UNCTAD, 2001). In the Scottish context, Turok (1993) delineated ‘developmental’ and ‘dependent’ relationships between the host and multinational firms. In the former set of relationships, there would be technology and expertise transfer through a set of close, sophisticated and dynamic linkages, leading to the development of a highly innovative domestic sector, with all the self-reinforcing cluster benefits identified by Porter (1990). In the latter set of relationships, however, the trading links are significantly more unequal; cost-cutting rather than adding value is the key element in the indigenous–multinational firm relationship; technology is neither developed nor shared; and there is very little in the way of sophisticated supply-chain benefits or system-wide learning. Lastly, the system itself is vulnerable to external forces and distant corporate decision-making (Dicken, 2003; Jones, 2005). Particularly in electronics, which has been the supposed jewel in the crown of Scottish FDI and manufacturing in the years since 1945, the criticisms of weak linkages, limited spin-offs and shallow supply-chain benefits have been sustained and persistent (Brown, 2002; Hood & Young, 1976; McDermott, 1976, 1979; Toothill Committee, 1961). At the same time, however, it is clear that there has been some long-term investment and some successful spin-offs.

Industrial diversification, skill upgrading and enhancement of domestic compe- tencies were the key goals of inward investment policy in the UK. UK policy included offering grants and incentives to foreign firms to locate in particular regions, and the Scottish case was given priority. Industrial Development Certificates (IDCs) were required before any firm could set up a new factory, and these could be used as a tool to direct investments to particular locations. The Scottish New Towns, established in sequence from the late 1940s through to the 1960s, offered opportunities and assistance for greenfield investments and quickly became the centres of new industrial growth. Studies of the impact of regional policy in Scotland have generally concluded that the greater attention paid to planning from the 1960s had a positive effect on the number of factory openings and employment generated; and that this impact was significantly greater on the foreign-owned than the indigenous manufacturing sector (Ashcroft & Ingham, 1982; Moore & Rhodes, 1974). One of the important implications of this, however, is that, if firms were sufficiently mobile, then their location could be influenced in this way. Therefore, the level of commitment to the specific locality was limited, at least at the outset of the relationship.

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Scotland was, then, both welcoming and attractive to new FDI. Of 96 firms surveyed in 1969, by far the largest number (32) identified government financial inducements as the most important factor in the decision to invest in Scotland. Availability of labour was the second ranking factor, followed by IDC policy and the possibility of market growth in Scotland; a number of firms suggested that they might have invested elsewhere had the IDC policy not actively directed them to Scotland (Forsyth, 1972). Haug (1986) reported a study of US high-technology firms that found low start-up costs, including readily available and subsidised factories, and the availability of skilled, relatively cheap workers, to be the main attractions of Scotland. He argued that there was a shift from the early 1950s incomers, who were attracted by the availability of Regional Development Grants and the presence of low-cost labour; through to the later period in the 1960s and 1970s, when skills, proximity to universities and some early economies of concentration began to appear in the emerging cluster of firms and technologies. It is from the late 1960s that the indigenous Scottish electronics sector began to appear (Firn & Roberts, 1984) and, by the second half of the 1970s, some 58% of electronics enterprises in the country were Scottish, though they accounted for only 10% of employment (Booz, Allen & Hamilton, 1979). By this period, therefore, it is clear that the policy strategy was having some success: inward investment was contributing significantly to Scottish employment, and manufacturing was beginning to diversify. In at least one sector, notably electronics, the emergence of a cluster of firms and technologies gave hope that an indigenous industry could be developed, and that the spillover, supply-chain and learning benefits would begin to accrue. It is worth noting, however, that the early explanations for investment in Scotland, namely financial incentives, the availability of cheap, skilled labour and the opportunity to move into ready-built factory units could all be easily replicated elsewhere.

Employment in Scottish foreign manufacturing firms reached its climacteric in the 1970s. FDI in Scotland was not immune to changes in the international economy. One analysis concluded that ‘as far as the MNEs are concerned, the expansionary phase of their activities in Scotland must be placed in the wider context of the MNEs’ corporate strategies in the European operations. Regional or national policy variables are in that context of relatively minor importance’ (Majmudar, 1983, p. 168). By the mid-1970s, the international economy was in rapid contraction, reeling from the twin shocks of the oil crisis and the breakdown of the Bretton Woods settlement. MNEs began to reassess their strategic priorities and look for ways of cutting costs. This had a particularly harsh impact on Scotland, and many of the early multinationals reconsidered their commitment to Scottish production. Hood and Young (1982) estimate that, between 1976 and 1981, at least 61 foreign- owned subsidiaries, which had employed at their peak up to 44,000 workers, closed. Some of the biggest and (by the mid-1970s) most established names of the Scottish manufacturing sector engaged in this retrenchment: Singer, Peugeot-Talbot, Good- year, Honeywell and Hoover all either closed or greatly reduced their presence in Scotland. The reasons cited by these firms are revealing: the development of new technology and the emergence of integrated, pan-European production systems (Boddewyn, 1979; Jones, 2005) shifted their attention away from Scotland, while poor productivity and difficult labour relations often played their part (Court of Enquiry, 1968; Young & Hood, 1977).

It is in this period that a clear disconnection between the strategies of policy makers and MNEs can be discerned. Policy makers sought to exploit the enterprises’

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ownership advantages, but the latter were mostly interested in gaining access to the financial incentives, relatively cheap skilled labour as well as cultural, linguistic and geographical location advantages that Scotland held. At the same time, Scotland seemed deficient in resources and capabilities that would enhance the levels of MNE subsidiary commitment and embeddedness. The barriers to exit, in the form of a highly skilled and sector-specific labour force; a set of supply-chain relationships; capital-intensive commitment to R&D facilities; and, headquarters managerial commitment to Scottish production had not been effectively developed across a wide spectrum of investments. Inward investment in Scotland had brought diversification, but not transformation (Committee on Scottish Affairs, 1980).

