Journal of International Business Studies (2011) 42, 958–970

& 2011 Academy of International Business All rights reserved 0047-2506

www.jibs.net

RESEARCH NOTE

Rationality vs ignorance: The role of MNE

headquarters in subsidiaries’ innovation
processes

Francesco Ciabuschi1, Abstract

Mats Forsgren1 and Innovation processes in multinational enterprises (MNE) are largely context
specific, and carried out at the subsidiary level. Therefore, corporate head-
Oscar Martı́n Martı́n1,2 quarters (HQ) involvement in these processes becomes a major issue. A typical
1
assumption in international business (IB) theory is that HQ, based on its own
Department of Business Studies, knowledge, makes rational choices about its own involvement. However,
Uppsala University, Uppsala, Sweden;
2 according to some studies, HQ involvement can be assumed to be less rational,
Department of Business Administration,
Public University of Navarre, Pamplona, Spain in the sense that it reflects not HQ knowledge but the normative expectations
associated with the role of HQ as top manager. The purpose of this paper is to
Correspondence: contrast these two perspectives by exploring their implications regarding the
M Forsgren, Department of Business relationship between HQ knowledge about and HQ involvement in innovation
Studies, Uppsala University, Box 513, processes at the subsidiary level, and regarding the impact of this potential
SE-751 20 Uppsala, Sweden. involvement on innovation processes performance. The analysis results in six
Tel: þ 46-18-471 13 84; propositions and an illustrative case. Our contribution to IB research is primarily
Fax: þ 46-18-471 68 10;
theoretical: we bring to the scene an alternative approach – the sheer ignorance
Email: mats.forsgren@fek.uu.se
perspective – with the potential to explain the behavior of key actors in the
MNE. We argue, however, that the theoretical conflict between the two
perspectives should be addressed by empirical research. We conclude with
suggestions for the directions such research might take.
Journal of International Business Studies (2011) 42, 958–970. doi:10.1057/jibs.2011.24

Keywords: bounded rationality; sheer ignorance; headquarters; subsidiary; innovation

processes; performance

INTRODUCTION
It has been recognized that innovation processes in multinational
enterprises (MNEs) are largely context-specific, local activities
carried out at the subsidiary level (e.g., Andersson, Forsgren, &
Holm, 2007; Asakawa, 2001; Birkinshaw & Hood, 1998; Doz &
Prahalad, 1981; Ghoshal & Bartlett, 1988; Hedlund, 1986; Rugman
& Verbeke, 2001). As a consequence, the ability of corporate
headquarters (HQ) to influence these widely dispersed processes
has become a major issue in contemporary research on MNEs.
What is the role of HQ in these processes? To what extent can it
participate in and play an active role in specific innovation
Received: 18 December 2009
Revised: 3 February 2011
processes? What are the performance implications when it gets
Accepted: 27 March 2011 involved? These questions, which have not yet established answers,
Online publication date: 9 June 2011 warrant further research. In addition, studies aimed at finding the
 Rationality vs ignorance
answers have not yet debated the validity of
alternative perspectives related to the knowledge
asymmetry between the potential participants in
innovation processes.
It is probably fair to say that, to date, the role of
HQ in innovation processes at the subsidiary level
has not been a major concern in mainstream
theories on MNEs. More often than not, it has
explicitly or implicitly been taken for granted that
corporate HQ is able to make rational choices
concerning its own involvement, and that such
involvement is conducive to the performance of
innovation processes. Some scholars, however,
have pointed out that both the ability of HQ to
contribute to these processes and the effect of its
intended contribution are far from clear (Barner-
Rasmussen, Piekkari, Scott-Kennel, & Welch, 2010;
Birkinshaw, Holm, Thilenius, & Arvidsson, 2000;
Ciabuschi, Martı́n Martı́n, & Ståhl, 2010; Collis,
Young, & Goold, 2007; Denrell, Arvidsson, & Zander,
2004; Foss, 2002; Goodall & Roberts, 2003; Goold &
Campbell, 2002; Kristensen & Zeitlin, 2001).
