What are the major concerns for corporations in developing and retaining expatriate employees, especially managers?

Foreign value-adding of industrial firms

Associations with international strategy and market experience

Anders Pehrsson School of Business and Economics, Linnaeus University, Växjö, Sweden

Abstract

Purpose – There is a lack of research on how the industrial firm’s international strategy is associated with basic and advanced value-adding modes of the wholly owned foreign subsidiary. The purpose of this paper is to fill the gap by answering two questions: how are relatedness between the firm and the foreign subsidiary, and the firm’s international scope associated with foreign subsidiary’s value-adding mode? How does the subsidiary’s market experience moderate the relationships? Design/methodology/approach – The study develops a conceptual model that integrates strategy theory and internationalization theory in order to explain basic value-adding modes (promotion, sales, and after-sales services), and advanced modes that also include product development and/or production. Also, the study tests the model using statistical data from subsidiaries of Swedish firms operating in Germany, the USA, and the UK. Findings – It was found that greater relatedness between the core business unit of the parent firm and the foreign subsidiary favors a basic mode. However, the foreign subsidiary’s market experience weakens the relationship, and the interaction triggers an advanced mode. Also, greater international scope of the firm favors an advanced mode. Research limitations/implications – The model test shows that research needs to consider both international strategy and market experience in explaining value-adding modes of an industrial firm’s wholly owned subsidiary. Practical implications – By using the study contributions the industrial firm’s efforts to efficiently implement international strategy would become more efficient as strategy coherence will increase. Originality/value – This paper contributes to literature on international strategy and internationalization by showing that international strategy and market experience of foreign markets mutually impact value-adding modes of wholly owned foreign subsidiaries.

Keywords Value adding, Foreign subsidiary, International scope, International strategy, Market experience, Relatedness

Paper type Research paper

Introduction The mode of value-adding activity on a foreign market manifests the industrial firm’s capacity to realize the international strategy (Calof and Beamish, 1995; Maitland et al., 2005; Porter, 1985, 1990). Thus, by relying on coherent relationships between international strategy and mode of local value-adding an industrial firm would gain a solid ground for crucial decisions regarding implementation of international strategy. However, despite the importance of the issue, there is a lack of research on relationships between international strategy and mode of value-adding on a foreign market.

This study contributes to literature on both international strategy and internationalization by developing and testing an integrated conceptual model that draws on strategy theory and internationalization theory. The model explains basic and advanced value-adding modes of industrial firms’ wholly owned foreign subsidiaries.

The current issue and full text archive of this journal is available at www.emeraldinsight.com/1755-425X.htm

Received 6 August 2013 Revised 15 November 2013

Accepted 16 November 2013

Journal of Strategy and Management Vol. 7 No. 2, 2014

pp. 155-171 r Emerald Group Publishing Limited

1755-425X DOI 10.1108/JSMA-08-2013-0047

155

Foreign value- adding of

industrial firms

The study establishes coherent relationships with firm/subsidiary relatedness and the firm’s international scope. Furthermore, the study establishes that the subsidiary’s market experience is a central moderator of the relationships.

A foreign subsidiary with basic value-adding activities is involved in promotion, sales, and/or after-sales services, while an advanced mode also includes product development and/or production (Delany, 2000). Relatedness is conceptualized as similarities among organizational units along central product/market dimensions (Pehrsson, 2006; Stimpert and Duhaime, 1997; Tanriverdi and Venkatraman, 2005). Furthermore, the range of foreign markets in terms of countries or geographical regions penetrated by the firm defines its international scope (Hitt et al., 2007), while the subsidiary’s market experience concerns experience of market conditions such as the behavior and characteristics of customers and competitors (Yeoh, 2004).

Investment in a basic value-adding mode in a foreign market is frequently followed by investment in an advanced mode (e.g. Ambos et al., 2011; Delany, 2000; Manolopoulos, 2006). In particular, the shift to an advanced mode is crucial as the firm’s local investment in foreign product development and/or production means extensive set up costs and a long term commitment that shapes future alternatives (Maitland et al., 2005). Thus, the study’s examination of the crucial shift applies the discontinuous view of internationalization (e.g. Pedersen and Shaver, 2011).

To my knowledge, despite its relevance the combination of firm/subsidiary relatedness and international scope is an unexplored explanation of value-adding modes of foreign subsidiaries. The combination would complement previous explanations that apply internalization theory (e.g. Buckley and Casson, 1976; Hennart, 1982; Rugman, 1981), or localization theory (e.g. Dunning, 1993, 1998). For example, Buckley and Casson (1976) explain localization of operations by the firm’s desire for internalizing activities and keeping transactions costs low. Here, a foreign subsidiary will be responsible for advanced value-adding as long as the benefits of internalization exceed the costs. Localization theory (Dunning, 1993, 1998) underscores that the firm will locate activities based on an evaluation of location-specific factors such as import barriers and structure of the local market.

According to the stages model of internationalization (Johanson and Vahlne, 1977; Luo and Wang, 2012; Malhotra et al., 2002) a firm goes international in an incremental manner where export activities are generally followed by direct investments such as establishment of local sales and production. In this evolutionary process of expansion, increased market knowledge leads to extended market commitment. However, the stages model does not acknowledge international strategy as a central antecedent of the firm’s internationalization (Chetty and Campbell-Hunt, 2004) but considers path dependence to be crucial (Malhotra et al., 2002).

The foreign subsidiary should be viewed as a semiautonomous organizational unit (Birkinshaw et al., 2005) that influences decisions on value-adding. Thus, the subsidiary’s market experience manifests path dependencies that may moderate the relationship between the firm’s international strategy and the subsidiary’s mode of value-adding (Pehrsson, 2009).

In summary, there is a lack of research on how the industrial firm’s international strategy is associated with basic and advanced value-adding modes of the foreign subsidiary. The study tries to fill the gap by answering two questions: How are relatedness between the firm and the foreign subsidiary, and the firm’s international scope associated with foreign subsidiary’s value-adding mode? How does the subsidiary’s market experience moderate the relationships?

156

JSMA 7,2

Theory and hypotheses This study tests relationships relying on strategy theory and internationalization theory. It is assumed that the value-adding mode of a foreign subsidiary is associated with the industrial firm’s international strategy in terms of firm/subsidiary relatedness and firm’s international scope (Figure 1). Thus, a basic mode or an advanced mode would be established locally in order to realize the strategy (Calof and Beamish, 1995; Maitland et al., 2005; Porter, 1985, 1990).