Identification of this clear strategic disconnection between the policy and the MNEs, however, occurred at precisely the point that events in the wider UK economy were quite dramatic. The staple industries entered the final period of rapid decline and, from the election of the Conservative governments in 1979, state support and subsidies began to be withdrawn (Lee, 1995; Payne, 1996). Unemploy- ment rose rapidly and the imperative for inward investment and new employment increased.

Faced with these difficulties, policy towards inward investment entered a new phase and took on some new institutional characteristics. The Scottish Development Agency was created in 1975 (Halkier, 2006) and Locate in Scotland (LiS) in 1981, largely as a result of a lengthy parliamentary investigation (Committee on Scottish Affairs, 1980).1 LiS was one of the earlier inward investment attraction agencies to be established around the world; and gained a reputation for professionalism and highly effective marketing of Scotland as a destination for internationally mobile investment projects (Scottish Affairs Select Committee, 1999).

As indigenous manufacturing declined in the 1970s and 1980s, the relative importance of FDI rose. At the peak in 1975, the 112,000 people employed in foreign-owned industry represented 18.2% of the manufacturing workforce. In 1995, the foreign sector had 85,000 employees, but this accounted for 29.8% of those in manufacturing. FDI was highly significant to the Scottish manufacturing base but it remained vulnerable to shifts in the international economy.

The second wave of multinational restructuring from the 1990s had a significant impact on Scotland. A number of case studies reported by Young, Hood, and Firn (2002) revealed that Scottish manufacturing remained highly vulnerable to shifts towards lower-cost production locations, commonly in Eastern Europe and Asia. The nature of much of Scottish-based MNE manufacturing meant that local managers were often unable to influence decisions relating to the development of global supply-chains and corporate centralisation; or to protect the Scottish affiliates. The Scottish Affairs Select Committee (1999, paragraph 57) noted the relative shortage of high-value and knowledge-intensive inward investments. In addition to the global restructuring issues in the 1990s, the collapse in the electronics industry was devastating. In 1999, there were 41,100 individuals employed in the Scottish electronics sector. By 2003, this had been cut to 21,500. Over the same period, the value of total output fell from £11.4bn to £5.1bn (The Scottish Government, 2003). At its peak in 2000 the electrical and instrument engineering sector accounted for 58% of Scotland’s manufactured exports by value. This industry remains Scotland’s largest exporting sector and accounted for 33% of Scotland’s total manufactured exports in 2007, despite falling, in absolute terms over the period, by more than 60% (The Scottish Government, 2007).

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It is clear, therefore, that weaknesses remained in the Scottish economic structure; and there were concerns about the changes that FDI had brought. The anxieties relating to embeddedness and high-value projects remained, and vulner- ability to changes in international investment patterns continued to represent a significant threat. But there were also some successes: from the 1980s, there were clear attempts to address the low-value nature of many of the investments, and in the 1990s sustained and concerted effort was directed towards building clusters (Botham & Downes, 1999), investing in aftercare programmes and encouraging embeddedness (Scottish Affairs Select Committee, 1999, paragraphs 65, 99). By 2001, the newly devolved Scottish government, without abandoning inward investment entirely, shifted towards ‘modern thinking on the importance of supply-side drivers to economic development and the key roles played by entrepreneurship, skills, new technologies and appropriate infrastructure in stimulating output growth’ (Ashcroft, 2002, p. 22). Responding to the new challenges (and therefore lower labour costs) of EU enlargement and wider globalisation, policy began to focus on the upgrade of domestic capabilities through education, provision of infrastructure and focus on R&D grants for both indigenous and overseas-owned firms.

MNE evolution: an international management perspective

Most of the early research on MNEs focused on the headquarters as the key actor in the multinational system and also considered the parent–subsidiary relationship from a traditional hierarchical perspective (Bartlett & Ghoshal, 1989; Birkinshaw & Morrison, 1995; Daniels, Pitts, & Tretter, 1984; Dunning, 1995; Roth & Morrison, 1990). Thus, the headquarters was viewed as the sole source of capabilities within the MNE (Birkinshaw & Hood, 1998; Birkinshaw, Hood, & Jonsson, 1998; Lipparini & Fratocchi, 1999).

In the 1980s, nonetheless, it was acknowledged that foreign subsidiaries could also contribute to the MNE’s stock of capabilities, with benefits for the entire multinational system. This was also reflected in the literature on subsidiary roles, which flourished during the 1980s and 1990s. During this era, researchers created numerous tools to classify the various mandates, missions or roles that subsidiaries may undertake within MNE operations. Subsidiary roles can be ‘assigned’ by the parent (Bartlett & Ghoshal, 1989; Prahalad & Doz, 1981), ‘assumed’ through subsidiary initiative (Birkinshaw, 1997), or determined by environmental influence (Forsgren, Holm, & Thilenius, 1997; Ghoshal & Nohria, 1989); while in most cases they are defined through an interaction of these three mechanisms. The ‘subsidiary role classification’ stream of research also represented a change of paradigm in the MNE literature. Analytically, MNEs were perceived to evolve from decisively hierarchical organisations towards strategically-networked differentiated heterar- chies (Bartlett & Ghoshal, 1989; Hedlund, 1986, 1994), with subsidiaries being assigned different mandates in order to secure a range of objectives.