Basically, the discrepancy regarding the potential
contribution of HQ largely mirrors the different
views of what can be called the HQ “knowledge
situation”. Some scholars, from a (more or less
bounded) rational perspective, assume that the
behavior of HQ, including the decision to become
directly involved in innovation projects at the
subsidiary level, reflects the extent of its relevant
knowledge. In other words, if HQ possesses exten-
sive relevant knowledge about a given situation, it
will be in a position to determine the appropriate
level of involvement. This also implies that, with-
out relevant knowledge, it will possibly reject the
idea of direct involvement or, if possible, will try to
obtain it before becoming involved.
We argue that the relationship between HQ
knowledge and HQ involvement might be more
complex. Given that the extent of HQ knowledge
may vary, we can assume that
(1) it actually possesses specific knowledge of
crucial importance for a particular innovation
process; or
(2) it does not possess such knowledge, but still has
a fair understanding of what kind of knowledge
is required; or
(3) the least desirable position, it not only lacks
relevant knowledge but does not know what
knowledge is required.
These three “knowledge situations” have dis-
tinct features that are particularly useful when
Francesco Ciabuschi et al
959
conceptualizing the role of HQ in innovation
processes at the subsidiary level. The third situa-
tion, in particular, is scarcely acknowledged in
mainstream international business (IB) manage-
ment literature. It represents a different perspective
on the role of HQ and, as we will argue below,
involves a less straightforward relationship between
knowledge and involvement than under the ration-
ality perspective. In this paper, we call it the sheer
ignorance perspective. In line with this perspective,
we will argue that, in certain specific circumstances,
HQ tends to intervene in subsidiary innovation
processes despite its lack of knowledge, rather than
because of its possession of relevant knowledge.
In light of the above, the purpose of this paper is
to explore the value of the rationality and sheer
ignorance perspectives in the context of innovation
processes at the subsidiary level. Specifically, we
focus on the implications of these two perspectives
on HQ involvement in subsidiary innovation
processes, and the impact this has on innovation
processes performance. It should be emphasized
that the sheer ignorance perspective is not posited
here as “better” or more efficient than the bound-
edly rational one. Our objective is rather to bring to
the fore a perspective that has been largely neg-
lected in IB research, and demonstrate that it may,
in some situations, be a more fruitful approach to
understanding the role of HQ in MNE management
processes.
For the sake of clarity, we provide some basic
definitions. First, following Collis et al. (2007),
corporate HQ includes staff functions and executive
management with responsibility for, or providing
service to, the whole of (or most of) the company,
excluding staff employed in divisional HQ. In the
remainder of the text, the terms “corporate head-
quarters”, “headquarters” and “top manager” will
be used interchangeably. Second, Nelson (1993)
defines innovation as the processes by which
firms master and put into practice products and
manufacturing processes that are new to them.
These innovation processes within the MNE
often include the development as well as the
transfer of innovations between subsidiaries. Finally,
innovation processes performance is conceptua-
lized in terms of both efficiency and effectiveness.
Following Daft (1998), we define efficiency as the
amount of resources used to produce a unit of output
(e.g., time and cost), and effectiveness as the degree
to which goals are attained (i.e., to what extent
the innovation is actually implemented within the
MNE).
Journal of International Business Studies
 Rationality vs ignorance
960
THE HQ “KNOWLEDGE SITUATION”
IN MNE THEORIES
Although the role of HQ in the knowledge-creating
process has been brought to the fore by the
emerging knowledge economy (Foss, 2002;
Goodall & Roberts, 2003), it also reflects a tradi-
tional watershed between two fundamental theore-
tical perspectives on firms and firm management,
referred to herein as the rationality perspective and
the sheer ignorance perspective. The first of these is by
far the most commonly used in theories on MNE,
and has a long tradition.1 From the writings of
Hymer (1976) to the knowledge-based view of the
firm, it is assumed, at least implicitly that HQ
to some extent understands and controls value-
creating processes within the MNE. HQ is at least
boundedly rational. This perspective has its roots in
the Coasian perspective on the firm (Coase, 1937;
Foss, 2002). Other perspectives, closer to business
network theory or institutionalization theory, have
questioned this assumption by pointing out that
HQ suffers from radical uncertainty, in the sense
that knowledge is much more socially embedded
and is therefore not controlled by anyone in its
entirety. Such perspectives are, to some measure,
rooted in the “Austrian” school of strategy (Foss,
2002; Jacobson, 1992; Kirzner, 1997). We take a
closer look at the two fundamental theoretical
perspectives below.
