Carla I. Koen. Comparative International Management

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of-origin’ effects on MNCs or, in other words, how the management and organization of

the MNC as a whole is inﬂuenced by its home country.

How do MNCs respond to cultural and institutional

diversity?

The decision of an MNC concerning the macro structure most suited to dealing with the

institutional and cultural diversity of the environments in which the company is oper-

ating can be compared to the ‘order penetration point’ decision. In deciding where the

order penetration point will be located, a ﬁrm determines which of its activities will be

inﬂuenced by market ﬂuctuations, and which not. In mass production, the production

process itself is normally scheduled ahead, but the distribution of the ﬁnal product is

determined by the demand. In case of production to order, all or part of the production

processes are inﬂuenced by the demand ﬂuctuations while, for instance, purchasing

activities may be scheduled ahead. By analogy, we could speak about the ‘diversity pen-

etration point’ in the MNC. In a multidomestic MNC the main interface between the

cultural and institutional diversity in the MNC’s various environments and the core of the

MNC (i.e. that part of the MNC that does not adapt to the speciﬁcities of any of the local-

ities in which it does business – other than that of the home country, see the next

subsection) lies between headquarters and the regional divisions. The regional divisions

adapt to the speciﬁc demands of their environments, as well as the diversity in the suben-

vironments they are dealing with. Headquarters guards over the common characteristics

and capabilities of the MNC. In the global MNC the interface between the diverse environ-

ments and the MNC is in the relationships between product-based divisions and their

subsidiaries in different countries. This means that this intercultural and inter-insti-

tutional interface has to be managed in many more intra-ﬁrm relationships than in the

multidomestic MNC, which will be possible only if the cultural and institutional diversity

is smaller or of less relevance. In the transnational, ﬁnally, the situation is more complex.

Here there is a diversity interface between the product-based part of the organization and

the subsidiaries in different countries. This interface will in many cases be managed in

coordination with the region-based part of the MNC (assuming a matrix-like macro

organizational structure). On top of this, however, relationships between subsidiaries are

also more frequent and important, meaning that cultural and institutional differences

will also have to be managed in these relationships. As a consequence, the number of

diversity interfaces is multiplied in comparison with the global MNC. This may be prob-

lematic, as the transfer of knowledge across cultural boundaries confronts the MNC with

increased complexities (Inkpen, 1998).

The task of operating the interface between the different cultures within which the

MNC operates is more difﬁcult the greater the cultural distance between the units con-

cerned. Hence we may expect that MNCs adapt their control strategy to this cultural

distance. The small number of empirical studies focusing on this issue provides some clues

that this is indeed the case. Hennart and Larimo (1998) found that a larger cultural dis-

tance between the home country of the MNC and the subsidiary country made it more

likely that the MNC would choose shared ownership of the subsidiary (i.e. a joint venture)

rather than a wholly owned subsidiary. Although the scope of this study is restricted (only

two home countries and one host country, and only ownership of subsidiaries as

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dependent variable), it does indeed suggest that the cultural diversity an MNC has to deal

with has an inﬂuence on its internal management. On the basis of this ﬁnding one would

be inclined to speculate that when the cultural distance that needs to be bridged is larger,

MNCs opt for less strict control and more ﬂexibility. This is conﬁrmed by Harzing’s (1999)

study of 287 subsidiaries of 104 MNCs, in which she found that a larger cultural distance

was associated with more use of personal centralized control, and less use of output

control and bureaucratic formalized control. However, whereas the ﬁndings from these

two studies suggest that with a larger cultural distance MNC headquarters leave more

room for local adaptation, Rosenzweig and Nohria (1994), in a study of human resource

management (HRM) practices in 249 US subsidiaries of MNCs from eight foreign coun-

tries, found that a larger cultural distance made it somewhat less likely that the MNC

followed local US HRM practices. Furthermore, they found that as MNCs use more expa-

triates and as there is more frequent communication between the subsidiary and

headquarters, it is more likely that home-country (instead of host-country) HRM prac-

tices are maintained.