First, this section of the paper conceptualizes basic and advanced modes of value- adding activity. Second, discussions on the relevance of firm’s international strategy lead to hypotheses on coherent associations regarding firm/subsidiary relatedness and firm’s international scope. The relatedness discussion concerns relatedness between the parent firm’s core business unit and the foreign subsidiary. Third, the moderating role of foreign subsidiary’s market experience is hypothesized.

Basic and advanced modes of value-adding activity Porter (1985) conceptualizes value-adding as a set of activities that support the building of competitive advantage. Categories of individual activities have been specified by several scholars (e.g. Birkinshaw and Morrison, 1995; Hobday and Rush, 2007; Pehrsson, 2009; Roth, 1992) where the categories are due to the character of the firm. For example, Hobday and Rush (2007) studied industrial firms and acknowledge product development and production that add value beyond sales, while Pehrsson (2009) adds promotion and after-sales services in a study of extent of international value-adding activity.

The framework of the current study uses product development, production, promotion, sales, and after-sales services as these activities are appropriate for examination of international industrial firms (Pehrsson, 2009). Product development means that engineering takes place locally, and the subsidiary may customize products, or design new products. A foreign subsidiary with production ability, such as assembly and/or manufacturing, employs engineers to take care of the production

H1

H3a

H3b H2

Relatedness between the

parent firm’s core business unit and

the foreign subsidiary

Foreign subsidiary’s

market experience

Foreign subsidiary’s mode

of value-adding activity

Firm’s international

scope

Note: H indicates hypothesis

Figure 1. Conceptual model

for the study

157

Foreign value- adding of

industrial firms

efficiency, while a foreign subsidiary with a promotion activity takes part in the development of promotion materials and one with a sales activity is involved in sales operations. Finally, after-sales services mean that the foreign subsidiary is involved in services after sales.

Various typologies distinguish roles of foreign subsidiaries where combinations of individual value-adding activities are central (e.g. Delany, 2000; Feinberg, 2000; Hogenbirk and van Kranenburg, 2006; Manolopoulos, 2006; White and Poynter, 1984). Furthermore, Delany (2000), Feinberg (2000), Manolopoulos (2006), and Taggart (1997) identify stages of development. In accordance with the pattern observed by Delany (2000) the role of a foreign subsidiary frequently develops from a basic role to an advanced role where the subsidiary becomes responsible for product development and/or production beyond responsibility for basic activities such as promotion, sales, and after-sales services.

Association regarding firm/subsidiary relatedness Firm/subsidiary relatedness enables integration (Robins and Wiersema, 1995; Zaheer and Mosakowski, 1997) as relatedness facilitates common exploitation of cross-business synergy originating from the firm’s resources (Slusky and Caves, 1991; Tanriverdi and Venkatraman, 2005; Teece et al., 1994; Piscitello, 2004). Relatedness is, thus, a source of economies of scale and scope deriving from the sharing of costs in the production of multiple products, resulting in lower joint costs of production per unit of output. In particular, relatedness favors the firm’s efforts to achieve coherence between the international strategy and the mandate assigned to the foreign subsidiary.

A foreign subsidiary that wishes to realize the synergy potential of relatedness can try to exploit core competencies of the parent firm’s core business unit (Pehrsson, 2010). However, it is important to underscore that organizational units besides the parent’s core business unit may be responsible for creating crucial competence as well (Gupta and Govindarajan, 2000; Holm and Pedersen, 2000). A core competence is a firm-level competence that provides potential access to many markets, makes a significant contribution to the perceived customer benefits of the end product, and is difficult to imitate (Prahalad and Hamel, 1990). Core competence provides a guide to market entry and expansion (Goddard, 1997).

Extensive relatedness between the parent firm’s core business unit and the foreign subsidiary is theoretically coherent with centralization of advanced value-adding activities such as product development and production and, hence, a basic value-adding of the foreign subsidiary (Prahalad and Doz, 1987). Advanced value-adding that is centralized to, for example, the parent’s core business unit is a way of realizing synergy for extensively related products. Centralization makes it easier to achieve cost advantages, while geographically widespread activities often require investments in multiple sites and great set up costs. In particular, simple products generally mean that value-adding tends to be centralized in order to fulfill uniform needs of customers (Jarillo and Martinez, 1990; Taggart, 1998).

Furthermore, the argument of Luo and Zhao (2004) means that the relatedness between a parent firm and a foreign subsidiary is great when the product is less complex which generally implies a limited need for product customization and local activities for value-adding. However, the subsidiary generally needs extensive corporate support to be able to pursue a product-based strategy based on a basic value-adding mode:

H1. The greater the relatedness between a foreign subsidiary and the core business unit of the industrial firm, the greater the probability of a basic value-adding mode of the subsidiary.

158

JSMA 7,2

Association regarding firm’s international scope The firm’s international experience originates from the international scope (Chang, 1995; Zahra et al., 2000; Tallman and Li, 1996). Exposure to diverse environments promotes, for example, technological learning and market learning (Hitt et al., 1997; Zahra et al., 2000; Yeoh, 2004).

Bartlett and Ghoshal (1989) and Birkinshaw and Morrison (1995) argue that foreign subsidiaries’ access to international experience to a large extent determines where the firm locates value-adding activities. In general, a subsidiary that is able to extensively exploit the firm’s international experience becomes responsible for advanced value-adding activities. The argument implies that knowledge flows between the headquarters and subsidiaries, and between subsidiaries, are essential to strategy coherence (Gupta and Govindarajan, 1991; Manolopoulos, 2008; Mudambi and Navarra, 2004). In particular, the foreign subsidiary needs to integrate and cultivate insights gained from other markets into value-adding activities in order to be able to exploit international experiences of the firm (Hitt et al., 2006; Lei et al., 1996).

Thus, international experience that stems from the firm’s international scope may support extension of the foreign subsidiary’s value-adding activity. For example, Zahra et al. (2000) found that a greater international scope leads to broader and deeper technological learning facilitating local value-adding in terms of product development or production. Furthermore, a foreign subsidiary that can rely on extensive international experience of the corporation may develop into a product specialist or a manufacturing specialist supporting the firm as a whole and the local market (Delany, 2000). However, even a foreign subsidiary that has incorporated extensive international experience may need corporate support (Luo and Zhao, 2004) until the subsidiary eventually becomes strategically independent:

H2. The greater the international scope of the industrial firm, the greater the probability of an advanced value-adding mode of a foreign subsidiary.