The Rationality Perspective
In Hymer’s writings, HQ access to knowledge
regarding what is going on in different parts of
the firm is not of major concern (Hymer, 1976;
Yamin & Forsgren, 2006). Or, as Hymer puts it: “in
the giant corporation of today, managers rule from
top of skyscrapers; on a clear day, they can almost
see the world” (Cohen, Felton, Liere, & Nkosi, 1979:
43). His overall assessment was that the center is
not really challenged by the operational level in
terms of knowledge and control. HQ is in this sense
close to being “unboundedly rational”.
Later theories on the MNE based on transaction
cost economics (TCE) pay more attention to the
problem of bounded rationality. It has been
proposed that top managers’ attempts to be rational
are limited by uncertainty, problem complexity,
limited information-processing capacity, time con-
straints on decision-making, and differences among
members of the organization concerning goals
(e.g., Simon, 1959; Verbeke & Greidanus, 2009).
Therefore managers are boundedly rational.
According to TCE, these managerial constraints,
Journal of International Business Studies
Francesco Ciabuschi et al
especially uncertainty in combination with oppor-
tunism, can be handled by the hierarchy (Buckley
& Casson, 1991; Hennart, 1982; Williamson,
1985). Williamson proposes that by structuring the
large, complex firm into essentially self-contained
divisions, and vertically separating strategic and
operating activities, the impact of uncertainty
and complexity on management decisions is sub-
stantially reduced (Williamson, 1971). Therefore,
although part of the TCE logics have been ques-
tioned by Verbeke and Greidanus, suggesting that
opportunism is still an issue as a dimension of
“bounded reliability” within the MNE (Verbeke &
Greidanus, 2009), it is fair to say that most writers
in the TCE tradition claim that bounded rationality
is a problem that can be handled by HQ. The
authority of HQ, in combination with its potential
to structure the organization and the information
systems in an efficient way, will not only make it
sufficiently knowledgeable about innovation pro-
cesses in different parts of the MNE, it will also
enable it, when appropriate, to intervene in these
processes. It will at least have a sufficient under-
standing of what it does not know about these
processes, and will be able to design its own role
optimally in accordance. It has even been argued
that a top manager “may be said to behave in a
metarational rather than a boundedly rational
way y His behaviour appears superficially to be
boundedly rational because he makes mistakes,
but these mistakes are calculated in the sense that
their frequency is set at an optimal level” (Casson,
1999: 114).
While TCE addresses uncertainty and problem
complexity as the most important dimensions of
bounded rationality, contingency theory, especially
the information-processing view, extends the ana-
lysis to explicitly include the problem of informa-
tion-processing capacity, as well as the problem of
time constraints on decision-making (Egelhoff,
1988, 2010).
The fact that a lot of information would have to
be collected and processed by top managers (and
this is more necessary when the level of uncertainty
and problem complexity is higher) forces them to
decentralize some decisions to the subsidiary level,
where some of that knowledge is located. The
transfer of “all” knowledge to HQ could not occur
without creating a serious information overload
and being highly time consuming. However, the
theory is clearly distinct on one point: HQ is able to
assess, which relevant information the subsidiary
possesses that it does not possess itself. On the basis
 Rationality vs ignorance
of this knowledge about what it does not know, HQ
is supposed to be able to design efficient structures,
decision rules and control systems. The environ-
ment may be uncertain and complex, and the
ability to process information may be limited, but
top managers are in any case able to assess what is
required from them in terms of their own role in
the innovation processes at the subsidiary level.
This conclusion is also valid for the so-called “MNE
as a differentiated network approach”, which is
basically the information-processing view comple-
mented by the idea of “shared values” (Ghoshal &
Nohria, 1997). The concept of shared values is
mostly treated as another, more subtle, control
mechanism at the disposal of top managers.
So, although the problem of bounded rationality
at HQ level receives more extensive treatment in
the contingency theory than in TCE, the emphasis
is more on rationality than on bounded rationality.
Even though access to information, information-
processing capacity, and time constraints are recog-
nized as serious problems, this does not seem to
have any profound consequences for top managers’
possibility to exert satisfactory control. The per-
spective assumes, at least implicitly that HQ is
informed of the performance implications of alter-
native innovation processes at least as well as, and
presumably better than, the subsidiaries (Foss,
2002).