Although the ﬁndings pertaining to the adaptation of MNC policies to local culture

discussed above are far from conclusive, a study by Newman and Nollen (1996) provides

some evidence that this type of adaptation does in fact lead to greater effectiveness. These

authors studied 176 work units in 18 foreign subsidiaries of one US corporation, and

found that units with practices better ﬁtting the local culture (operationalized along

Hofstede’s dimensions) performed better than units with less ﬁtting practices. This corre-

sponds to the general trend in the literature that, although the empirical evidence is

scarce, consistently points at the importance for MNCs of taking cultural differences into

account in their internal management. For instance, Brock et al. (2000) theorize that dif-

ferences in national culture will affect the planning approaches preferred by

headquarters and subsidiaries. Welch and Welch (1997) put forward that national cul-

tural differences will make it more difﬁcult for MNCs to impose parent–company values on

their diverse foreign afﬁliates, hence this favoured coordination mechanism may in fact be

difﬁcult to implement. Hofstede (2001: 442) opines that, in particular, power distance dif-

ferences in which MNC headquarters is inﬂuenced by a high power–distance culture, and

the subsidiary by a low power–distance culture, lead to problems; the opposite situation

would be much easier to deal with. On the other hand, Hofstede expects differences in

uncertainty avoidance to be equally problematic, whichever way they go. The conclusion

can be drawn that, whereas there are many indications that cultural diversity is indeed an

important factor in the management of MNCs, as yet it is difﬁcult to offer speciﬁc guidance

as to the best way to deal with this diversity.

The situation is not signiﬁcantly different if we look at institutional differences. The

general thrust of the literature is that MNCs need to adapt to local institutional idiosyn-

cracies, but there is a paucity of systematic empirical research (Westney, 1999).

Furthermore, there is an overlap between the presumed inﬂuence of institutional differ-

ences and that of cultural differences. For instance, Hofstede (2001: 443) states that

cultural values become (partly) institutionalized in, say, legislation, labour union struc-

tures and organizations of stakeholders. In addition, some categories of institution, like

the normative component of the institutional proﬁle of a country described by Kostova

and Roth (2002: 217) as ‘the values, beliefs, norms and assumptions about human

nature and human behavior held by the individuals in a given country’, seem to be

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identical to culture. However, institutional environments are assumed to inﬂuence MNCs

in ways that are different from that ascribed to culture. Culture enters into the equation

through the beliefs and preferences of individuals, predominantly in their roles as man-

agers, employees and other stakeholders of the MNC.

The adaptation of the MNC to local institutions is assumed to be a more conscious

process. Three mechanisms are usually distinguished (Westney, 1993). Institutions may

have a ‘coercive’ inﬂuence, meaning that the MNC is forced by a powerful authority,

usually the state, to adapt its organization in a certain way. A second possibility is that the

institutional inﬂuence is ‘normative’ – that is, organizational patterns that are deemed to

be appropriate within a certain environment are championed (but not coercively pre-

scribed) by, say, professional associations. Third, the inﬂuence may be of the ‘mimetic’

kind, in that the MNC copies organizational features from other companies (local

companies or other MNCs) that are seen as successful. In all cases, the MNC adapts its

organization to acquire or maintain legitimacy in the perspective of powerful stake-

holders, and in this way to increase its chances of survival and success. However, this

adaptation is restricted to the extent that the MNC also strives for integration across coun-

tries and regions (Westney, 1993).

All organizations are subject to institutional inﬂuences, but what is typical for the

MNC is that it is subject to a variety of different and potentially contradictory inﬂuences

in the different environments in which it operates (Westney, 1993: 60). At the same time,

because of the need for global integration in order to utilize organizational capabilities

worldwide, there will be an internal drive in the MNC towards standardization of struc-

tures and processes within the company. As a result the MNC faces a unique institutional

complexity, and local subsidiaries are faced with ‘institutional duality’: they have to main-

tain legitimacy both in their local environment and within the MNC (Kostova and Roth,

2002: 216). The tension between institutional pressure from the environment and from

the MNC is felt within the local subsidiaries. Kostova and Roth show how the extent to

which subsidiaries adopt practices institutionalized within the MNC (in their research this

was a quality management system) depends, among other things, on the degree of ﬁt

between the practice and their local institutional environment. Some of the other factors

inﬂuencing the extent of adaptation pertain to the subsidiary–parent relationship. The

expectation would be that stronger subsidiaries (in terms of capabilities, value added and

inﬂuence within the MNC) will have stronger local links with customers and suppliers,

and will adapt relatively more to local institutions and less to MNC practices (Rosenzweig

and Singh, 1991). However, Kostova and Roth’s (2002) ﬁndings point in the opposite

direction: subsidiaries that seem to be more dependent on the MNC report lower degrees

of adaptation to MNC practices. This suggests that much more research is needed in order

to unveil the true interplay of institutional inﬂuences on the MNC.

