The role of Subsidiaries from emerging economies

Published online in Wiley Online Library (wileyonlinelibrary.com)© 2012 Wiley Periodicals, Inc. • DOI: 10.1002/tie.21467

Several research projects have been devoted to the study of the internationalization of Brazilian firms;

however there is a lack of research related to the strategy and management of subsidiaries of Brazil-

ian multinational corporations in other countries. This article seeks to contribute to filling this gap. An

academic research study was conducted involving 30 Brazilian multinational corporations. Of the 93

subsidiaries involved, 66 foreign subsidiaries answered the questionnaires. The main results concern

the identification of three factors and the proposition of a typology of Brazilian subsidiaries of mul-

tinational corporations: implementing subsidiaries; market-exploiting subsidiaries, and aspirants to

strategically relevant subsidiaries. © 2012 Wiley Periodicals, Inc.

FEATURE ARTICLE

Introduction

F or the past 30 years, the literature on the manage-ment of multinational companies’ subsidiaries has increased significantly (Paterson & Brock,

2002). In its beginnings, the theme was studied through a static view on the parent company and subsidiaries’ strategy and structure (Stopford & Wells, 1972). Later, it developed toward a more complex perspective of orga-nizational architecture, with the attribution of different

By

Moacir de Miranda Oliveira Jr.

Felipe Mendes Borini

361

The Role of Subsidiaries From Emerging Economies—A Survey Involving the Largest Brazilian Multinationals

Correspondence to: Moacir de Miranda Oliveira, Jr., Universidade de Sao Paulo, Business Administration, Av. Prof. Luciano Gualberto, 908 sala E-196., 05509-900. São Paulo – SP, Brazil, Phone: 55 11 30915973, Fax: 55 11 38184039, [email protected]

362 Feature artIcle

thunderbird International Business review Vol. 54, No. 3 May/June 2012 DOI: 10.1002/tie

ness networks and factors of the external environment. To sum up, the studies verify how these factors favor sub-sidiaries’ strategic importance.

Despite this evolution and the existence of typologies of developing countries, such as Brazil, there is a gap to be filled: how these factors behave themselves jointly to determine the subsidiaries’ strategic role.

Thus, this article aims to investigate how subsidiaries’ internal environmental factors (integration, entrepre-neurial guidance, flow of knowledge, and development of capabilities) and external environmental factors (busi-ness network and competitive context) influence subsid-iaries’ strategic role.

Another gap to be filled is the fact that the majority of typologies focus on subsidiaries originating in developed countries (Enright & Subramanian, 2007). The novelty in this article is the analysis of subsidiaries originating from developed countries. By virtue of this difference, the question is whether these subsidiaries are influenced by the same factors described in other typologies.

theoretical Background

The literature presents three perspectives to explain the role played by subsidiaries (Birkinshaw, 2001; Birkinshaw et al., 1998; Paterson & Brock, 2002): the perspective of environmental determinism, relationship between parent company and subsidiaries, and subsidiaries’ strategies. Subsidiaries’ strategic importance varies to the extent that these three macro factors can influence the capabil-ity of a company to create competitive global innovations and advantages (Frost et al., 2002; Rugman & Verbeke, 2001).

environmental DeterminismThe first perspective is environmental determinism. The multinational company operates in different strategic environments, and, according to local characteristics, its subsidiaries perform different strategies (Bartlett & Ghoshal, 1998; Porter, 1990). The institutional apparatus, which supports the operation in the country, makes the place where the subsidiary is organized feasible for learn-ing, innovation, and subsequent investments (Frost, 2001; Frost & Zhou, 2000).

A company’s technological process depends on ex-ternal environmental dynamics, customers, competitors, and competitive suppliers (Porter, 1990). A company located in dynamic contexts has a higher potential to develop innovations by virtue of (a) customers’ needs for better and more functional products; (b) the tight competition that makes companies innovate constantly

organizational strategies to foreign subsidiaries (Bartlett & Ghoshal, 1986; Ghoshal & Nohria, 1989). It was a stra-tegic perspective, with decisions centralized in the parent company, the function of which was to attribute different strategic importance to its subsidiaries, pursuant to differ-ent parameters. For example, the subsidiaries’ strategic role could vary according to the organizational capaci-ties of the foreign unit and the complexity of the place (Ghoshal & Nohria, 1989); according to the subsidiaries’ level of autonomy (Roth & Morrison, 1992) and integra-tion (Jarillo & Martinez, 1990); or even to the subsidiary’s creation and dependence of knowledge (Gupta & Govin-darajan, 1991), among other attributes.