One of the first approaches to distinguish among the different roles of subsidiaries is attributed to the pioneering work of White and Poynter (1984), who found considerable asymmetry in strategic importance, product development tasks or other value-adding activities for subsidiaries based in Canada. According to their typology, subsidiaries may develop three distinctive dimensions in the process of expansion into foreign markets. First, they explore new product areas and production procedures (product scope). Second, they expand into new geographical

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locations to market their products (market scope). Third, they generate value-adding activities (value-adding scope). The research of White and Poynter (1984) identified distinctive subsidiary roles including the miniature replica, rationalised manufac- turer, product specialist and strategic independent subsidiary roles. The motivations for this and other research in Canada derived from concerns about the impacts of US-owned MNEs on economic development in the country. For example, strong criticism was directed at the ‘truncated’ miniature replica category, which produced at low volume and high cost behind protective tariff barriers. Conversely, there was significant policy interest in ‘world product mandate’ roles, in which the subsidiary assumes the overall responsibility for the design, manufacturing and worldwide marketing of a product, with significant positive economic benefits assumed for the economy (Rugman & Bennett, 1982).

A somewhat different perspective for the subsidiary-focused contribution to MNE evolution and subsidiary roles emerged from the work of Bartlett and Ghoshal (1986, 1989). Their approach emphasises the impact of knowledge competencies in the global economy; suggesting a more direct emphasis (compared with scope typologies) on the subsidiary’s creativity and access to valuable resources. This ‘knowledge-based’ approach is based on the assumption that as MNEs seek to achieve global competitiveness, they are forced to manage dispersed activities across numerous continents and cultures simultaneously, rendering the need for inter-unit coordination an imperative. Although White and Poynter (1984) also noted that subsidiaries may be confronted with different challenges and require different administrative practices, ‘knowledge-related’ typologies extended this line of thinking, considering the extent of subsidiaries’ discretion in respect of managerial authority a decisive factor contributing to varied strategic roles. Overall, Bartlett and Ghoshal (1986, 1989) argue that subsidiaries can be classified into four types, namely ‘strategic leaders’, ‘black holes’, ‘implementers’ and ‘contributors’; based on two dimensions, namely the competitiveness of the local environment and the organisational competence of the subsidiary.

Knowledge-related typologies were further developed by Gupta and Govindar- ajan (1991), who approached MNEs as networks of transactions that comprise capital, product and knowledge flows. According to these authors, knowledge flows were considered to be the most important dimension of MNE activities. Two aspects of knowledge flows were identified: magnitude (i.e. the extent to which subsidiaries engage in knowledge transfers) and directionality (i.e. subsidiaries as recipients or providers of knowledge) of transactions. Combining these two dimensions, Gupta and Govindarajan identified four subsidiary roles, namely ‘global innovator’, ‘integrated player’, ‘implementer’ and ‘local innovator’.

Parallel to the aforementioned developments, the 1980s and particularly the 1990s witnessed a shift from a ‘hierarchical’ towards a ‘heterarchical’ conceptualisa- tion of the MNE; and from a parent-based towards a subsidiary-based focus. This tendency is characteristic of the view that autonomous subsidiaries can increase their influence within the MNE system (Forsgren, Holm, & Johanson, 1992) and contribute towards firm-specific advantages (Birkinshaw et al., 1998). In a heterarchical structure, subsidiaries with critical resources and powerful positions could influence not only their own activities but also those of the rest of the MNE (Doz & Prahalad, 1993; Forsgren, 1989). This viewpoint has been mainly supported by research under the ‘subsidiary choice’ perspective, and considered autonomy as both a prerequisite and a desirable result of subsidiary development

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(Birkinshaw, 1997; Birkinshaw & Hood, 1998; Hood & Taggart, 1999; Paterson & Brock, 2002). In a similar vein, studies have positively linked the notion of autonomy to the subsidiary’s innovative potential (Ghoshal & Bartlett, 1988; Gupta & Govindarajan, 1994; Jarillo & Martinez, 1990) and the pursuit of entrepreneurial initiatives (Birkinshaw, 1997, 2000).

The Scottish experience: from branch plants to developmental subsidiaries

The major focus of research on FDI in Scotland, undertaken over a period of more than 30 years, has concerned the evolutionary relationship between multinational corporate–subsidiary strategy (paralleling the MNE international management literature stream) and regional economic development. The stimulus to this research derived from a paper by Firn (1975) on external control in the Scottish economy, in which he famously described less developed regions in the UK as ‘branch plant economies’. Firn (1975, p. 164) contrasted the ‘routine, management-type super- vision of branch plants’ with the ‘innovative, entrepreneurial-type decision-making’ required for long-run development. As Brown (2002, p. 130) noted, ‘[this] term was used to depict a regional economy which was highly dependent upon truncated manufacturing operations of multinational enterprises with few decision-making powers, bringing little in the way of self-sustaining economic development to the host economy.’ The thesis of ‘the branch factory syndrome’ was confirmed in part by the Hood and Young (1976) survey of US MNE subsidiaries in Scotland, which showed limited levels of R&D and marketing. These two functions represented the highest levels of loss of autonomy. The importance of value-adding activities and decision-making responsibilities in manufacturing branch plants in order to enhance the economic benefit for a host economy was thus recognised.