Associations regarding foreign subsidiary’s market experience In a process extended in time, the foreign subsidiary accumulates market experience by, for example, learning how to treat a diversity of customers (Yeoh, 2004), segmenting the market and accessing distribution channels (Delios and Beamish, 2001; Fang et al., 2007). Also, the subsidiary becomes experienced by learning from meeting different competitors when trying to access customers (Grant, 1996; Ketchen et al., 2004; Porter, 1985; Sutcliffe and Zaheer, 1998). Literature shows that experience gained from handling diverse market settings is vital for foreign subsidiaries because it increases the chances for successful strategy implementation (Kogut and Zander, 1992; Lado and Martinez-Ros, 2004; O’Donnell and Jeong, 2000).

Furthermore, the foreign subsidiary’s market experience tends to moderate relationships between firm’s international strategy and the subsidiary’s value-adding mode. Ambos et al. (2011) show that a foreign subsidiary that gains greater experience increases the chances of becoming responsible for advanced value-adding. More precisely, extensive initial relatedness with the parent firm facilitates trust building and favors the subsidiary’s influence on relevant decisions when the subsidiary has become more experienced. Accordingly, it is logical to expect that greater market experience of the foreign subsidiary weakens the association between firm/subsidiary relatedness and a basic value-adding mode of the subsidiary. A foreign subsidiary

159

Foreign value- adding of

industrial firms

possessing extensive market experience may, thus, be more capable of conducting advanced value-adding.

Greater market experience facilitates the subsidiary’s efforts to exploit relatedness and assimilate the parent firm’s core competencies (Pehrsson, 2010) that may help building an advanced value-adding mode. For example, the subsidiary’s exploitation of core competencies and reuse of technology knowledge reduces the subsidiary’s costs for product development and production. Thus, the benefits of firm/subsidiary relatedness involve efficient utilization of resources (Helfat and Eisenhardt, 2004) and a possibility of achieving strategy coherence by transferring a greater amount of resources to support an advanced value-adding mode of the foreign subsidiary provided that the subsidiary has enough market experienced:

H3a. The greater a foreign subsidiary’s market experience, the weaker the association between greater firm/subsidiary relatedness and a basic value- adding mode of the subsidiary.

The firm’s international scope is a source of cross-market experience (Chang, 1995; Zahra et al., 2000; Tallman and Li, 1996) that is associated with the value-adding mode of the foreign subsidiary (Bartlett and Ghoshal, 1989; Birkinshaw and Morrison, 1995). It is logical to expect that a subsidiary possessing great experiences of its particular local market is able to extensively exploit and cultivate the firm’s international experience. For example, as the subsidiary learns how to access customers and cope with competitors the subsidiary will be more capable of efficiently pursuing customized product development and other aspects characterizing advanced value-adding. Hence, as the foreign subsidiary accumulates market experience the association between greater international scope of the firm and an advanced value-adding mode of the subsidiary will be stronger:

H3b. The greater a foreign subsidiary’s market experience, the stronger the association between greater international scope of the industrial firm and an advanced value-adding mode of the subsidiary.

Method Sample and data collection The unit of analysis was the wholly owned foreign subsidiary of an industrial firm. Such firms were chosen as their foreign subsidiaries may be responsible for various value-adding activities and no other owners influenced the subsidiaries. Furthermore, the intention was to keep home country effects constant and enable control for host country effects. Therefore, the sample consisted of Swedish industrial firms in Germany, the UK, and the USA. These countries are the dominant export markets for Swedish industrial firms, and, most probably, the firms would demonstrate experience of the markets and variations regarding other issues of the study.

The Kompass search engine was used to identify firms to be included in the sample. Annual reports of the identified firms were examined to secure that the firms targeted business customers, and that the firms had established at least one wholly owned subsidiary in Germany, the UK, or the USA. The resulting sample consisted of 303 subsidiaries.

Corporate data valid for 2004 were collected from annual reports. Furthermore, telephone interviews were made in 2005 with the subsidiary executives responsible for

160

JSMA 7,2

the foreign operations. The interview method ensured that the intended respondents were reached and delivered answers, and it was possible to avoid misunderstandings pertaining to the questions. Eight managers representing firms similar to those in the sample tested a draft questionnaire. The questionnaire was then tested in telephone interviews with five respondents in Germany, the UK, and the USA, respectively. For Germany, the questionnaire was translated into German and the answers were translated into English. The tests showed that no major changes of the questionnaire were needed.

Two assistants with German and English as their first language made the telephone interviews. The assistants and this author met during data collection to ensure that the survey items were applied in accordance with the intentions and, for the German part, translations were made correctly. However, our impression was that managers uniformly understood the survey items. Yet, there may be response bias due to, for example, respondents’ education level and culture (Chami-Castaldi et al., 2008).

Of the original 303 subsidiaries (105 in Germany, 108 in the UK, and 90 in the USA), executives of 57 subsidiaries (40, nine, and eight, respectively) were too busy or did not want to participate. Furthermore, the assistants did not reach executives of 55 other subsidiaries (five, 25, and 25, respectively) after four phone calls. The outcome was 191 completed questionnaires corresponding to an overall response rate of 63 percent. The response rates in Germany, the UK, and the USA were 57 percent (60 responses), 69 percent (74 responses), and 63 percent (57 responses).

The total number of parent firms was 136 and 36 parent firms were responsible for two or more foreign subsidiaries. The maximum number of responding subsidiaries of a parent firm was 4 and the median was 1. Furthermore, the mean number of foreign countries in which a firm had subsidiaries was 16, and varied between 1 and 152. The mean total foreign sales of the corporations in 2004 was 818 million SEK (1 USD¼7 SEK), and varied between seven million and 9,400 million SEK.

A comparison of number of foreign countries with subsidiaries and total foreign sales regarding the responding and non-responding subsidiaries showed no significant differences of mean values. Most probably, the interview responses were representative and the subsidiaries provided reliable information. However, the small sample size and the missing cases together with the impossibility of later collecting information from those subsidiary managers limit the possibility of generalizing the study results.