In the mid-1990s, studies on subsidiaries’ strategies turned around. The parent company’s centralized deci-sion to attribute strategic roles to subsidiaries was put to the test (Birkinshaw, 1996; Birkinshaw & Morrison, 1996). The idea of decentralizing corporate strategic de-cisions has emerged in favor of the existence of a decision strongly influenced by the strategies determined by the subsidiaries themselves (Birkinshaw, 1997; Birkinshaw & Hood, 1997; Birkinshaw, Hood, & Jonsson, 1998). Subsid-iaries’ roles have no longer been analyzed as static roles, in favor of an evolutionary perspective of gain or loss of strategic importance, pursuant to three factors: strategies assumed by the subsidiary itself, factors of a competitive context (environmental determinism), and parent com-panies’ decisions with respect to subsidiaries (Birkinshaw & Hood, 1998; Frost, Birkinshaw, & Ensign, 2002).

Within this perspective, the current decade is marked by several studies aiming to understand what factors of subsidiaries, parent company, and environment influ-ence subsidiaries’ different strategies. Studies carried out in Brazil, which focus on subsidiaries’ role in the country (Oliveira, Boehe, & Borini, 2009), represent the discus-sions about subsidiaries’ strategy. The articles present the importance of a competitive context and of business networks for subsidiaries’ strategies (Amatucci & Ber-nardes, 2009; Boehe & Zawislak, 2007; Borini, Oliveira, & Guevara, 2005; Borini, Oliveira, & Proença, 2005; Consoni & Quadros, 2006) and the relevance of parent companies’ internal mechanisms of control and coordi-nation (Boehe, 2008; Borini, Stefano, & Vernerey, 2007; Rezende & Versiani, 2010), as well as the capability de-veloped by the subsidiaries’ strategies, with the objective of gaining more strategic relevance in the multinational corporation (Boehe, 2007a,b; Borini, Fleury, & Fleury, 2009; Borini, Fleury, Fleury, & Oliveira, 2009; Oliveira, Borini, et al., 2009). The variables studied are related to the transfer of knowledge and capabilities, integration, entrepreneurial guidance, as well as the influence of busi-

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DOI: 10.1002/tie thunderbird International Business review Vol. 54, No. 3 May/June 2012

High autonomy, when it is not associated with the sub-sidiary’s creation of global innovations, can jeopardize the subsidiary itself because the subsidiary, by virtue of its high autonomy, tends to develop projects that do not integrate the multinational corporation’s purposes.

The parent company’s strategic determinations in terms of structure, control, communications, and economy define the subsidiary’s importance (Nobel & Birkinshaw, 1998; Roth & Morrison, 1992).

High autonomy, when it is not associated with the subsidiary’s creation of global innovations, can jeopar-dize the subsidiary itself (Moore, 2001) because the sub-sidiary, by virtue of its high autonomy, tends to develop projects that do not integrate the multinational corpora-tion’s purposes (Frost et al., 2002; Nobel & Birkinshaw, 1998).

Thus, the higher the integration between parent company and subsidiary, in terms of communications, socialization, and exchange of knowledge, the higher the strategic importance of subsidiaries (Gupta & Govindara-jan, 2001; Nohria & Ghoshal, 1997). The integration of the subsidiary’s activity with the corporation’s network is essential for the subsidiary’s strategic alignment with the parent company and other subsidiaries’ processes, activi-ties, and strategic guidelines (Frost et al., 2002).

Therefore, the higher the integration of values, the higher the possibility for subsidiaries to develop roles of more strategic importance in the foreign country.

in the search for competitive differentials; and (c) the support of suppliers in favor of lean, just-in-time, and technologically advanced production (Asmussen, Peder-sen, Dhanaraj, 2009; Birkinshaw & Hood, 1998; Porter, 1990, 1998, 2001).

For this reason, the higher the competitive environ-mental dynamism, the higher the probability for the subsidiary to develop more relevant strategic roles. This is because the context in which the subsidiary is inserted requires constant development of innovations and com-petitive advantages.