Subsequent research in Scotland began to probe more deeply into other features of inward FDI, highlighting emerging European Economic Community-based corporate strategies as regional integration progressed (Dunning & Robson, 1988; Hood & Young, 1988; Young & Hood, 1976); as well as specific country-of-origin factors and varying entry modes (Hood, Reeves, & Young, 1981; Hood, Young, & Lal, 1994). Haug, Hood, and Young (1983) identified substantial employment effects and technology transfers in R&D units in electronics subsidiaries in Scotland; whereas, Ashcroft and Love (1993) cast doubts on whether spillover benefits from MNE subsidiaries occurred to any significant degree in UK peripheral regions, including Scotland.

Overall, the research evidence showed considerable heterogeneity in the population of MNE subsidiaries in Scotland. Major interest, therefore, turned to the theme of the relationships between MNE subsidiary roles and economic impact, drawing initially upon the work of Canadian authors such as Rugman and Bennett (1982), and White and Poynter (1984). Young, Hood, and Hamill (1988) presented a hypothetical categorisation of the relationships between subsidiary roles (based upon the White & Poynter, 1984 classification) and economic development impacts in the areas of employment, balance of trade, technology transfer and entrepreneurial capacity. These relationships were explored in a large-scale empirical study ofMNE subsidiaries in Scotland (Young et al., 1988): the largest group identified (39% of the sample) were conventional branch plants (‘rationalised manufacturers’ in the White and Poynter categorisation), albeit high-tech versions of the ‘branch factory syndrome’. However, the second largest group (35% of the sample) were ‘product specialists/strategic

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independents’, whose characteristics included a narrow, specialised product range, broad market area (Europe and possibly global), significant R&D and marketing, and high-level authority delegated to management at subsidiary level. These subsidiaries were some of the largest employers in the foreign sector, and both significant direct and dynamic economic benefits were suggested for the economy.2

By the late 1980s and early 1990s, research on MNEs and regional economic development was beginning to develop more rapidly in both the international management and economic geography fields. An effort was made to integrate these literature streams by Young, Hood, and Peters (1994).3 These authors introduced the notion of the ‘developmental subsidiary’ and proposed a linkage between subsidiary strategies and concepts of virtual and vicious cycles of technological development. The potential contribution of these MNE subsidiaries to dynamic benefits and evolving comparative advantage at the country and regional levels was highlighted. Recognising that one or a small number of sectorally or technologically diverse developmental subsidiaries would have little impact, these authors discussed the integration of MNEs and cluster strategies for economic development. Two routes to cluster formation were proposed, namely the local sourcing route and the technological innovation route. Within the latter route, developmental subsidiaries may play a key role, alongside a concentrated package of innovative policy measures at the micro-level, and effective management of the macro-economy and investment in the infrastructure.

The conceptual paper by Young et al. (1994) has not been fully explored in subsequent empirical work. However, interest in the differential contributions of production subsidiaries (branch plants) and developmental subsidiaries led to the commissioning of a study on the subject in Scotland, prepared by FirnCrichton Roberts Ltd and University of Strathclyde (2001; see also Young et al., 2002). Both the case study and economic modelling results were somewhat ambiguous. Nonetheless, key attributes of the developmental subsidiaries concerned their comparatively higher levels of management autonomy and authority; and both their greater level and depth of management and their entrepreneurialism. The strong commitment of Scottish executive teams to the firm and country was also in evidence.

Subsidiary initiative and the entrepreneurial subsidiary

The late 1990s experienced an important shift to the focus of MNE study towards a more heterarchical or subsidiary-based view. Also, the aforementioned FDI developments and MNE research undertaken in Scotland informed a creative and productive stream of subsidiary-focused research by Birkinshaw, Hood and colleagues concerning subsidiary strategies, evolution and innovation. Scotland was included in some of the empirical research, examples including Birkinshaw and Hood (1997) on development processes in subsidiaries in Scotland and Canada; and Birkinshaw and Hood (2000) on subsidiaries in industry clusters in Canada, Scotland and Sweden. The evidence from Birkinshaw and Hood’s (2000) study suggests that MNE subsidiaries in leading-edge clusters tended to be more autonomous, more embedded in local clusters, and have greater market scope than their counterparts in other industry sectors.

A great deal of this research has focused on the notion of subsidiary initiative (Birkinshaw, 1996, 1997, 2000). Birkinshaw (1997, p. 207) defined subsidiary

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initiative as ‘essentially an entrepreneurial process’ manifested through one or a set of autonomous actions ‘undertaken with a view to expanding the subsidiary’s scope of responsibility’ (Birkinshaw, 2000, p. 8). Subsidiary initiatives are viewed as opportunity-exploiting projects with benefits for the entire MNE rather than limited- scope activities that are of interest to the individual subsidiary per se (Birkinshaw & Ridderstråle, 1999).

However, this approach to subsidiary initiative may be too narrow and tends to disregard important aspects of the subsidiary’s entrepreneurial activity. Indeed, the entrepreneurship literature examines the value-adding potential of activities linked to both incremental and radical innovation. Following Andersson and Pahlberg’s (1997) rationale related to technological development and innovation, subsidiary entrepreneurship can be viewed as comprising not only radical change and innovation; but also less fundamental but still significant improvement that continuously takes place at the subsidiary level. Such ‘incremental innovations’ (Freeman, 1987) may have a significant impact on the subsidiary’s operations. Viewed in this light, ‘strategic entrepreneurship’ may relate to more radical opportunities identified at the subsidiary level. The pursuit of these opportunities requires additional resources and corporate approval. On the other hand, ‘operational entrepreneurship’ encompasses opportunities with a more operational locus (Dutton, Ashford, O’Neill, Hayes, & Wierba, 1997), thus being more simple to implement. The latter opportunities are developed as part of the ‘entrepreneurial’ subsidiaries’ daily activities, and hence contribute to their entrepreneurial record.