Dependent variable The value-adding activities of product development, production, promotion, sales, and after-sales services were captured in the study. In the questionnaire, respondents marked the activities that their firms performed in Germany, the UK, or the USA. The questionnaire indicated that a subsidiary employing design engineers was engaged in product development. Having a production plant and engineers involved in local assembly and/or manufacturing on a regular basis indicated the presence of production. A subsidiary handling promotion, sales, or after-sales services meant presence of a basic mode of value-adding activity. A subsidiary that also handles product development and/ or production represented an advanced mode. The dependent variable, mode of foreign value-adding activity, could assume 0 or 1 corresponding to a basic value-adding mode (n¼124) and an advanced mode (n¼67).

Independent variables A formative scale ( Jarvis et al., 2003) was developed to measure firm/subsidiary relatedness. This independent variable captured relatedness between the parent firm’s

161

Foreign value- adding of

industrial firms

core business unit and the foreign subsidiary. Each respondent rated the degree of relatedness regarding four items (product technology, product design, type of end customer, and customer requirements, Cronbach’s a: 0.70). The interviewer informed the respondent that the parent’s core business unit is viewed as a center of core competence (Prahalad and Hamel, 1990). The ratings were made on five-point Likert scales, on which scale point 1 represented “very low relatedness” and point 5 represented “very high relatedness.” A subsidiary’s mean value of the scores for the items was used as a score for the variable.

The independent variable of firm’s international scope was designed to specify the firm’s international scope. The variable was measured by the number of foreign countries with subsidiaries of the firm. Data were collected from annual reports and transformed into logarithmic values. Finally, questionnaire respondents reported the number of years the particular subsidiary had operated in the market, and foreign subsidiary’s market experience was represented by logarithmic values.

Control variables As industries of the studied firms may reflect, for example, competition contingencies (e.g. Ethiraj et al., 2005) industry effects were control for. Dummy variables, industry: main products, captured industries of the firms according to the main products offered. Data were collected from annual reports and five industries were represented: electrical products (n¼42), machinery (n¼23), metal products (n¼41), products based on raw materials (energy, food, wood, paper; n¼37), and miscellaneous products (n¼48) which was treated as the base case in the analysis.

Product complexity may influence the local presence of value-adding activities ( Jarillo and Martinez, 1990) and more complex products would be expected to provide buyers with additional values. Essentially, the product complexity of firms offering individual products tends to differ from that of firms offering systems comprising individual products. A dummy variable, product complexity, was included in the analysis: 0 represented subsidiaries that primarily offer individual products (n¼125), and 1 represented subsidiaries that primarily offer systems of products (n¼66). The questionnaire asked respondents whether the subsidiaries primarily offer individual products or systems composed of individual products.

Size was controlled for as smaller and larger firms generally possess different resources that suit them to coping with value-adding on foreign markets. Corporate sales in the last fiscal year were used as an indicator of corporate size. Sales data (SEK millions) were transformed into logarithmic values.

Host country characteristics may have an impact on strategy issues (Makino et al., 2004; Qian et al., 2008). In order to control for host country effects, two dummy variables, foreign subsidiary: Germany and foreign subsidiary: the USA, indicated if the subsidiary was located in Germany, or the USA, while the UK was the base case.

Finally, foreign subsidiary performance was controlled for as high performance generally tends to attract investments. All foreign subsidiaries were responsible for at least sales and, therefore, respondents reported return on sales (ROS, percent) in the last fiscal year as a basis for foreign subsidiary ROS. This is a common performance measure in studies of foreign subsidiaries (e.g. Makino et al., 2004). However, biases such as the effects of transfer pricing and corporate desires for different performances might exist.

162

JSMA 7,2

Analysis procedure As data regarding some subsidiary variables came from the same executive the problem of common method variance may occur (Chang et al., 2010). In order to reduce the likelihood of the problem Harman’s statistical single-factor test (Podsakoff and Organ’s, 1986) was carried out. The test included three quantitative subsidiary variables (foreign subsidiary ROS, firm/subsidiary relatedness, and foreign subsidiary’s market experience) and identified two unrotated factors explaining 44 percent and 33 percent of the variance in data. No single or general factor appeared and source bias was not a serious problem.

Associations among the variables were examined in three steps. First, associations were explored by comparing mean values of the independent variables across values of the dependent variable. Second, correlations among continuous variables were examined. Third, a regression analysis was conducted. The binary logistic regression technique (Kachigan, 1986) was applied as the dependent variable was binary. Logistic regression does not rely on distributional assumptions but multicollinearity among the predictors can lead to biased estimates. However, a number of parent firms (n¼36) were responsible for more than one foreign subsidiary and the analysis may be biased due to common corporate policies and, thus, dependent observations. Therefore, effects of dummy variables for each repeated parent firm were tested in a logistic regression analysis. The analysis did not show any significant effects and, thus, the observations fulfilled the requirement on independence.

In the subsequent analysis the independent variable coefficients were interpreted in accordance with recommendations for logistic regression (Pampel, 2000). In the analysis, a positive coefficient means favor of an advanced mode of value-adding, while a negative coefficient means favor of a basic mode. The control variables were entered in the first regression model and independent variables were entered in the second model, while interaction terms were added in the final model.

In order to eliminate problems due to multicollinearity the interactions were orthogonalized (Little et al., 2006). For each interaction, the product term was regressed onto the first-ordered effects and the residual then represented the interaction effect. The variance of the interaction term contained the unique variance that fully represented the interaction effect, independent of the first-order effect variance and general error or unreliability.

Results Table I shows mean values for the independent variables across mode of foreign value-adding activity. The basic mode is associated with a greater relatedness between

Mode of foreign value-adding activitya

Independent variables Basic mode

(n¼124) Advanced mode

(n¼67) Anova F

Firm/subsidiary relatedness 4.52 4.22 11.18* Firm’s international scope: No. of foreign countries with subsidiaries 12.44 23.73 11.03* Foreign subsidiary’s market experience: No. of years of foreign subsidiary operation 17.83 28.82 19.85*

Notes: aLocal presence of product development and production means an advanced mode; lack of

these activities means a basic mode. * po0.001

Table I. Mean values for

independent variables across mode of foreign

value-adding activity

163

Foreign value- adding of

industrial firms

the parent firm’s core business unit and the foreign subsidiary, than is the advanced mode ( po0.001). On the other hand, the advanced mode is associated with greater international scope and local market experience ( po0.001).