Still another relevant factor, with respect to the envi-ronmental determinism, is the company’s participation in the network of companies located where the company is organized. The Nordic School of International Busi-ness is the main reference when it comes to a business network in the ambit of international business (Björk-man & Forsgren, 2000; Johanson & Mattsson, 1988). In-ternational business networks play an important role for subsidiaries’ development of capabilities and evolution (Johanson & Mattsson, 1988). The external network is the fruit of the relationship between the subsidiary and its business partners, such as: suppliers, research institutes, and advertising companies, among others (Andersson, Forsgren, & Holm, 2002).

The more the subsidiary is linked to international business and technical networks, the higher the possibil-ity for the subsidiary to have access to new knowledge that can ensure the global competitive advantage (An-dersson & Forsgren, 2006; Andersson et al., 2002). The subsidiaries that are involved and that build relations with local institutions are symbolically characterized as more respectable corporations in the country and accepted as participants of the technical and scientific community of the foreign country and of the network of companies of that sector (Frost, 2001; Frost & Zhou, 2000). This enables the more tacit and complex knowledge, which would not have been acquired otherwise (Anderson & Forsgren, 2006). Consequently, the subsidiaries that manage to in-sert themselves in international business networks have a higher probability to develop higher strategic importance (Andersson et al., 2002)

Thus, it is expected that subsidiaries with more stra-tegic importance (a) will be located in a dynamic and competitive context and (b) will actively participate in the international business network.

the relationship Between Parent company and SubsidiariesThe second perspective considers that the subsidiary’s role is determined by the parent company’s decisions.

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With the increasing impor-tance of external markets, national subsidiaries have in their hands ever more significant units, out of the company’s total units.

Consequently, the higher (c) the integration and (d) the flow of knowledge in both directions (parent com-pany and subsidiary and vice versa) in the multinational corporation, the higher the probability for the subsidiary to play a role of more strategic importance.

Subsidiaries’ ManagementThe third perspective of subsidiaries’ strategy proposes that their role is determined by their own strategy. This is because, in relation to the parent company, the subsidiary is more capable of understanding the complexity and op-portunities of the place in which it operates (Birkinshaw, 2001). Subsidiaries’ initiatives and organizational capabil-ities determine the subsidiary’s role (Birkinshaw, 1997).

Studies on subsidiaries’ initiatives have the tradition of the Canadian school of investigating foreign subsidiar-ies’ role. The studies carried out by White and Poynter (1984) and D’Cruz (1986), in a deductive way, pointed out toward the importance of initiatives, which started gaining a definitive space in the literature with the studies carried out by Birkinshaw (1997).

The subsidiary’s initiative would be some innovative activity carried out with the resources and under the re-sponsibility of the foreign subsidiary itself (Birkinshaw, 1997). It is an encouraging task, but it is not easy, because the subsidiary needs to face several barriers, such as par-ent company’s dependence, lack of its own resources, lack of entrepreneurial guidance, and corporate recogni-tion (Birkinshaw & Fry, 1998).

When the subsidiary manages to surpass these bar-riers and develop initiatives that are recognized and used by the global business network, the subsidiary gains higher strategic importance within the corpora-tion (Birkinshaw et al., 1998; Borini et al., 2009). The inverse is true: lack of initiatives and loss of importance (Birkinshaw & Hood, 1998). Therefore, initiatives are essential for the subsidiaries’ strategic importance within the multinational company. Consequently, the corpora-tion’s entrepreneurial guidance, which is the source of the initiative (Birkinshaw, 1997; Birkinshaw et al., 1998), is essential for subsidiaries’ strategic importance.

The subsidiary with its own initiatives has a higher probability of developing organizational capabilities of global ambit (Andersson & Forsgren, 2006; Birkinshaw et al., 1998). These initiatives induce the creation of nonlo-cal capabilities, that is, global capabilities, which starts integrating the company’s global competitive advantage. When a subsidiary manages to create capabilities for global use [nonlocal capabilities (Rugman & Verbeke, 2001)], it means the subsidiary’s automatic gain of stra-tegic importance (Birkinshaw & Hood, 1998; Borini et

When this integration occurs, there is a probability of exchange of knowledge between parent company and subsidiary and vice versa (Björkman, Barner-Rasmussen, & Li, 2004; Gupta & Govindarajan, 2001; Kostova, 1999; Nohria & Ghoshal, 1997). This exchange of knowledge is essential for multinational companies’ competitive advantage.