The complexity is further increased because the inﬂuence of local institutions will

vary from situation to situation. For instance, it is likely to depend on the industry in

which MNC operates. For MNCs in service industries, acquiring local legitimacy is essen-

tial, because of the intangible nature of services. For this reason the ability to engage in

local networks and adaptation to local institutions may be particularly important

(Campbell and Verbeke, 1994). Second, MNCs may choose to locate in regions within a

country where local institutional pressures are weakest. This is, for instance, the case with

many Japanese automobile manufacturing subsidiaries in the USA, which were targeted

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at regions where the inﬂuence of the traditional automobile labour union was weak or

non-existent (Westney, 1993). The inﬂuence of state policies may be assumed to vary

with the policy credibility of the government in question. When the government is not

perceived to be credible in its commitments (e.g. because of past policy changes, or

because of its attitude towards business enterprises in general) attempts to inﬂuence

MNCs will be likely to have only a marginal effect on MNCs, but will not fundamentally

change MNC strategies (Murtha and Lenway, 1994). This is particularly true if the gov-

ernment’s institutional pressure is of the normative, rather than coercive, kind (i.e.

requirements do not take the form of formal laws, but rather of informal expectations and

demands). Finally, local institutions not only inﬂuence the MNC, but this also works the

other way around: the introduction by an MNC subsidiary of a new organizational prac-

tice in a country may challenge the legitimacy of existing practices, and in this way erode

or change local institutions (Westney, 1993). This tendency was also documented by Lane

(2000) in a study of the strategies of UK and German MNCs. Her study also made clear,

however, that the strategies of these companies for the time being remain heavily inﬂu-

enced by their home countries. We will now turn to this ‘country-of-origin effect’.

The country-of-origin effect on MNCs

In the globalization literature the MNC is presented as a harbinger of global practices

(Dicken 1998). However, far from being ‘nationless’, even the most global MNCs in many

respects still seem to be strongly rooted in their country of origin (this section is based on

Noorderhaven and Harzing, 2003). Various studies have pointed at this ‘country-of-

origin’ effect. In particular, human resource management practices (Ngo et al., 1998) and

control strategies (Lubatkin et al., 1998; Harzing and Sorge, 2003) reﬂect speciﬁc inﬂu-

ences of the home countries of MNCs. Country-of-origin effects can be caused by both the

cultural and the institutional speciﬁcities of the home country of the MNC. The under-

lying assumption of the culturalist approach is that individual inhabitants of a country

are ‘mentally programmed’ by the way they were raised by their parents and peers, and

by the institutions of the country (Hofstede, 2001). This makes them adopt broad prefer-

ences for certain states of affairs that they share with their compatriots. In the

institutionalist perspective – for example, the ‘business systems’ approach (Whitley and

Kristensen, 1996), differences in the structures and operations of ﬁrms ‘clearly stem from

variations in dominant social institutions such as the state and the ﬁnancial system’

(Whitley, 1992: 1).

Why, though, would these national factors inﬂuence MNCs operating in dozens of

countries? A possible explanation is corporate inertia. MNCs may continue to operate in

ways attuned to their cultural and institutional home country, but not necessarily to their

present multifarious environments. This effect is strengthened by the fact that most MNCs

continue to hire country-of-origin nationals for many of their key management positions

(Perlmutter, 1969; Lane, 2000). These managers share the cultural background of their

home country, and their perceptions are inﬂuenced by the institutional environment in

which they grew up and were trained. The question could be asked, however, what

country can be assumed to be the country of origin of an MNC? This may be another

country than that in which the MNC headquarters are located, as this may be relocated

(e.g. for tax reasons) at a time when the original ‘imprint’ of the country of origin has

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already been made. It makes more sense to assume that the country of origin is deter-

mined by the ‘historical experience and the institutional and ideological legacies of that

experience’ (Pauly and Reich, 1997: 4). This means that the country in which the MNC

originally ‘grew up’ is most relevant.

While there is mounting evidence that MNCs are indeed subject to a ‘country-of-

origin effect’ (for an overview, see Noorderhaven and Harzing, 2003), there is less clarity

about the speciﬁcs. What country speciﬁcs cause what types of MNC behaviour, and

under which conditions are these effects stronger or weaker? Much work remains to be

done. The following sketchy comments mainly serve as a warning that elements of

national idiosyncracy can be found even within the actor that is often seen as the herald

of globalization: the MNC.

Bartlett and Ghoshal (cited in Birkinshaw and Morrison, 1995: 738) had already rec-

ognized the importance of the parent country of origin, and on the basis of their

observations noted that socialization was a predominant coordination mechanism in

European MNCs, centralization in Japanese MNCs and formalization in US MNCs.