Table II contains descriptive statistics and Pearson correlation coefficients for the variables in the study, except for dummy variables. As expected, there were significant associations between the continuous control variables and independent variables ( po0.01). Also, the table shows a significant association between two independent variables ( po0.01). The comparison of mean values across the value-adding modes (Table I) and the correlation coefficients (Table II) indicate a need for further exploration of the relationships.

Table III shows the results of the regression with mode of foreign value-adding activity as the dependent variable.

The results support H1 predicting that the greater the firm/subsidiary relatedness between a foreign subsidiary and the core business unit of the industrial firm, the greater the probability of a basic value-adding mode of the subsidiary (Model 2, po0.01; Model 3, po0.05). Also, H3a is supported ( po0.05) and greater market experience of the subsidiary means a weaker association between the relatedness and a basic value-adding mode of the subsidiary.

H2 predicts that the greater the international scope of the industrial firm, the greater the probability of an advanced value-adding mode of a foreign subsidiary. The test supports the hypothesis as the coefficient of international scope was positive (Model 2, po0.05; Model 3, po0.10). However, the results did not support that the foreign subsidiary’s market experience strengthens the relationship as predicted by H3b.

As expected, the control of corporate size showed a positive association in all models ( po0.001; po0.10; po0.05) consistent with the view that larger firms generally possess more resources that suit them to coping with issues pertaining to foreign value-adding. The test also confirms that industry characteristics and host country characteristics may have an impact. The reason why subsidiary presence in the USA favored a basic value-adding mode ( po0.05; po0.10) may be the geographical distance to the domestic market in Sweden and accompanying risk assessments.

The mean values of the independent variables across the value-adding modes of foreign subsidiaries (Table I) confirm that the regression results are robust regarding main effects. Thus, the basic mode of value-adding activity is associated with a greater firm/subsidiary relatedness compared to the advanced mode, while the advanced mode is associated with greater international scope of the firm. The correlation analysis particularly underscores the importance of corporate size.

Variables Min. Max. Mean SD 1 2 3 4

1. Corporate size 0.60 3.96 2.55 0.80 – 2. Foreign subsidiary ROS 0.00 29.00 5.23 5.42 �0.04 – 3. Firm/subsidiary relatedness 2.00 5.00 4.42 0.61 0.00 �0.32* – 4. Firm’s international scope 0.30 2.18 1.00 0.41 0.57* �0.03 �0.02 – 5. Foreign subsidiary’s market experience 0.00 2.09 1.21 0.37 0.28* �0.01 �0.05 0.28*

Notes: n¼191. * po0.01 (two-tailed)

Table II. Descriptive statistics and Pearson correlation coefficients

164

JSMA 7,2

Discussion and conclusions Contributions to theory The study examines associations between the industrial firms’ international strategy and value-adding modes of wholly owned foreign subsidiaries. The discontinuous

Variables Predicted

sign Finding Model 1 control

effects Model 2 main

effects Model 3 all

effects

Intercept �1.33 0.53 3.67 (1.60) (2.13) (6.09)

Control variables Industry: electrical products 0.21 0.14 �0.06

(0.53) (0.56) (0.58) Industry: machinery 0.26 0.44 0.42

(0.60) (0.64) (0.64) Industry: metal products �0.59 �0.30 �0.29

(0.49) (0.53) (0.54) Industry: raw materials basis �0.82* �0.88* �0.91*

(0.49) (0.53) (0.54) Product complexity �0.08 �0.29 �0.18

(0.37) (0.39) (0.40) Corporate size 0.84**** 0.51* 0.65**

(0.23) (0.28) (0.30) Foreign subsidiary: Germany �0.41 �0.05 0.06

(0.48) (0.51) (0.53) Foreign subsidiary: the USA �1.01** �0.85* �0.87*

(0.42) (0.45) (0.46) Foreign subsidiary ROS 0.04 0.04 0.06

(0.04) (0.04) (0.04) Independent variables Foreign subsidiary’s market experience

1.10** 1.90

(0.57) (4.37) H1: firm/subsidiary relatedness � Supported �0.90*** �2.72**

(0.31) (1.23) H2: firm’s international scope þ Supported 1.08** 4.61*

(0.55) (2.56) Interactions H3a: foreign subsidiary’s market experience � firm/ subsidiary relatedness

þ Supported 1.50** (0.72)

H3b: foreign subsidiary’s market experience � firm’s international scope

þ Rejected �2.82 (1.86)

Nagelkerke R2 0.21 0.32 0.35 �2 log likelihood 215.62 197.70 190.90 w2 31.89**** 49.81**** 56.61**** Correct classifications (%) 70.20 75.40 78.00 Maximum VIF value 1.73 1.84 1.94

Notes: n¼191. H, hypotheses. aAdvanced value-adding, 1; basic value-adding, 0. * po0.10; ** po0.05; *** po0.01; **** po0.001,

Table III. Binary logistic regression of mode of foreign value-

adding activitya

165

Foreign value- adding of

industrial firms

step from a basic mode to an advanced mode is critical in the strategy implementation as the firm’s investment in advanced local capabilities for product development and/or production brings extensive set up costs. Also, the step signals a long-term commitment that restricts the number of freedom degrees in formulating and implementing future international strategies.

The study draws on strategy theory and internationalization theory, and develops and tests an integrated model. Thus, the study establishes coherent relationships among firm/subsidiary relatedness and foreign subsidiary’s mode of value-adding activity, and firm’s international scope and the mode. First, it was found that greater relatedness between the subsidiary and the core business unit of the parent firm favors local presence of basic value-adding activities such as promotion, sales, and after-sales services. Extensive physical similarities among products and markets do not favor the building of advanced local value-adding activities. Rather, the finding indicates support for the view that relatedness is a source of synergy (Slusky and Caves, 1991; Tanriverdi and Venkatraman, 2005; Teece et al., 1994; Piscitello, 2004) that may be exploited by centralizing advanced activities such as product development or production to just a few sites and in that way facilitating the search for economies (Prahalad and Doz, 1987). In principle, geographically widespread advanced activities are not coherent with great product/customer relatedness. Thus, relatedness is a source of economies of scale and scope enabling the sharing of costs by means of centralizing product development and/or production. At the same time the foreign subsidiary needs corporate support to be able to respond to local customer needs based on a basic value-adding mode.

