Subsidiaries down-under: victims of their geographical isolation?

In the early 2000s I teamed up with Niels Noorderhaven to conduct an international mail survey that sought to expand and update findings from my PhD with regard to HQ-subsidiary management. We collected data from 169 subsidiaries of MNCs headquartered in the USA, Japan, the UK, Germany, France and the Netherlands. Of these 169 subsidiaries, 59 were located in either Australia (46) or New Zealand (13), reflecting the much higher response rate in these countries.

We thus decided to investigate the impact of geographical distance on the role that subsidiaries play in the MNC network and the way they are managed. To this end, we compared Australian and New Zealand subsidiaries - which provide a significant example of geographically isolation - with subsidiaries in other countries. Since most MNCs’ HQs are located in the USA, Europe and Japan, subsidiaries down-under are separated from their HQ by 8,000–16,000 kilometers, a full-day plane journey and a time difference that drastically reduces the opportunity for direct communication. Given the relatively small size of the Australian/New Zealand population and economy, many MNCs only have one or two subsidiaries in the region. It takes eight hours just to fly to Hong Kong or Singapore from Australia and even longer from New Zealand. As a result subsidiaries down-under tend to be isolated not just from HQ but even from their sister subsidiaries.

The dominance of geographical distance over other forms of distance in Australia and New Zealand was clearly illustrated in another research project, where we asked managers in nine different host countries/regions to report on the extent to which different types of distance impacted on the relationship between HQ and subsidiaires. As the figure above shows, Australia and New Zealand were the only countries in which geographical distance trumped any other form of distance.

Language, legal, cultural, institutional, and geographical differences

Our analysis shows that most Australian/New Zealand subsidiaries, although not closely integrated into the MNC network of physical flows (products and components), demonstrate few significant differences with other subsidiaries in terms of knowledge flows. Only knowledge inflows for marketing are significantly lower than for other subsidiaries. Confirming our expectations, Australian and New Zealand subsidiaries are granted a higher level of autonomy than subsidiaries in other countries. In particular, decisions relating to pricing of products for local markets are more likely to be in the realm of subsidiary decision-making than in other countries. This finding is in line with the relatively low knowledge inflows pertaining to marketing knowledge. The same is true for the higher level of autonomy with regard to design of advertising.

Capabilities in IT and marketing in Australian and New Zealand subsidiaries are higher than in other subsidiaries. In contrast, capabilities in production and R&D are somewhat lower than those of other subsidiaries. This is a potential danger, as it appears that the full inclusion of Australian/New Zealand subsidiaries in the MNC knowledge network (as senders as well as receivers of knowledge streams) might be influenced by their capabilities. Upgrading capabilities in production and R&D may be necessary to ensure that these subsidiaries will not in the future become relatively isolated within their MNC networks, not only in terms of physical flows (as is already the case), but also in terms of knowledge flows.

Reference

  • Harzing, A.W.; Noorderhaven, N.G. (2006) Geographical distance and the role and management of subsidiaries: The case of subsidiaries down-under, Asia-Pacific Journal of Management, vol. 23, no. 2, pp. 167-185. Available online... - Publisher's version (read for free) [reprinted in International Human Resource Management, Editors: Pawan Budhwar, Randall S. Schuler, Paul R. Sparrow, Sage Publications 2009]