Papers written from the knowledge-based or
dynamic capability perspective (e.g., Barney, 1991;
Birkinshaw & Hood, 1998; Conner & Prahalad,
1996; Grant, 1996; Kogut & Zander, 1992, 1993;
Spender, 1994) see the HQ “knowledge situation” as
being more complicated than suggested in the
theories discussed above. Knowledge is not only
an existing resource ready for use; it is also the
outcome of complex processes within the MNE. In
other words, the MNE is a repository of embedded
knowledge (Verbeke, 2003), and causal ambiguity
clouds the knowledge on which a firm bases its
capability (Barney, 1991). The role of HQ in value-
creating processes is therefore also more ambigu-
ous, although most of the literature in this tradition
seems to claim that HQ exercises some form of
control over these processes. In some studies, the
possibility of HQ executing authority over knowl-
edge-creating processes is in fact a necessary condi-
tion for the knowledge-based firm. Conner and
Prahalad (1996: 480), for instance, claim that the
firm is created as a result of the fact that “the
managers’ understanding (present and future) is
believed to be of superior value compared with
Francesco Ciabuschi et al
961
corresponding elements of the employees”. Because
of differences in employees’ knowledge, HQ author-
ity is a crucial mechanism for the handling of
problems. In the knowledge-based view, the ability
to combine heterogeneous pieces of knowledge by
executing authority from above, rather than econ-
omizing on opportunism, is the main reason why
firms exist (Conner & Prahalad, 1996).
In Kogut and Zander’s version of the evolutionary
theory, the MNE is first and foremost a social
community. This is the main reason why knowl-
edge can be combined and transferred more
effectively within the firm than between firms
(Kogut & Zander, 1993). As a result, most of the
problems typically associated with bounded ration-
ality are avoided, because units/individuals are not
only supposed to know each other’s competences
but also have the ability and willingness to share
them. In this sense, Kogut and Zander view MNEs
as having a characteristic of “metarationality”,
albeit in a general sense rather than directly in
association with HQ or any other unit.
Overall, the approaches discussed above are
founded on the assumed rationality of HQ in
MNEs, although with certain constraints. HQ may
or may not possess specific knowledge of crucial
importance for a particular innovation process, but
it does have a reasonable understanding of what
kind of knowledge it lacks. Let us now turn to
approaches that take a different outlook on this
matter.
The Sheer Ignorance Perspective
Although the rationality perspective has dominated
the writings on MNEs, some IB theories seem to be
more in line with an alternative perspective on the
HQ knowledge situation: the sheer ignorance per-
spective. This perspective takes into considera-
tion the fact that firms are basically distributed
knowledge systems: they are decentralized systems,
lacking an overseeing “mind” (Mintzberg, 1990;
Tsoukas, 1996). This idea, which is more in line
with Hayek than with Coase, conceives economics
as “a problem of the utilization of knowledge not
given to anyone in its totality” (Hayek, 1945: 520).
Such a view avoids what Hayek called the “synoptic
delusion” – that is, the assumption that knowledge
can be surveyed by a single mind. It has its corollary
in the “Austrian” school of strategy, which main-
tains that an enormous amount of ignorance stands
in the way of coordinating economic decisions and
actions (Jacobson, 1992; Kirzner, 1997).
Journal of International Business Studies
 Rationality vs ignorance
962
Examples of IB theories more in line with this
perspective are the business network theory (e.g.,
Andersson et al., 2007; Forsgren, Holm, & Johanson,
2005; Garcia-Pont, Canales, & Noboa, 2009) and
MNE theories based on institutionalization theory
(e.g., Björkman, 2006; Ferner, Almond, & Colling,
2005; Ghoshal & Westney, 1993; Kostova, 1999;
Morgan & Whitley, 2003; Rosenzweig & Singh,
1991). A cornerstone in business network theory is
that MNE subsidiaries are highly embedded in their
local business networks, which makes the MNE
extremely “distributed” when it comes to knowl-
edge and control. HQ is always an outsider to
these business networks, with limited possibility to
understand, let alone control, processes at the
subsidiary level. There is no such thing as a “master
mind” in the embedded MNE. HQ is seen rather as
one player among others in the contest to influence
strategic behavior within the MNE (Forsgren et al.,
2005).