Lubatkin et al. (1998), comparing the behaviour of UK and French parent ﬁrms after an

acquisition, noted that the French companies made more use of expatriate management,

and relied more on centralized control than the UK parent companies. More generally,

reasoning from a culturalist perspective, Hofstede (2001) opines that differences in power

distance and uncertainty avoidance are the most important cultural differences for MNCs

(see Chapter 2). Hofstede speculates that MNCs originating in countries with a small

power distance will be better able to manage subsidiaries in large power distance cultures

than the other way around (Hofstede, 2001: 442). Regarding uncertainty avoidance,

Hofstede expects the ﬂexibility to use different degrees of and bases for coordination in dif-

ferent businesses and different parts of the world to be more prevalent in MNCs based in

weak uncertainty avoidance countries than in MNCs based in strong uncertainty avoid-

ance cultures (Hofstede, 2001: 444). This suggests that the ability to manage the MNC as

a differentiated, but at the same time strongly integrated network of subsidiaries, is at

least in part determined by the cultural background of the MNC. Hence, the applicability

of the ‘transnational solution’ may not only depend on industry conditions, but also on

the administrative heritage of the MNC.

Study Questions

1. Discuss the three conditions leading to the existence of multinational corpora-

tions (MNCs). Why is there no need for an MNC to arise if one of the conditions is

not present?

2. MNCs historically have tended to develop through a number of stages. Describe

these stages, and explain the factors influencing an MNC’s progress through suc-

cessive stages.

3. Describe the types of MNC that arise under varying combinations of weak/strong

pressures for local adaptation and for global integration.

4. Describe and critically discuss the ‘transnational form’ of MNCs.

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436 COMPARATIVE INTERNATIONAL MANAGEMENT

5. Describe the main mechanisms of coordination and control used in MNCs.

6. Discuss possible roles of subsidiaries in MNCs, in relation to the learning

capabilities of the MNC.

7. Discuss the ‘country-of-origin effect’ on MNCs.

Further Reading

Bartlett, C.A. and Ghoshal, S. (2000) Transnational Management: Text, Cases, and

Readings in Cross-Border Management (3rd edn). Boston, MA: McGraw-Hill.

This book is a rich source on the management of MNCs, paying particular attention

to the transnational form.

Harzing, A.-W.K. (1999) Managing the Multinationals: an International Study of Control

Mechanisms. Cheltenham, UK: Edward Elgar.

An empirical study of the use of control mechanisms within MNCs, with much attention

paid to the roles and functions of expatriates.

Case: The Evolving International Structure of

Heineken

Case written by N.G. Noorderhaven on the basis of interviews at Heineken cor-

porate headquarters, and the Heineken website.

he history of Heineken beer breweries dates back to 1863. The first inter-

national expansion consisted of the opening of a brewery in Indonesia in

1931. At that time, Indonesia was a colony of the Netherlands. In the 1970s

Heineken actively used licensing as an instrument of further internationalization,

to France, Ireland, Spain and Italy, among other places. At present Heineken is

the number two beer brewery in the world. During its history, Heineken has gone

through a series of organizational structures to adapt to the growing complexity

of its operations and environment. In the 1960s the company was organized into

two major groups: Heineken Nederland and Heineken International. The latter

was responsible for handling foreign subsidiaries and participations, and inter-

national licensing. Heineken Nederland was responsible for the home market as

well as for exports (the famous ‘green bottles’). Around 1970, as an answer to

growing internationalization and diversification, Heineken shifted to a geograph-

ical structure, with all domestic operations (beer as well as soft drinks and

distilled beverages) remaining in one group, and the international activities coor-

dinated in four regional groupings: Europe, Asia/Australia, Africa and the

‘Western Hemisphere’. Around 1983 the company had gradually moved towards a

matrix structure with, on the one hand, the operating companies that had

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MULTINATIONAL CORPORATIONS: STRUCTURAL ISSUES 437

increasingly gained independence, and on the other, five regional coordinating

directors (the Western Hemisphere had been split into the USA, Canada and the

Caribbean and South America). A number of functional central staff departments,

like Financial and Economic Affairs and Technical Affairs, provided support to the

regions, and also tended to be organized along geographic lines (while all being

located in the Netherlands). As the functional staff departments could have a

strong influence on the operations of the operating companies, there was in prac-

tice almost a three-dimensional matrix (see Figure 9.7).