A strong entrepreneurial culture in the subsidiary may permeate various levels and functions of the MNE subsidiary, contributing to dispersed corporate entrepreneurship. This view is consistent with that put forward by the emerging entrepreneurial subsidiary literature strand that is based on research conducted on Scottish and other UK MNE subsidiaries (Boojihawon et al., 2007; Dimitratos et al., 2009). Conducting case study research on advertising agency subsidiaries in the UK, Boojihawon et al. (2007) found that an entrepreneurial culture in MNE subsidiaries includes global vision, entrepreneurial orientation (innovativeness, proactiveness, risk-taking attitude) and entrepreneurial MNE network management. They also provide evidence suggesting that responsiveness to local environmental conditions is both affected and affects subsidiary autonomy and responsiveness to host environmental conditions. Based on a large-scale empirical study across the UK, Dimitratos et al. (2009) further found that subsidiaries with a proven entrepreneurial record contribute to host economic development activities in terms of technology and management know-how transfers to other firms, company spinoffs, and enhancement of innovativeness of other firms; and that entrepreneurial subsidiaries pursue intensive networking activities with partners external to the MNE system, including host actors.

Dimitratos et al. (2009) operationalise entrepreneurial output as an activity that may include, among other major innovative activities, more subtle aspects such as restructuring of organisational forms or developments in innovative work practices. Therefore, it may be that subsidiary entrepreneurship, as a broader notion, encompasses innovative, proactive and risk-taking behaviour (Boojihawon et al., 2007); is manifested through both radical innovation (strategic entrepreneurship) and incremental but continuous change (operational entrepreneurship) (cf. Dimitratos et al., 2009); and, in both cases, is likely to bring value-creating potential to the individual subsidiary and the host environment. Drawn from the discussion

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hitherto, Table 1 provides a summary of the characteristics of the branch plant, developmental and entrepreneurial subsidiary.

The entrepreneurial subsidiary in a historical perspective

In the MNE literature, scholars have long recognised the importance of ownership- specific advantages to the understanding of the MNE’s existence (Hymer, 1976). According to Dunning (1980, 1988) these advantages can be asset advantages that stem from the exclusive possession of income-generating assets; and transaction advantages that reflect the MNE’s ability to economise on transaction costs. The work of Buckley and Casson (1976) has, however, had the principal impact on economic thought concerning the MNE. These scholars argued that firms grow by internalising imperfect external markets until the point that transaction benefits from further internalisation are outweighed by costs. They also stressed the ability to

Table 1. Characteristics of the branch plant, the developmental subsidiary and the entrepreneurial subsidiary.

Branch plant

Low/no autonomy Low value added scope: assembly High proportion of imported inputs (High volume activity and integration within regional/global value chains more recently) Potential economic contributions: Direct contributions: employment, exports [depending on market scope], productivity, technology transfer, upgrading of industrial structure

Dynamic contributions: minimal, principally limited local linkages

Developmental subsidiary

Significant autonomy/authority Subsidiary management initiative Internal competencies Wide value added scope: range of value-adding activities (R&D, procurement, manufacturing, marketing)

Two types of developmental subsidiaries: Integrated value chain (associated with strong local supplier capabilities) Technological innovator (integrated within and contributing to technological clusters) Potential economic contributions: Direct contributions: as above Dynamic contributions: linkages and spillovers; subsidiary innovation and upgrading; managerial commitment and entrepreneurialism

Entrepreneurial subsidiary

Strong entrepreneurial culture and orientation Dispersed corporate entrepreneurship Manifestations of both strategic and operational entrepreneurship Subsidiary global vision and leadership Increased subsidiary capabilities Entrepreneurial intra-MNE network activities Responsiveness to local environmental conditions e.g. innovative local clusters, local embeddedness

Subsidiary autonomy Potential economic contributions: Direct contributions: as above Dynamic contributions: as above; enhanced subsidiary capabilities; entrepreneurial culture and opportunity identification; internal and external network performance

412 P. Dimitratos et al.

innovate as the crucial MNE-specific advantage leading to internalisation across international boundaries.

A difficulty in this internalisation viewpoint is that it assumes that MNE firm- specific advantages and innovative knowledge originate in the headquarters (Rugman & Verbeke, 1992), a fact that may contradict modern reality. Local subsidiary-level initiatives and innovation-related knowledge are likely to contribute to the development and exploitation of MNE-specific advantages (Birkinshaw & Hood, 2001). Consequently, subsidiary initiatives and entrepreneurship represent the autonomous activities of the subsidiary to alter its role; and are mainly driven by subsidiary-specific advantages, as presented in the subsidiary-focused approach in the literature.4

In a recent contribution, Buckley and Carter (2004) posited that ‘knowledge combination’ in MNEs refers to a value-creating process associated with the amalgamation of different types of spatially separated knowledge in the MNE. If this process is not properly managed, imperfections in the form of knowledge, decision objective and coordination losses can emerge. According to Buckley and Carter (2004), the ‘initiator-entrepreneur’, who can be the motor of this process, is able to anticipate potential gains and costly imperfections. This idea follows Buckley’s (1990) plea in favour of incorporating the concept of entrepreneurship to a greater extent into the international business theory. It follows that this initiator- entrepreneur may be MNE subsidiary management in the host country, who can reduce uncertainty associated with innovative and entrepreneurial projects through exchanging knowledge with local players (Buckley & Carter, 2004). Hence, the internalisation approach continues to have substantial relevance to our under- standing of modern-day MNE activities, complementing international management thinking.