Large multinational corporations (MNCs) depend on the innovations obtained in their national market, as well as in the subsidiaries’ market (Almeida & Phene, 2004; Cantwell & Mudambi, 2005; Phene & Almeida, 2008). Besides this, with the increasing importance of external markets, national subsidiaries have in their hands ever more significant units, out of the company’s total units. Consequently, in order to maintain the competitive advantage sustainable at a global scale, the company must use its best efforts and resources to man-age its knowledge. According to this argument, multi-national corporations, in order to avoid a sudden fall or loss of knowledge, shall encourage the exchange of knowledge in the business network (Almeida, Song, & Grant, 2002; Nohria & Ghoshal, 1997), for the purpose of promoting the creation of global knowledge (Chai, Gregory, & Shi, 2003; Nonaka & Takeuchi, 1997) and its flow between parent company and subsidiaries (Gupta & Govindarajan, 2001).

Therefore, it is expected that the higher the flow of knowledge in both directions—i.e., between parent company and subsidiaries and vice versa—the higher the probability for the subsidiary to develop strategic roles within the business network.



vice industry (21%). Of these, 42% manufacture abroad, 33% provide professional services, and the rest (25%) are involved with both. BrMN subsidiaries are found mainly in Latin America (35%), followed by Europe (17%) and North America (15%). Individually, the country with the largest number of subsidiaries is the United States (15%), followed by Argentina (14%) and Mexico (8%). China (7%) is already becoming an important destination for BrMN subsidiaries.

The main path to internationalization taken by BrMNs is split between acquisitions (43%) and direct investment (42%), with 15% involved in joint ventures or alliances. BrMNs are also newcomers to the global mar-ket: 50% started foreign operations after 1999 and a fur-ther 30% in the 1990s. Therefore, 80% of the subsidiaries have less than 15 years of foreign operating experience.

constructing the VariablesThe first variable in the analysis model was knowledge flow from the headquarters to the subsidiaries and from the subsidiaries to the headquarters, comprising the follow-ing variables (Gupta & Govindarajan, 2001): transfer of knowledge about R&D, production, sales, marketing, and human resources. These variables yielded a Cron-bach’s alpha of 0.812. The question checks how many of these competences come from the corporate head-quarters and are used in the same way as they are in the headquarters.

The entrepreneurial orientation variable was constructed from the following variables (Birkinshaw et al., 1998): existence of support from top management for entrepre-neurial activities; experience of top management with innovation activities; support for individual risk decisions; encouragement of calculated risk taking; and seeing as-suming risk as a positive attribute. The Cronbach’s alpha is 0.879.

The competences variable (Birkinshaw et al., 1998) comprises the following variables: competences in R&D, production, sales, marketing, and human resources. The question asked respondents to assess the competences developed in the subsidiaries versus those of the corpora-tion’s other units. These variables yielded a Cronbach’s alpha of 0.643.

The competitive context variable was constructed from the following variables (Birkinshaw et al., 1998): strong competition in the country; high supplier skills and quali-ties; strong relationships between buyers and suppliers; the existence of major research centers; high speed of product innovation among competitors; demand for high standards among local consumers; sound business sup-port institutions; rapidly growing market demand; and

al., 2009; Cantwell & Mudambi, 2005; Frost et al., 2002; Rugman & Verbeke, 2001).

Thus, subsidiaries’ strategic importance depends on nonlocal capabilities, especially the organizational capa-bilities in the fields of research and development (R&D), manufacturing, human resources, sales, and marketing (Birkinshaw, 1996; Birkinshaw & Morrison, 1996; Bir-kinshaw et al., 1998; Li, Barner-Rasmussen, & Björkman, 2007).

Therefore, the higher (e) the corporation’s entrepre-neurial guidance to create initiatives, as well as the higher the presence (f) of global capabilities in the subsidiary, the higher the probability for this subsidiary to play a role of more strategic importance.

Methodology

The research population consisted of Brazilian multina-tionals with manufacturing activities or those that pro-vided professional services abroad. This choice excludes from the analysis representatives, stores, or distribution posts in other countries. Therefore, based on secondary research using various Brazilian mailing lists, especially the one from the Editora Análise publishing house, plus UNCTAD and CEPAL studies, we obtained a list of 46 Brazilian multinationals active until 2006.