Figure 9.7 Heineken organizational structure around 1983 (simplified)

Operating companies

Executive

board

Functional

staff

Regional

directors

In more recent years Heineken has become an increasingly decentralized

company. This was accelerated when Freddy Heineken stepped down as chairman

of the executive board in 1995. His successor, Karel Vuursteen, exerted a much

less dominating influence on the company. Compared to the situation in 1983, a

substantial part of the corporate staff has been decentralized to the level of the

regional clusters. The cluster directors are responsible for profit performance in

their area, and form a liaison point between the executive board and the brew-

eries and other plants in their region. These plants function as ‘quasi-operating

companies’, meaning that they have a certain degree of autonomy, but not as

much as that of the ‘real’ operating companies (OCs). These OCs report directly to

the executive board. The present structure of Heineken is depicted graphically in

Figure 9.8.

The policy of Heineken is to form an OC if the activities within a certain

country or region exceed above a certain threshold and come to be of strategic

importance. OCs work within a set of guidelines concerning financial ratios, brand

policies, production standards and HRM. The aim of Heineken is to think and act

both globally and locally. The company is very much aware of maintaining a strong

positive corporate image, and pursues worldwide policies in the fields of

employee healthcare and education, terms of employment, and adherence to

environmental regulations, and regulations concerning alcohol consumption.

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438 COMPARATIVE INTERNATIONAL MANAGEMENT

Figure 9.8 Organizational structure of Heineken around 2004 (simplified)

Marketing

Production

Finance

etc.

Technical services

Security

etc.

Heineken Nederland

Sogebra France

Heineken Italia

Vrumona Holland

Athenian Brewery

etc.

Latin America

Caribbean/Central America

Africa/Middle East

Asia Pacific

Other Europe

Executive

board

Policy and

control

Facilities and

support staff

Clusters

Operating

companies

Question

1. Discuss the factors requiring Heineken to operate both in a centralized and in

a decentralized way.

Case: Integration of the Operations of the London

Branch of a German Bank

Case written by N.G. Noorderhaven on the basis of Moore (2003).

he organization described in this case is the London branch of an unidenti-

fied major German bank, headquartered in Frankfurt. The London branch

was opened in 1981 and, for many years, was managed as a quasi-

independent operation. Of the 160 staff members, around a third were German,

Swiss or Austrian, one-tenth were non-German-speaking foreigners, the rest

were British. In the summer of 1999 the bank began the implementation of a new

international matrix structure. Whereas, previously, most of the contacts between

the London branch and headquarters in Frankfurt had been maintained by the

general manager of the branch, now individual department heads had to report

directly to their superiors in Frankfurt. This integrated the activities of the London

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MULTINATIONAL CORPORATIONS: STRUCTURAL ISSUES 439

branch into the overall operations. This shift brought about considerable tensions

in the London branch and, in the process, fault lines between various categories

of employee became increasingly visible. In the first place there were the German

expatriates sent to the London branch by headquarters for a limited period of

time; these expatriates saw themselves as a bridge between the London branch

and headquarters. However, for many other employees they were seen as unfit to

play this role, as the assumption was that their main loyalty was with headquar-

ters. A second group of employees was formed by locally hired Germans:

employees who, although of German nationality, had been hired directly by the

London branch, and hence were not in expatriate positions. These employees

emphasized that their nationality did not colour their view of the relationship

between the branch office and headquarters. A third category of employees, the

‘Germanophiles’, were those that were not German but had some particular con-

nection to Germany or the German culture (e.g. because their spouse was of

German origin). Observing the growing tensions between the expatriates and the

other groups of employees, they interpreted this as a clash between two

parochialisms: that of headquarters, which wanted to impose practices that were

supposed to be ‘global’ but were in reality rooted in Germany, and that of the local

staff of the London branch, who resisted any change initiated from abroad. The

local UK employees, finally, framed the situation as the imposition of a hostile

foreign culture. The overall effect was increased tension and suspicion between

employee groups and resistance to the implementation of the matrix structure.

Headquarters, while aware of this resistance, did not recognize the differences

between the various groups of employees, except for the distinction between

expatriates and local employees. The resistance against the matrix structure was

interpreted in terms of cultural differences between the British and the German.

The assumption that all employees of the London branch but the expatriates

would be hostile to greater headquarters’ interference alienated those groups

(locally hired Germans and ‘Germanophiles’) who could have functioned as a

bridge between headquarters and the branch office. One can speculate to what

extent this made the difficulties of implementing the new structure more serious

than would have been necessary.

Questions

1. What are plausible reasons for an international bank to switch to an inter-

national matrix structure?

2. What could headquarters have done differently in implementing the inter-

national matrix structure, in order to minimize resistance from the London

branch?

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