This complementarity is illustrated also through the importance of the locational factor of the host country in the strategy of the MNE (Buckley & Ghauri, 2004). Due to the increasing wealth in many emerging markets, the advancement of information and communication technology, and falling trade barriers, subsidiaries are increasingly involved at an early stage in the MNE innovation process (McCann & Mudambi, 2004). Subsidiaries in host countries may strengthen their location- driven advantages; gain knowledge, lessen transaction costs and risks associated with innovative projects; and augment their entrepreneurial competencies and credibility in the MNE system (Birkinshaw, 1999; Rugman & Verbeke, 2001). Viewed in this light, the notions of subsidiary initiative and entrepreneurship are likely to enlarge the scope of MNE research.

The idea of the ‘global factory’, which fits nicely with the notion of the entrepreneurial subsidiary, has recently been developed by Buckley (1996, 2007, 2009), and Buckley and Ghauri (2004). The global factory refers to an integrated MNE network that combines core functions, distributed manufacturing, service operations and marketing activities. This differentiated MNE network chooses location and ownership policies worldwide in order to maximise profits. However, this often involves outsourcing or offshoring rather than internalisation of activities. It follows that this MNE governance structure can benefit from a flexible network configuration in which subsidiaries are characterised by an entrepreneurial culture, learning effects and linkages with domestically owned firms (Buckley, 2007, 2009).

In addition, according to Gourvish (2006), two dominant paradigms on the business history research agenda are those of Alfred D. Chandler Jr. and Michael

Business History 413

Porter. According to Chandler (1962), large-scale investments and multi-divisional forms of big businesses appear to be prerequisites for long-term survival. The assumption in this line of thinking is that big (multinational) firms may enjoy advantages of size that can offer them enhanced business performance. Porter’s (1990) study included an analysis of countries’ ‘diamonds’, stressing the importance of industrial clusters of supporting and related industries. Therefore, Porter implicitly underscores the importance of the embeddedness of the firm in the local context with actors involving distributors, suppliers, competitors, and government agencies. This rationale is close to the notion of subsidiary initiative and local embeddedness, which is highly characteristic of Birkinshaw’s ideas on the subject.

In short, the subsidiary entrepreneurship notion represents a culmination of evolving MNE research that acknowledges the importance of local subsidiaries in reducing uncertainty linked to innovative projects of an operational or strategic entrepreneurial nature. Furthermore, moving away from the Chandlerian view, the subsidiary entrepreneurship ideas extend Porter’s ideas on local clustering and elaborate on the notion of the quasi-autonomous heterarchical subsidiary that may share different firm-specific advantages than those of the headquarters (in implicit contrast with the viewpoint of Chandler).

IBM, Greenock: evolution and transformation during 1951–2008

In order to illustrate the main points referring to MNE subsidiary evolution advanced hitherto, empirical evidence drawn from case studies of the Scottish subsidiary of the IBM Corporation is discussed. In particular, a synthesis occurs of key insights from three relevant investigations that were conducted at distinct time intervals in this subsidiary located in Greenock, Scotland. Gourvish (1995) accentuates the importance of the case study method in the research methodology of business history.

The first case study was prepared mainly from secondary sources and related to the history of IBM, Greenock from its start-up till 1983 (Young, 1984). The second case study derived from an Economic and Social Research Council (ESRC) funded project investigating subsidiaries of UK-based MNEs. This examination was carried out during 2004–2005 and, among other subsidiaries, IBM, Greenock was analysed in depth. Specifically, four interviews with subsidiary top management and on-site observation were undertaken. The third case study involved one follow-up interview with a key subsidiary manager of IBM, Greenock during 2008. All interviews were supported by archival data and other relevant documentary material up to July 2008.

IBM’s subsidiary in Scotland was established in 1951 as a purely manufacturing facility, involved in the assembly of a wide range of calculating and tabulating machines for the UK market. During its early years of existence, the subsidiary was essentially assigned a branch plant status in that it was given limited value-adding scope and a low level of autonomy. A high proportion of the manufacturing facility’s inputs were imported. Although initial employment was 250 people, the plant enjoyed particular location-specific benefits, such as the availability of government assistance and high quality of local engineering skills. With little decision-making power, the site made a limited contribution to economic development in the host economy, except in terms of direct employment benefits.

From the mid-1960s, the plant went through a period of accelerated expansion, accompanied with the undertaking of new responsibilities, primarily the assembly

414 P. Dimitratos et al.

and testing of IBM’s first desk-top computer. The 1970s witnessed increased responsibility in high-volume, low-cost manufacturing products. Employment grew to 1600 people in the mid-1960s; and to around 2000 people in the 1970s. In general, the 1970s saw a clear enhancement of the subsidiary’s branch plant role through an extension of its product offerings and a rise in the levels of autonomy and authority. The plant’s exceptional performance increased its credibility at the parent corporation level while subsidiary management was proactively sensing changes in the market.

During the 1980s, IBM, Greenock experienced significant growth. Employment in the early 1980s amounted to 2500 people, while exports accounted for 50% of the plant’s turnover. In January 1983, the plant became responsible for IBM’s personal computers series for the entire Europe, Middle East and Africa (EMEA) region. At the end of the 1980s, the plant was introducing a new product every four working days. The subsidiary became a final assembly and test plant, with some process engineering also undertaken on-site. Through expanding its role, the subsidiary was gradually transformed from a branch plant to a developmental subsidiary associated with important contributions to the local economy. Expansion was accompanied by an increase in the proportion of locally-sourced inputs (120 Scottish suppliers in 1981) and the employment of significant numbers of local graduates. Critical factors in the subsidiary’s development were considered to be the presence of strong local management; the consistently high levels of performance that rendered the Greenock case strong at the MNE group level; and the support and lobbying of LiS, the inward investment agency in the country. The subsidiary’s local embeddedness was associated with benefits such as support and exploitation of high-quality local skills and resources in Scotland.