Each was personally contacted to explain the study’s aims and the results expected; 30 agreed to take part in the research, which was carried out in two stages. In the first, a questionnaire was sent out with questions on head-quarters activity, to be filled in by the CEO or the person responsible for the firm’s international business area. Each headquarters had to answer at least one questionnaire for each relationship with its subsidiaries. The first stage took the longest because it was necessary to persuade the CEO or firm director to take part in the study and then get headquarters approval to contact each country manager of the 30 firms’ subsidiaries, which amounted to 93 subsidiar-ies and an average of 3 subsidiaries per firm. The contact names in the subsidiaries were given to us by the respon-dents in the headquarters, and authorization was granted for the subsidiaries to complete the questionnaires by the senior management of each headquarters.

Of these multinationals, some only had 1 subsidiary, whereas others had as many as 8. Of the 93 subsidiaries involved, 66 replied to the questionnaire, which was re-turned via the web, with telephone calls to clarify any of the respondents’ doubts. The total data collection took 8 months, from December 2006 to July 2007.

The sample is comprised of Brazilian manufacturing multinationals or BrMNs (79%) and by firms in the ser-

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Measure of Sampling Adequacy (KMO) test and the Bartlett Test of Sphericity (BTS).

KMO is a test that examines the adjustment of data by taking all the variables simultaneously; it provides synthetic information on the data. In the case of factor analysis, KMO was over 0.600. This result, though not ideal, has a degree of explanation greater than 0.500 and can satisfactorily describe the variation of the original data (Corrar, 2007).

BTS tests the hypothesis that the correlation matrix is an identity matrix (diagonal equal to 1 and all other mea-sures equal to 0)—i.e., that there is no correlation among the variables. All the BTS tests had p < 0.05, thus meeting the assumptions required for the analysis (Corrar, 2007; Hair et al., 2005). The definition of the number of com-ponents to be used was done using the selection criterion, which consists of including only those components whose own-values are greater than 1.

Given the reduction in the sample space into three factors and the objective being to arrive at a typology for subsidiaries, we continued the analysis by using the re-tained factors agglomeration technique. To do so we used the mean scores of the resulting factors. First, we ran hier-archical cluster analyses, using the groups and farthest neighbor method, the objective of which was to find the approximate number of clusters into which our sample could be divided. This number was between three and four clusters, in accordance with the homogeneity coef-ficient pattern (between groups) and the Pearson corre-lation (farthest neighbor). Starting with the assumption of a solution that has three or four clusters, a K-means clustering test was carried out, with which we arrived at a combination of three clusters as the most suitable for explaining our sample.

results—Factors that explain the role and cluster analysis of Subsidiaries

The result of the factor analysis shows that the behavior of the variables can be explained by three factors in the order of importance in which they are located in Table 1.

Factor 1 concerns the insertion of the subsidiary in business networks abroad and its operation in competi-tive environments, which is associated with knowledge creation and the flow of knowledge from the subsidiary to the headquarters. This seems to show that the head-quarters’ recognition of the knowledge created in the subsidiary is linked to the dynamics of the competitive context of subsidiaries and their insertion in business net-works in the host country. Therefore, the main sources of knowledge creation for Brazilian multinationals are those

skilled, specialized labor force. The Cronbach’s alpha is 0.859.

The business network variable investigated the relation-ship with strategic partners and was constructed from the following variables (Andersson et al., 2002): the degree of relationship with other subsidiaries of the firm abroad, with the R&D units of other firms, with engineering firms from other enterprises, with universities or specific re-search institutions, with preferential corporate suppliers in the country, with specific suppliers from the market, with corporate customers, with customers from the local market, and with government institutions. The Cron-bach’s alpha is 0.803.

The entry strategy variable indicates whether the sub-sidiary took the greenfield operations route or made an acquisition.