Second, the findings show an association between greater international scope of the firm and an advanced mode of local value-adding. Great international experience of the firm follows a broad scope (Hitt et al., 1997; Zahra et al., 2000; Yeoh, 2004) and, provided that the foreign subsidiary is able to exploit the experience, the subsidiary may be responsible for product development and/or production (Bartlett and Ghoshal, 1989; Birkinshaw and Morrison, 1995; Hitt et al., 2006; Lei et al., 1996). In particular, a greater international scope leads to broader and deeper technological learning Zahra et al. (2000) facilitating advanced value-adding in terms of product development and/or production.

Third, the study findings underscore that path dependency, a dominating theme of internationalization theory (e.g. Pedersen and Shaver, 2011), is a central moderator of associations regarding international strategy. It was found that path dependency in terms of greater market experience of the foreign subsidiary weakens the association between firm/subsidiary relatedness and basic local activities. By accumulating experience regarding local market settings the foreign subsidiary increases the chances of becoming responsible for advanced value-adding despite relatedness with the parent’s core business. An interpretation would be that initial relatedness facilitates trust building and coming efforts of the subsidiary to influence decisions (Ambos et al., 2011). A foreign subsidiary possessing extensive market experience may, perhaps, become a production specialist serving the corporation as a whole (Delany, 2000).

By developing and testing the integrated model, the study contributes to both strategy theory and internationalization theory. The model extends knowledge on international strategy implementation as it demonstrates that both international strategy and path dependencies are central to the foreign subsidiary’s mode of foreign value-adding. The mode is crucial as it manifests the firm’s local capacity to realize the international strategy (e.g. Maitland et al., 2005). More precisely, the integrated model

166

JSMA 7,2

contributes to strategy literature as the model establishes that a firm implementing its international strategy on a foreign market needs to assess the subsidiary’s relatedness with the parent firm’s core business unit, the firm’s international scope, and path dependencies in terms of market experiences of the foreign subsidiary.

The study contributes to internationalization theory by underscoring the need to recognize that local market experiences and international strategy may interact in processes of internationalization. Setting up value-adding activities on a foreign market with just a weak linkage to firm’s international strategy may seriously restrict the firm’s possibility to strategically coordinate and integrate the local units into the corporate framework. A firm that wishes to configurate its capacity in a foreign country is, thus, better equipped if the firm not only pays attention to local experiences, but also to firm/subsidiary relatedness and the firm’s international scope.

Managerial implications By relying on the relationships established by the study the industrial firm may be able to effectively implement international strategy and build strategy coherence in an international context. The headquarters of the firm is advised to evaluate the degree of relatedness between the core business unit of the parent firm and the foreign subsidiary in making decisions on the international configuration of value-adding activities. The study indicates that firm/subsidiary relatedness is associated with centralizing advanced activities such as product development and production to just a few sites, where an experienced foreign subsidiary may be a candidate to host such activities. Furthermore, a broader international scope is associated with foreign establishment of advanced local value-adding activity. The headquarters may facilitate the transfer of international experience from elsewhere in the corporation to support the expansion of the foreign subsidiary’s scope of value-adding. In addition, headquarters need to pay attention to the subsidiary’s level of experience of the local market as the experience is an important parameter in decisions on modes of value- adding activity.

Limitations and future research There are limitations to generalizing the results of this study. First, the study did not analyze time-varying data and causality was not addressed which may limit the contributions of the study. Second, the missing cases in the collection of data and the impossibility of collecting information from those firms later restrict the possibility of generalizing the findings. Third, the varying response rates of the sub-samples of the study are limitations. Fourth, the survey was completed in 2005 and perhaps the observed strategic pattern is not stable over time. Fifth, choice of other indicators than those used in the study perhaps should have increased the number of correct classifications in the regression analysis.

A future study may test hypotheses regarding causality by analyzing time-varying data. What are the effects of changing firm/subsidiary relatedness and firm’s international scope? Also, it would be interesting to repeat the study to test the stability of the results using the same sample or samples covering, for example, subsidiaries operating in emerging country markets. In particular, rigorous measurement invariance tests require larger samples per country.

Furthermore, the study indicates a need for in-depth studies of relevant issues. For example, a further study may examine the complementarity between firm/ subsidiary relatedness and international scope in-depth. Using a process approach it

167

Foreign value- adding of

industrial firms

would be interesting to study whether a foreign subsidiary starts with a basic mode of value-adding and then proceeds to an advanced mode, and what drives the process. Will an analysis of the process show that the first state is associated with great relatedness and a limited international scope of the firm? Is the second state associated with low relatedness and a great international scope? Overall, additional data and analysis are needed in which different techniques are deployed to further validate the integrated model developed in the paper.

References

Ambos, B., Asakawa, K. and Ambos, T.C. (2011), “A dynamic perspective on subsidiary autonomy”, Global Strategy Journal, Vol. 1 Nos 3/4, pp. 301-316.

Bartlett, C.A. and Ghoshal, S. (1989), Managing Across Borders: The Transnational Solution, Harvard Business School Press, Boston, MA.

Birkinshaw, J.M. and Morrison, A.J. (1995), “Configurations of strategy and structure in subsidiaries of multinational corporations”, Journal of International Business Studies, Vol. 26 No. 4, pp. 729-753.

Birkinshaw, J.M., Hood, N. and Young, S. (2005), “Subsidiary entrepreneurship, internal and external competitive forces and subsidiary performance”, International Business Review, Vol. 14 No. 2, pp. 227-248.

Buckley, P. and Casson, M. (1976), The Future of Multinational Enterprise, MacMillan, London.

Calof, J. and Beamish, P. (1995), “Adapting to foreign markets: explaining internationalization”, International Business Review, Vol. 4 No. 2, pp. 115-131.

Chami-Castaldi, E., Reynolds, N. and Wallace, J. (2008), “Individualised rating-scale procedure: a means of reducing response style contamination in survey data?”, The Electronic Journal of Business Research Methods, Vol. 6 No. 1, pp. 9-20.

Chang, S.J. (1995), “International expansion strategy of Japanese firms: capability building through sequential entry”, Academy of Management Journal, Vol. 38 No. 2, pp. 383-407.