Being a high-performing subsidiary staffed by high-quality local management, the subsidiary entered the 1990s, which was considered the ‘decade of change’ for IBM, Greenock, in a position of strength. The subsidiary managed to upgrade its value- adding scope through the introduction of many non-manufacturing-related activities on-site. In 1990, the plant became responsible for numerous areas of product development. In 1995, the first help centre was launched; while in 1997 the site was allocated the production of all IBM personal computers for the EMEA market, undertook certain global procurement and distribution functions, and gained the product development mandate for PC servers. Employment increased to 3600 people in late 1999, of which approximately 200 were involved in product and software development, including global responsibilities. Exports amounted to 86% of annual sales, with the subsidiary becoming the largest exporter in Scotland. The Greenock subsidiary made a significant contribution to the local economy, not only in terms of its massive financial investment, job creation and exports, but also through the development of local supplier capabilities and potential technology spillover effects.

During its metamorphosis from a branch plant to a developmental subsidiary, the firm continued to transform itself through reinforcing its internal competencies. Subsidiary management invested considerable effort in building an internal entrepreneurial culture that would allow the firm proactively to address changes in the market through a process of continuous transformation. In the mid-1990s, Greenock led a global assignment that essentially tried to predict what the business would be like in 2000. At that stage, there was a realisation that PC manufacturing was commoditising and, along with the increased competition from China, there was a clear need to alter orientation.

Business History 415

The pace of change accelerated at the beginning of the 2000s. In particular, in 2000 all card manufacturing was divested to Solectron. Between 2002 and 2005, all PC and server manufacturing was divested to Sanmina-SCI (USA); and most recently all the PC operations were sold to Lenovo (China). Along with these divestitures, the service activities continued to grow on-site, transforming the subsidiary to a services-based campus location. IBM, Greenock succeeding in transforming itself into a microcosm of the IBM Corporation, aided by local management efforts and support from Scottish Development International (part of Scottish Enterprise). In 2008, the Greenock location still employed around 2000 people, but had evolved from a 100% manufacturing-based operation into a 100% services-based location. The campus site is now involved in supply chain manage- ment, customer relationship management (CRM), technical support and software development.

The Greenock case provides an excellent example of an entrepreneurial subsidiary. Although initially being assigned limited value-adding scope and little autonomy through its branch plant status, IBM, Greenock has continued to transform itself in proactive and innovative ways. Over time, the plant expanded its value-adding scope and upgraded from assembly to development activities; and also transformed itself from a purely manufacturing to a service-based location in response to global forces. The subsidiary undertook entrepreneurial activities that were operational in nature, such as the development of innovative work practices to improve the working climate, and organisational restructuring to achieve efficiency and facilitate innovation. The subsidiary was also a pioneer in launching a structured innovation programme, which was then adopted by the entire IBM corporation. Subsidiary management highlighted how they constantly had to reinvent themselves and be very proactive and innovative at the individual, team and site level. Through its transformation, the development of internal competencies and increase in autonomy levels, the subsidiary also showed increased output of strategic entrepreneurship, such as involvement in the development of global and regional product and service offerings.

This process of continuous transformation has been based on subsidiary management initiatives and their systematic efforts to build strong intra-MNE and local networks. From the early years, subsidiary management invested in building solid relationships with its headquarters through promoting competent Greenock people to work at the parent firm and showing a track record of exceptional performance. This has helped the Scottish subsidiary increase its visibility and credibility with the headquarters and win bids for different projects. Table 2 summarises the major events of IBM, Greenock from its transformation from a branch plant to an entrepreneurial subsidiary.

Conclusions

Synopsis

In this paper, a discussion took place of how MNE subsidiary research has evolved in line with developments in MNE strategies and public policy changes in Scotland. In relation to the latter aspect, we explored how Scottish policy supporting FDI has changed from seeking efficiency improvement and technological development in the 1950s and 1960s to enhancing embeddedness and technological innovation through supply-side measures in the 2000s. We also analysed how the MNE literature has

416 P. Dimitratos et al.

T a b le

2 .

K ey

ev en ts

a n d ch a ra ct er is ti cs

in th e ev o lu ti o n o f IB

M , G re en o ck .

1 9 5 0 s– 1 9 6 0 s

1 9 7 0 s– 1 9 8 0 s

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se rv ic es

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P la n t re sp o n si b le fo r so m e

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Business History 417

T a b le

2 .

(C o n ti n u ed ).

1 9 5 0 s– 1 9 6 0 s

1 9 7 0 s– 1 9 8 0 s

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(fi n a n ce

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fo r E u ro p ea n m a rk et s.

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en q u ir y ce n tr e fo r E u ro p ea n

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a n d so lu ti o n s

in su p p ly

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to S a n m in a -S C I (U

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d .