Statistical techniquesWe start the data analysis by analyzing the main compo-nents for generating new variables (a number equal to the original number of variables) in such a way that they become independent. In this method, data normalcy is not assumed and the idea is to summarize the correla-tion pattern between the variables, which means that it is often possible to arrive at a set of variables that are not correlated with each other (Hair, Black, Babin, Ander-son, & Tatham, 2005). Consequently, it helps when it comes to choosing the number of factors, which in this specific case used the criterion of choice of the number of factors, based on the number of own-values (eigenval-ues) greater than one. For the three main components’ analyses, the criterion of own-values coincidentally re-sulted in three factors.

Having chosen the number of factors, we started the factor analysis with own-values greater than one. Factor analysis is a multivariate analysis technique, the objective of which is to examine the interdependence between variables and their capacity for reducing data. Factor analysis enables one to work with a small number of vari-ables without significant loss of information. The rotation method used was the varimax method (Hair et al., 2005). However, in the specific case of BrMNs, as the sample size is small, one must keep in mind that the results obtained in the factor analysis must be assessed from the point of view of an exploratory analysis.

Factor analysis is based on the assumption that there is low correlation among the variables (Corrar, 2007). In this specific case, the sample’s correlations are average, falling between 0.400 and 0.600.

To apply factor analysis we need to test whether the data are sufficiently related, using the Kaiser-Meyer-Olkin



and Context) have the strongest relationship with their headquarters (Factor 2: Headquarters–Subsidiaries Re-lationship), but are not too dependent on headquarters competences and knowledge (Factor 3: Dependence on the Knowledge of the Headquarters). The results indicate that the subsidiaries from Cluster 2, though at first sight independent from their headquarters, seem to lack the capability of creating competences that are of interest to the global network. The subsidiaries from Cluster 1 prove to be very dependent on headquarters competences and have less innovation power than those from Cluster 3.

Discussion—role of Brazil ian Multinationals’ Subsidiaries

The typology that emerges from the results shows three types of subsidiaries worth discussing in order to under-stand their role in the global corporate network.

Subsidiaries aspiring to Be Sres (Strategically relevant Subsidiaries)Cluster 3 subsidiaries are characterized by creating knowl-edge abroad thanks to their position in dynamic competi-tive contexts and their participation in business networks in the host country. However, they are not totally inde-pendent in terms of knowledge, because they depend on office knowledge and are the most strategically aligned with headquarters, as the factor Headquarters–Subsidiar-ies Relationship shows.

These subsidiaries can be regarded as those that enjoy the greatest strategic relevance, but the results show that their level of knowledge creation is rather average, meaning that there is still a long road ahead of them before they acquire a truly strategic role in Brazilian mul-tinationals. The factor Dependence on the Headquarters can be regarded in a similar way, albeit in the opposite sense, from which we can infer that there is relative in-dependence as far as headquarters knowledge goes, but these results may be seen as being of an average level, at

coming from subsidiaries, which operate in countries that have a dynamic environment in the firm’s sector and in which the subsidiary is involved in business networks. Thus, Factor 1 becomes Knowledge Creation and Context.

Factor 2 presents the aspects linked to the relation-ship between headquarters and subsidiaries, which con-cerns identification of which organizational factors under headquarters control are important for managing the subsidiaries. Although less important, this factor stands out because it has the highest averages relative to the others, which shows the headquarters’ concern with the management of its subsidiaries. This factor is therefore called Headquarters–Subsidiaries Relationship.

Factor 3 analyzes knowledge transfer from the head-quarters to subsidiaries and its influence on the develop-ment of subsidiaries’ competences. The result shows that the competences developed in the subsidiaries of Brazil-ian multinationals seem to be strongly linked to knowl-edge coming from the headquarters. Subsidiaries seem to be highly dependent on the headquarters when it comes to developing competences. Thus, Factor 3 becomes De-pendence on the Knowledge of the Headquarters.

Once we obtained the three factors, we moved on to cluster analysis to check how the subsidiaries differenti-ate themselves by these factors. The main results of these tests are shown in Table 2.

Table 2 shows three clusters that are balanced in terms of the number of participating subsidiaries.

Cluster 3 shows the most important subsidiaries, be-cause they are the most heavily involved with the creation of knowledge relating to the foreign market, and the partners in local networks (Factor 1: Knowledge Creation

Component

1 2 3

Context 0.838 0.067 –0.234

Knowledge flow from subs to h.o.