Chang, S.J., Van Witteloostuijn, A. and Eden, L. (2010), “From the editors: common method variance in international business research”, Journal of International Business Studies, Vol. 41 No. 2, pp. 178-184.

Chetty, S. and Campbell-Hunt, C. (2004), “A strategic approach to internationalization: a traditional versus a ‘born global’ approach”, Journal of International Marketing, Vol. 12 No. 1, pp. 58-81.

Delany, E. (2000), “Strategic development of the multinational subsidiary through subsidiary initiative-taking”, Long Range Planning, Vol. 33 No. 2, pp. 220-244.

Delios, A. and Beamish, P.W. (2001), “Survival and profitability: the roles of experience and intangible assets in foreign subsidiary performance”, Academy of Management Journal, Vol. 44 No. 5, pp. 1028-1038.

Dunning, J.H. (1993), Multinational Enterprises and the Global Economy, Addison Wesley, Reading, MA.

Dunning, J.H. (1998), “Location and the multinational enterprise: a neglected factor?”, Journal of International Business Studies, Vol. 29 No. 1, pp. 45-66.

Ethiraj, S.K., Kale, P., Krishnan, M.S. and Singh, J.V. (2005), “Where do capabilities come from and how do they matter? A study in the software services industry”, Strategic Management Journal, Vol. 26 No. 1, pp. 25-45.

Fang, Y., Wade, M., Delios, A. and Beamish, P.W. (2007), “International diversification, subsidiary performance, and the mobility of knowledge resources”, Strategic Management Journal, Vol. 28 No. 10, pp. 1053-1064.

168

JSMA 7,2

Feinberg, S.E. (2000), “Do world product mandates really matter?”, Journal of International Business Studies, Vol. 31 No. 1, pp. 155-167.

Goddard, J. (1997), “The architecture of core competence”, Business Strategy Review, Vol. 8 No. 1, pp. 43-52.

Grant, R.M. (1996), “Towards a knowledge-based theory of the firm”, Strategic Management Journal, Vol. 17 No. 2, pp. 109-122.

Gupta, A.K. and Govindarajan, V. (1991), “Knowledge flows and the structure of control within multinational corporations”, Academy of Management Review, Vol. 16 No. 4, pp. 768-792.

Gupta, A.K. and Govindarajan, V. (2000), “Knowledge flows within multinational corporations”, Strategic Management Journal, Vol. 21 No. 4, pp. 473-496.

Helfat, C.E. and Eisenhardt, K.M. (2004), “Inter-temporal economies of scope, organizational modularity, and the dynamics of diversification”, Strategic Management Journal, Vol. 25 No. 13, pp. 1217-1232.

Hennart, J.F. (1982), A Theory of Multinational Enterprise, University of Michigan Press, Ann Arbor, MI.

Hitt, M.A., Hoskisson, R.E. and Kim, H. (1997), “International diversification: effects on innovation and firm performance in product-diversified firms”, Academy of Management Journal, Vol. 40 No. 4, pp. 767-798.

Hitt, M.A., Ireland, R.D. and Hoskisson, R.E. (2007), Strategic Management: Competitiveness and Globalization, South-Western, Mason, OH.

Hitt, M.A., Tihanyi, L., Miller, T. and Connelly, B. (2006), “International diversification: antecedents, outcomes, and moderators”, Journal of Management, Vol. 32 No. 6, pp. 831-867.

Hobday, M. and Rush, H. (2007), “Upgrading the technological capabilities of foreign subsidiaries in developing countries: the case of electronics in Thailand”, Research Policy, Vol. 36 No. 9, pp. 1335-1356.

Hogenbirk, A.E. and van Kranenburg, H.L. (2006), “Roles of foreign-owned subsidiaries in a small economy”, International Business Review, Vol. 15 No. 1, pp. 53-67.

Holm, U. and Pedersen, T. (2000), The Emergence and Impact of MNC Centres of Excellence, MacMillan, Basingstoke.

Jarillo, C.J. and Martinez, J.I. (1990), “Different roles for subsidiaries: the case of multinational corporations in Spain”, Strategic Management Journal, Vol. 11 No. 7, pp. 501-512.

Jarvis, C.B., MacKenzie, S.B. and Podsakoff, P.M. (2003), “A critical review of construct indicators and measurement model misspecification in marketing and consumer research”, Journal of Consumer Research, Vol. 30 No. 2, pp. 199-218.

Johanson, J. and Vahlne, J. (1977), “The internationalization process of the firm: a model of knowledge development and increasing foreign market commitments”, Journal of International Business Studies, Vol. 8 No. 1, pp. 23-32.

Kachigan, S.K. (1986), Statistical Analysis: An Interdisciplinary Introduction to Univariate and Multivariate Methods, Radius Press, New York, NY.

Ketchen, D.J., Snow, C.C. and Hoover, V.L. (2004), “Research on competitive dynamics: recent accomplishments and future challenges”, Journal of Management, Vol. 30 No. 6, pp. 779-804.

Kogut, B. and Zander, U. (1992), “Knowledge of the firm combinative capabilities, and the replication of technology”, Organization Science, Vol. 3 No. 3, pp. 383-397.

Lado, N. and Martinez-Ros, E. (2004), “Identifying successful marketing strategies by export regional destination”, International Marketing Review, Vol. 21 No. 6, pp. 573-597.

Lei, D., Hitt, M.A. and Bettis, R. (1996), “Dynamic core competences through meta-learning and strategic context”, Journal of Management, Vol. 22 No. 4, pp. 549-569.

169

Foreign value- adding of

industrial firms

Little, T.D., Bovaird, J.A. and Widaman, K.F. (2006), “On the merits of orthogonalizing powered and product terms: implications for modelling interactions among latent variables”, Structural Equation Modeling, Vol. 13 No. 4, pp. 497-519.

Luo, Y. and Wang, S.L. (2012), “Foreign direct investment strategies by developing country multinationals: a diagnostic model for home country effects”, Global Strategy Journal, Vol. 2 No. 3, pp. 244-261.

Luo, Y. and Zhao, H. (2004), “Corporate link and competitive strategy in multinational enterprises: a perspective from subsidiaries seeking host market penetration”, Journal of International Management, Vol. 10 No. 1, pp. 77-105.