418 P. Dimitratos et al.

recently given special attention to the empowerment of subsidiaries and development of subsidiary resources through the notion of subsidiary initiative (Birkinshaw, 1997). It was argued that this idea can be viewed in the context of internalisation theory (Buckley & Casson, 1976) that continues to be a markedly relevant approach in our comprehension of modern MNE activities. It was posited that there has been an evolution in the nature of Scottish subsidiaries from branch plant (Firn, 1975) to developmental subsidiaries (Young et al., 1994), each having dissimilar economic development impacts. It was also noted that very recent research conducted in Scotland and other parts of the UK introduced the notion of entrepreneurial subsidiaries (Boojihawon et al., 2007; Dimitratos et al., 2009); and this was explored in depth in the IBM, Greenock case. The evidence from this research suggested that this Scottish subsidiary has over time transformed into a firm with a strong entrepreneurial culture, pursuing strategic and operational entrepreneurial activities and rooted itself in a local network and economy that has benefited from this subsidiary’s activities.

Implications

In relation to implications for research, it is argued that the subsidiary-focused stream of research appears to have culminated recently in the idea of entrepreneurial subsidiaries. These quasi-autonomous units are characterised by an entrepreneurial culture and augmented subsidiary capabilities as well as enhanced network activities both within their MNE and host country contexts. These ideas, which favour the heterarchical approach in the MNE literature stream, accentuate the view that entrepreneurial subsidiaries seek to emphasise an organisation-wide culture of entrepreneurialism; engage in innovative projects of radical as well as incremental nature; and provide a positive economic development contribution to their host contexts. The notion of the entrepreneurial subsidiary enriches the MNE literature agenda and paves the way for fruitful future research, strengthening the heterarchical viewpoint.

As a geographically peripheral country, Scotland must compete on the basis of knowledge, skills and ingenuity rather than low-cost labour advantages. The findings of the IBM, Greenock case provide some support for the strengthening of the heterarchical perspective in the MNE literature. However, the IBM subsidiary may be a special case in terms of its longevity, successive transformations and substantial economic contributions. Considering the total FDI stock in Scotland, there is still evidence of significant heterogeneity in subsidiary roles. Strategies of global integration and global supply chain management suggest that the headquarters influence is paramount in many subsidiaries in the country, with branch factory operations suffering continuing restructuring and divestment.

Hence, the notion of MNE subsidiary evolution from branch plants to developmental and to entrepreneurial subsidiaries should not be viewed as a diminution of the strong influence that headquarters can still have over the formulation of MNE subsidiary roles and strategies nowadays. In an era of significant MNE restructuring and cost-reducing strategies, the role of headquarters seems vital. Consequently, an interesting research avenue is to explore how this entrepreneurial-heterarchical perspective can best complement the hierarchical viewpoint. This is essential in order for scholars to gain insights on how the parent firm can effectively release the innovative potential of its entrepreneurial subsidiaries

Business History 419

within the wider MNE system. Towards this objective, Buckley (1996, 2007, 2009) recently introduced the ‘global factory’ notion that effectively explores relevant governance challenges that MNE headquarters and their subsidiaries can face in a complex system of worldwide operations.

The major policy implication for Scotland and other countries refers to the fact that enhanced efforts are required to support subsidiary upgrading; and that features of the entrepreneurial subsidiary may provide a model upon which a new policy paradigm can be developed. Further refinement of supply-side measures fostering innovation and entrepreneurialism, and enhancing networking and spillovers in the host environment is important. However, the principal policy challenge is to promote the distinctive characteristics of the entrepreneurial subsidiary, namely the quality of management, its vision and leadership; effective motivation within the subsidiary; and embeddedness of an entrepreneurial culture within the modern MNE.

Acknowledgements

The authors gratefully acknowledge that part of the research discussed in this paper has benefited from an Economic and Social Research Council Grant (RES-000-22-0621).

Notes

1. The Scottish Development Agency was replaced by Scottish Enterprise in 1991; while LiS was subsumed within Scottish Development International in 2001.

2. The direct contributions of FDI refer to effects on capital formation, trade and the balance of payments; employment and human resource development; technology and innovation; and, market structure, performance and business practices. Dynamic contributions concern the long-run effects on dynamic comparative advantage associated with linkages and spillovers; and, enterprise development in both multinational subsidiaries and indigenous firms. Subsidiary embeddedness and upgrading is essential for sustaining the competitiveness of the subsidiary within the multinational group; and, for value-added, productivity growth and innovation in the host country.

3. In the international business field, research to integrate subsidiary roles and economic development in the UK and other European countries was further developed by a number of scholars associated with the University of Reading (for example, Pearce, 1999; Pearce & Papanastassiou, 1997; Tavares, 2001). In the economic geography field, significant contributions were made by Amin, Bradley, Howells, Tomaney, & Gentle (1994), Morgan and Sayer (1988) and Phelps (1993).

4. The theoretical roots of this stream of work are presented in Birkinshaw and Hood (1998). These comprise the product life cycle, internationalisation process, network perspective, decision process and regional development perspectives. These authors integrate these perspectives by taking a dynamic capabilities approach to subsidiary evolution.

Notes on contributors

Pavlos Dimitratos is Assistant Professor at the Athens University of Economics and Business, Greece and Visiting Senior Research Fellow at the University of Glasgow, UK. His research interests refer mainly to activities of multinational enterprises, internationalisation of small firms and international entrepreneurship.

Ioanna Liouka is Honorary Research Fellow at the Centre for Internationalisation and Enterprise Research (CIER), Department of Management, University of Glasgow, UK. Her research interests include MNE activities, corporate and international entrepreneurship.

Duncan Ross is Senior Lecturer in the Department of Economic and Social History at the University of Glasgow, UK. His research interests include the development of the Scottish economy and the impact of FDI and multinational companies in Scotland.

420 P. Dimitratos et al.

Stephen Young is Professor of International Business at CIER, University of Glasgow, UK. His research interests mainly concern multinationals, economic development and public policy; and the internationalisation of the firm.

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