0.727 0.197 0.388

Business network 0.633 0.094 0.405

Integration 0.036 0.848 0.162

Entrepreneurship 0.155 0.803 0.110

Knowledge flow from h.o. to subs

–0.081 –0.021 0.859

Competence 0.186 0.225 0.761

Source: Author.

table 1 Retained Factors

Clusters 1 2 3

F1 2.27 2.21 3.34

F2 3.45 3.63 4.32

F3 3.30 1.96 2.96

24 21 21

Source: Author.

table 2 Cluster Analysis

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Insertion in business net-works in the host country has the potential to enable subsidiaries to acquire a new type of knowledge that would be impossible to learn in Brazil.

the host country reality and to create new knowledge, to safeguard their competitiveness in the foreign country.

When the context conditions are very favorable, the knowledge that is created in the subsidiary can become even more useful for creating value in the Brazilian mul-tinational than knowledge from the headquarters itself, thus driving reverse knowledge transfer (from subsidiary to headquarters). This is the case of Brazilian firms that are trying to get their subsidiaries to develop a position in more advanced competitive environments such as the biotechnology and information technology (IT) sectors of Silicon Valley in California.

When in possession of this knowledge created abroad, the headquarters can try to replicate it in other affiliates and in the home country, which are more backward in competitive terms than the subsidiary in the advanced competitive environment of the host country. This position generates opportunities for the Brazilian multinational to expand its national and global competitive advantage by establishing new patterns of competition, combining and creating new knowledge, or “breaking the rules of the game” via the introduction of a new product/service/pro-cess in an old market (Bartlett & Ghoshal, 2000).

On the other hand, insertion in business networks in the host country has the potential to enable subsidiar-ies to acquire a new type of knowledge that would be impossible to learn in Brazil, because of international involvement in sectors in which national partners lack the skills of partners abroad. This involvement with business networks abroad acts as a way of acquiring foreign knowl-edge and as a trigger to corporate process innovation.

This is in line with the Nordic school’s evolution for-mulation (Andersson & Forsgren, 1996). However, acquir-ing knowledge abroad may be a trap if helps to isolate the subsidiary. This can occur when the knowledge acquired in the host country is out of line, in strategic terms, with the corporation’s global directives or when the new knowledge does not add to what the corporation already knows.

In the case of the sample used in this thesis, the con-clusion is that an average level of strategic alignment and relative dependence on headquarters knowledge are es-sential for a subsidiary to be viewed as aspiring to strategic relevance, as opposed to being seen merely as a simple, isolated operation whose aim is to serve an international market. The lack of articulation with current headquar-ters knowledge may lead to the paradigm that Anderson et al. (2007) named the subsidiary dilemma: subsidiaries, because of their involvement in networks abroad, may innovate a lot, but the knowledge tends to become encap-sulated in and restricted to the subsidiaries, because the dependence on foreign partners is so great that the reuse

most, in the sample cases. Therefore, it would be inap-propriate to deal with such units as strategically relevant subsidiaries. Perhaps the most appropriate way of dealing with this cluster’s affiliates would be to name them “sub-sidiaries aspiring to strategic relevance.”

This means that the main feature of a subsidiary as-piring to strategic relevance is its capacity to create knowl-edge abroad, provided that it is a type of knowledge that can be profitably used by Brazilian multinationals—i.e., that it is aligned with the aspirations of the Brazilian mul-tinationals and can be used in the corporate network’s other units, thereby aiding their strategic initiatives.

The capacity to create knowledge abroad is related, in turn, to the dynamic nature of the competitive context and to insertion in business networks in the host country. This statement supports a theory from industrial econom-ics, expressed in Porter’s model, about the competitive advantage of nations (Porter, 1990), as well as strengthen-ing the theory of business networks as an evolution of the Uppsala School (Johansson & Mattson, 1988; Björkman & Forsgren, 2000).

The competitive context is essential for subsidiaries to develop new knowledge. Therefore, subsidiaries that are within dynamic contexts, especially in sectors classified as national diamonds, have a greater opportunity to gain a relevant strategic role within the corporate network. The conditions of demand, infrastructure, partners, and sec-tor competitive dynamics drive the subsidiaries to develop the internal knowledge that came from the headquarters, as well as encouraging them to adapt this knowledge to



developed in the corporation’s home country. We shall name them the “implementing subsidiaries.”