Although the institutionalism used in IB research
is characterized by a diverse set of approaches
rather than one distinctive MNE model (Barner-
Rasmussen et al., 2010), there are some common
characteristics. One is that the MNE is portrayed as
a loosely coupled organization, owing to the
different institutional worlds the MNE subsidiaries
inhabit. Local isomorphism (Westney, 1993), orga-
nizational distance (Goodall & Roberts, 2003;
Kostova & Zaheer, 1999) and local rationalities
(Morgan & Whitley, 2003) are crucial dimensions of
the institutional perspective. To a large extent,
therefore, the MNE is seen as a “contested social
space” (Morgan & Kristensen, 2006), in which HQ
action suffers not only from lack of knowledge but
also from lack of legitimacy in relation to the MNE
subsidiaries. This perspective differs radically from
those we have labeled “rational”, both in terms of
the relationship between the environment and the
MNE, and in terms of the role played by HQ. It has
been suggested that HQ is more of an “absentee
landlord” than a “managerial apex” (Barner-
Rasmussen et al., 2010; Kristensen & Zeitlin, 2001).
The proposition that MNEs are distributed knowl-
edge systems, in the strong sense, contains several
interrelated sub-themes. First, knowledge is context
specific and action oriented (Giddens, 1984; Weick
& Roberts, 1993). Consequently, it is difficult to
separate knowledge as a resource from the local
context in which knowledge-related activities are
carried out. Second, the fact that knowledge is
action oriented implies that activities not only use
knowledge but also produce knowledge. This, in
Journal of International Business Studies
Francesco Ciabuschi et al
turn, implies that a manager’s understanding
resides, first and foremost, in the practices in which
he or she participates (Tsoukas, 1996). Third,
knowledge is not only individualistic but also
collective (Weick & Roberts, 1993). It is shared by
many in a complex system, which means that it is
known in its entirety by no one, although portions
of it are known differently by all (Tsoukas, 1996).
Fourth, knowledge as a context-specific and action-
oriented phenomenon also implies that managers
not only have incomplete knowledge, but, more
fundamentally, do not know what they need to
know. No single mind can specify in advance what
kind of practical knowledge is going to be relevant,
or when, or where (Tsoukas, 1996). In this sense,
MNEs lack a cognitive equivalent of a “control
room” (Stacey, 1995).
To summarize, in the sheer ignorance perspective,
HQ is likely to be “groping in the darkness” when it
comes to managing the innovation processes at the
subsidiary level, and even when designing its own
role in these processes.
THE IMPACT OF HQ INVOLVEMENT ON THE
PERFORMANCE OF INNOVATION PROCESSES
AT THE SUBSIDIARY LEVEL
We argue that when it comes to HQ involvement in
innovation processes at the subsidiary level (in
terms of both the development and the transfer of
innovation) and its impact on the performance of
these processes, the two knowledge situations and
perspectives lead to different predictions. Given the
fact that HQ knowledge of a certain innovation
process can vary considerably (depending, among
other things, on contextual factors, such as the
degree of innovation novelty), the rationality
perspective holds HQ involvement to be based
on a realistic understanding of its own expertise
(or lack thereof). The sheer ignorance perspective,
in contrast, implies that HQ not only suffers from
a lack of knowledge about a specific innovation
process at the subsidiary level, but also lacks a
genuine possibility to assess its own level of
knowledge. Therefore it is unable to make a rational
decision regarding the extent of its possible inter-
vention. If HQ decides to intervene, it may be
counterproductive if based on false premises in
terms of the expertise it is able to contribute.
In the following subsections, we discuss the
relationships between HQ knowledge of innovation
processes at the subsidiary level, HQ involvement
in these processes, and innovation processes per-
formance. We also present some considerations
 Rationality vs ignorance
regarding the influence of the degree of innovation
novelty on the relationship between HQ involve-
ment and innovation processes performance.
Through six different propositions concerning these
relationships, we claim that the reasoning behind
the two perspectives leads to different predictions.