Maitland, E., Rose, E.L. and Nicholas, S. (2005), “How firms grow: clustering as a dynamic model of internationalization”, Journal of International Business Studies, Vol. 36 No. 4, pp. 435-451.

Makino, S., Isobe, T. and Chan, C.M. (2004), “Does country matter?”, Strategic Management Journal, Vol. 25 No. 10, pp. 1027-1043.

Malhotra, N.K., Agarwal, J. and Ulgado, F.M. (2002), “Internationalization and entry modes: a multitheoretical framework and research propositions”, Journal of International Marketing, Vol. 11 No. 4, pp. 1-31.

Manolopoulos, D. (2006), “The concept of autonomy in the subsidiary management research: a conceptual investigation”, Journal of Transnational Management, Vol. 11 No. 4, pp. 45-63.

Manolopoulos, D. (2008), “A systematic review of the literature and theoretical analysis of subsidiary roles”, Journal of Transnational Management, Vol. 13 No. 1, pp. 23-57.

Mudambi, R. and Navarra, P. (2004), “Is knowledge power? Knowledge flows, subsidiary power and rent seeking within MNCs”, Journal of International Business Studies, Vol. 35 No. 5, pp. 385-406.

O’Donnell, S. and Jeong, I. (2000), “Marketing standardization within global industries”, International Marketing Review, Vol. 17 No. 1, pp. 19-33.

Pampel, F.C. (2000), Logistic Regression: A Primer, Sage Publications, Thousand Oaks, CA.

Pedersen, T. and Shaver, J.M. (2011), “Internationalization revisited: the big step hypothesis”, Global Strategy Journal, Vol. 1 Nos 3/4, pp. 263-274.

Pehrsson, A. (2006), “Business relatedness and performance: a study of managerial perceptions”, Strategic Management Journal, Vol. 27 No. 3, pp. 265-282.

Pehrsson, A. (2009), “Marketing strategy antecedents of value adding by foreign subsidiaries”, International Marketing Review, Vol. 26 No. 2, pp. 151-171.

Pehrsson, A. (2010), “Business-relatedness and strategy moderations: impacts on foreign subsidiary performance”, Journal of Strategy and Management, Vol. 3 No. 2, pp. 110-133.

Piscitello, L. (2004), “Corporate diversification, coherence and economic performance”, Industrial and Corporate Change, Vol. 13 No. 5, pp. 757-787.

Podsakoff, P.M. and Organ, D.W. (1986), “Self-reports in organizational research: problems and prospects”, Journal of Management, Vol. 12 No. 4, pp. 531-544.

Porter, M.E. (1985), Competitive Advantage: Creating and Sustaining Superior Performance, The Free Press, New York, NY.

Porter, M.E. (1990), The Competitive Advantage of Nations, The Free Press, New York, NY.

Prahalad, C.K. and Doz, Y.L. (1987), The Multinational Mission, The Free Press, New York, NY.

Prahalad, C.K. and Hamel, G. (1990), “The core competence of the corporation”, Harvard Business Review, Vol. 68 No. 3, pp. 79-91.

Qian, G., Li, L., Li, J. and Qian, Z. (2008), “Regional diversification and firm performance”, Journal of International Business Studies, Vol. 39 No. 2, pp. 197-214.

170

JSMA 7,2

Robins, J.A. and Wiersema, M.F. (1995), “A resource-based approach to the multibusiness firm: empirical analysis of portfolio interrelationships and corporate financial performance”, Strategic Management Journal, Vol. 16 No. 4, pp. 277-299.

Roth, K. (1992), “International configuration and coordination archetypes for medium-sized firms in global industries”, Journal of International Business Studies, Vol. 23 No. 3, pp. 533-549.

Rugman, A. (1981), Inside the Multinationals, Columbia University Press, New York, NY.

Slusky, A.R. and Caves, R.E. (1991), “Synergy, agency and the determinants of premia paid in mergers”, Journal of Industrial Economics, Vol. 39 No. 3, pp. 277-296.

Stimpert, J. and Duhaime, I. (1997), “In the eyes of the beholder: conceptualizations of relatedness held by the managers of large diversified firms”, Strategic Management Journal, Vol. 18 No. 2, pp. 111-125.

Sutcliffe, K.M. and Zaheer, A. (1998), “Uncertainty in the transaction environment: an empirical test”, Strategic Management Journal, Vol. 19 No. 1, pp. 1-23.

Taggart, J.H. (1997), “An evaluation of the integration responsiveness framework: MNC manufacturing subsidiaries in the UK”, Management International Review, Vol. 37 No. 4, pp. 295-318.

Taggart, J.H. (1998), “Strategy shifts in MNC subsidiaries”, Strategic Management Journal, Vol. 19 No. 7, pp. 663-681.

Tallman, S. and Li, J. (1996), “Effects of geographic diversity and product diversity on the performance of multinational firms”, Academy of Management Journal, Vol. 39 No. 1, pp. 179-196.

Tanriverdi, H. and Venkatraman, N. (2005), “Knowledge relatedness and the performance of multibusiness firms”, Strategic Management Journal, Vol. 26 No. 2, pp. 97-119.

Teece, D.J., Rumelt, R., Dosi, G. and Winter, S. (1994), “Understanding corporate coherence. Theory and evidence”, Journal of Economic Behavior and Organisation, Vol. 23 No. 1, pp. 1-30.

White, R. and Poynter, T. (1984), “Strategies for foreign-owned subsidiaries in Canada”, Business Quarterly, Vol. 48 No. 4, pp. 59-69.

Yeoh, P. (2004), “International learning: antecedents and performance implications among newly internationalizing companies in an export context”, International Marketing Review, Vol. 21 Nos 4/5, pp. 11-535.

Zaheer, S. and Mosakowski, E. (1997), “The dynamics of the liability of foreignness: a global study of survival in financial services”, Strategic Management Journal, Vol. 18 No. 6, pp. 439-464.

Zahra, S.A., Ireland, R.D. and Hitt, M.A. (2000), “International expansion by new venture firms: international diversity, mode of market entry, technological learning, and performance”, Academy of Management Journal, Vol. 43 No. 5, pp. 925-950.

Corresponding author Professor Anders Pehrsson can be contacted at: [email protected]

To purchase reprints of this article please e-mail: [email protected] Or visit our web site for further details: www.emeraldinsight.com/reprints

171

Foreign value- adding of

industrial firms

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.