The chi-square tests (chi-square 6,493; p < 0.05) yield interesting results that relate to how long the subsidiary has existed with its classification in the clusters presented herein. The tests indicate that there is a significant presence of newer subsidiaries in Cluster 1—implementing subsidiar-ies—and of older subsidiaries in Cluster 3—subsidiaries as-piring to strategic relevance. If we analyze subsidiaries from the perspective of a continuous development process, implementing subsidiaries can be understood as the first entry stage of subsidiaries into international markets, when the headquarters tries to construct replicas of its national operation. However, those that get involved in dynamic environments and business networks seem to evolve and gradually acquire greater strategic relevance. This alterna-tive may be positive, but it may also be a risk, in that oppor-tunities may go to waste if the Brazilian multinational does not consider the strategic alternative of deliberately creating strategically relevant subsidiaries, by skipping stages and ad-vancing faster, so as to gain competitive advantages through the establishment of affiliates in dynamic environments and business networks abroad.

An inference to be drawn from the tests carried out allows us to indicate two alternative routes for subsidiar-ies of the implementing kind. One route would be to become slightly more independent of the headquarters and to start to create knowledge abroad, thus becoming a subsidiary aspiring to strategic relevance. This would be one way of gaining strategic relevance.

The other route in their quest for relative independence from headquarters knowledge would be for subsidiaries to transform their processes profoundly for the local market, but without creating knowledge relevant to competing globally. In this case, knowledge becomes relevant only for competing locally. In this process, strategic relevance is lost.

Additionally, within this process of strategic role trans-formation, another possibility for Cluster 3 subsidiaries—i.e., those aspiring to strategic relevance—is linked to their mode of entry. The tests seem to indicate that there is a significant difference versus Cluster 2 subsidiaries—i.e., those that exploit the market—which are generally incorporated into Brazilian multinationals’ corporate network through their acquisition strategies. Cluster 2 subsidiaries—i.e., those that exploit the market—which seem to be mainly the result of takeovers, appear to oper-ate principally as local units. One possibility that explains these results is that process integration difficulties along with strategic alignment difficulties may complicate the creation of any new knowledge capable of adding value to the corporation as a whole in such subsidiaries.

of this knowledge anywhere else would only be possible with the same business partners.

Therefore, if Brazilian multinationals want to create subsidiaries that aspire to strategic relevance, they must: (a) encourage knowledge creation abroad; (b) locate subsidiaries in countries and sectors that have dynamic and competitive contexts; (c) encourage involvement with business networks abroad; (d) try to develop knowl-edge abroad that is aligned with the strategic expecta-tions of the headquarters in Brazil; and (e) strategically align each of their international operations through integration, using knowledge transfer mechanisms and encouraging entrepreneurial activities in selected foreign sites, with a well-planned and well-implemented global strategy as a starting point.

Market exploiting Subsidiaries and Implementing SubsidiariesThese conclusions enable us to explain why almost two-thirds of our sample does not fit into the group of subsid-iaries that aspire to be strategically relevant. Cluster 2 sub-sidiaries, despite their independence from headquarters knowledge, typically generate little knowledge of interest to the Brazilian multinational as compared to Cluster 3 subsidiaries (those that aspire to strategic relevance). This may indicate that these subsidiaries, because of their independence from headquarters knowledge, end up isolated from global strategic directives, becoming merely “market-exploiting subsidiaries.” Nor do these subsidiaries distinguish themselves for their skill in creating new knowl-edge, which tends to indicate that the priority for these subsidiaries’ executives is to exploit the market and earn above-average returns so as to keep the operation running and, to a lesser extent, to collaborate with the corporate strategy in terms of transferring new knowledge.

Such subsidiaries, which we shall name market-ex-ploiting subsidiaries, seem to be more subject to suffering from a lack of continuity in their development process, such as divestment and even closure. The median index of the factor Headquarters–Subsidiaries Relationship seems to function more as a mechanism for controlling operations than as a strategic alignment factor.

Finally, Cluster 1 subsidiaries, like those in Cluster 2, are not knowledge generators, unlike subsidiaries that aspire to strategic relevance. Moreover, they are more dependent on headquarters knowledge than any other group of subsidiaries. This seems to indicate that these subsidiaries function as extensions of the headquarters abroad, focusing mainly on applying the strategic deci-sions taken by the headquarters in Brazil to international operations and on replicating the products or services

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