Applying the Rationality Perspective
Under the rationality perspective, HQ is assumed to
have the ability to assess the character of its
knowledge and lack of knowledge and, conse-
quently, the ability to determine what role it should
play to make the innovation processes as efficient
and effective as possible. If HQ decides to become
actively involved in developing and transferring
innovations at the subsidiary level, it is because it
has an accurate understanding of how this will
enhance the performance of these processes. If, on
the other hand, HQ decides to adopt a “hands-off”
approach, it is because it has judged its own level
of knowledge to be so limited as to make non-
intervention the best option. In general, the
rationality perspective leads to the following
proposition regarding the relationship between
HQ knowledge of and involvement in a specific
innovation process:
Proposition 1: HQ knowledge about a subsidiary
innovation process is positively related to HQ
involvement in the process.
The rationality perspective implies that HQ
expertise matters: that is, its knowledge will con-
tribute positively to the performance of the innova-
tion processes at the subsidiary level. Furthermore,
HQ involvement can guarantee greater innovation
legitimacy and guidance for the subsidiary, and
increase overall commitment to the project
(Birkinshaw, Hood, & Jonsson, 1998; McDermott
& O’Connor, 2002; Quinn, 1985). Through these
means, HQ involvement will lead to better results
(Brown & Eisenhardt, 1995; Clark & Fujimoto,
1991; Poppo, 2003). Consequently, and strictly in
line with the rationality argument, we formulate
the following proposition:
Proposition 2: HQ involvement in a subsidiary
innovation process is positively related to the
performance of the process.
It is reasonable to expect that the impact of HQ
involvement may also be contingent on other
factors related to the specific context of a given
Francesco Ciabuschi et al
963
innovation process. Among the various potential
factors, the literature has often reported innovation
novelty as one of the most critical (Anderson &
Tushman, 1990). It reflects the disruptiveness of
the innovation: that is, the degree to which it
changes existing skills, products and processes. The
distinction between incremental and radical inno-
vations is commonly associated with the novelty
of the innovation (Garcia & Calantone, 2002).
There is no consensus regarding exactly what
constitutes a radical innovation, but it is always
modeled as the “degree of discontinuity in
marketing and/or technological factors” (Garcia &
Calantone, 2002: 112).
The more radical and novel the subsidiary’s
innovation, the stronger the dependency of the
innovation process on a wider range of internal and
external expertise. This means it is also more
difficult to know ex ante what expertise is needed
in this type of innovation as opposed to the
incremental type. This applies to managers at the
subsidiary level as well as to those at HQ. However,
in line with the rationality perspective, the extent
of HQ intervention in such a process is determined
by the crucial knowledge it possesses, which is not
accessible from any other source. Furthermore, it
has been pointed out that support in the form of
active involvement by HQ is particularly important
for radical projects (McDermott & O’Connor,
2002). Consequently, given that HQ is able to
evaluate its knowledge situation, the rational
perspective leads us to propose the following:
Proposition 3: The more novel the innovation,
the more positive the impact of HQ involvement
on the performance of a subsidiary’s innovation
process.
Applying the Sheer Ignorance Perspective
In a situation of sheer ignorance, HQ not only lacks
knowledge; it also suffers from incomplete infor-
mation about what knowledge it lacks. Under this
perspective, HQ is truly an outsider vis-à-vis the
operational context of each subsidiary, fundamen-
tally lacking the means to assess what expertise is
needed, and possibly in possession of valuable
expertise of which it is unaware. Some scholars
have argued that this is what creates the character-
istic tension between center and periphery in
MNEs (Regnér, 1999), or actually constitutes a pre-
requisite for entrepreneurship at the subsidiary level
(Mudambi & Navarra, 2004; Yamin, 2002). Note
Journal of International Business Studies
 Rationality vs ignorance
964
that lack of information on the part of HQ about
the subsidiaries’ innovation processes is not the
main problem, since, according to the rationality
argument, it can be solved by means of appropriate
action. The fundamental problem stems rather
from the fact that HQ is often essentially un-
aware of what its subsidiaries are doing, or why
(Birkinshaw et al., 2000). This in turn implies
that HQ has limited capability to determine what
information to collect, let alone to decide what role
to play in innovation processes.
This problem might not be too serious if HQ
simply adapts its degree of involvement to its level
of knowledge and capacity, as assumed under the
rationality perspective. However, the view of the
MNE as a highly distributed knowledge system also
implies that HQ bases its behavior within the
organization on the normative expectations asso-
ciated with its role as a top manager, past socializa-
tion into this role, and the context of social activity
within which the normative expectations and
past socialization are activated (Tsoukas, 1996).
The normative expectations include demands from
different stakeholders, as well as a demand for
leadership and the exercise of authority. The past
socialization of top managers will most probably
strengthen these role expectations. Therefore, even
if HQ suffers from sheer ignorance, it may tend to
interfere in innovation processes at the subsidiary
level, simply because the organization and its
stakeholders expect it to. It may in fact be a
case of HQ acting on signals from subsidiaries.
Thus subsidiaries sometimes attract the attention
(Ambos, Andersson, & Birkinshaw, 2010; Bouquet,
Morrison, & Birkinshaw, 2009) of (an ignorant) HQ,
which gets involved despite its ignorance, since
it is expected to take action and make decisions.
Therefore, contrary to the knowledge situation
characterized by bounded rationality, in which
HQ involvement is the result of a rational choice
reflecting its possession of knowledge, in the sheer
ignorance scenario its involvement reflects norma-
tive expectations associated with its role irrespective
of its knowledge. Thus the sheer ignorance perspec-
tive leads to the following proposition:
Proposition 4: HQ knowledge about a subsidiary
innovation process is not related to HQ involve-
ment in the process.
If HQ interferes in the subsidiary innovation
processes despite its lack of relevant knowledge, it
will probably complicate the situation. There is an
Journal of International Business Studies
Francesco Ciabuschi et al
apparent risk that HQ involvement in the
processes, after some time, will prove meaningless,
and wrong and that its legitimacy to intervene will
be partly lost (Kristensen & Zeitlin, 2001). HQ
involvement, among other things, also increases
project visibility and reporting requirements, thus
adding to the cost and extending the timescale for
the implementation of the innovation by the
subsidiary (e.g., Birkinshaw, Bouquet, & Ambos,
2007; Björkman, Barner-Rasmussen, & Li, 2004).
The coordination costs of innovation projects
in which HQ is actively involved are likely to be
higher, as more people and locations become
involved. Moreover, direct involvement of HQ, as
an outsider, will make the innovation project less
likely to benefit from existing routines, since HQ is
unlikely to have as much (if any) specific knowl-
edge of the particular context. In such circum-
stances, HQ involvement runs the risk of becoming
dysfunctional, and thus more likely to destroy
value than to create it (Barner-Rasmussen et al.,
2010; Goold & Campbell, 2002). This line of reason-
ing has some equivalence with the “bounded
reliability problem” identified by Verbeke and
Greidanus (2009), i.e., that HQ relationships with
subsidiaries, apart from opportunism, also include
changes and scale-backs in HQ commitments vis-à-vis
subsidiaries during the innovation processes (Verbeke
& Greidanus, 2009). Consequently, from a sheer
ignorance perspective, we propose the following:
Proposition 5: HQ involvement in a subsidiary
innovation process is negatively related to the
performance of the process.
The reasoning that HQ involvement tends to
have a detrimental impact on innovation processes
performance is founded on two assumptions: one
that there is a wide gap between the reality of the
local context in which the innovation processes are
carried out and HQ knowledge of that context; and,
two that HQ lacks the ability to assess the actual
width of the gap. The difficulty of the situation,
however, might depend on the type of innovation.
It is reasonable to expect that the more radical
and novel the innovation, the wider and more
difficult it is to assess the knowledge gap. For more
radical and novel innovations, it is especially
difficult to estimate ex ante what practical knowl-
edge will be required, or to acquire it during the
innovation processes. HQ ignorance, therefore, is
more acute in processes concerning radical and
novel innovations than in those dealing with
 Rationality vs ignorance
incremental innovations. Its intervention may
therefore have a more negative impact in the
former. The sheer ignorance perspective, therefore,
leads to the following proposition:
Proposition 6: The more novel the innovation,
the more negative the impact of HQ involvement
on the performance of a subsidiary’s innovation
process.
To further illustrate the difference between the
two perspectives and, particularly, to show the
relevance of the sheer ignorance perspective, a real
case of a specific technology transfer from the USA
to Europe is presented below.
THE CASE OF SVENSKA CELLULOSA
AKTIEBOLAGET (SCA) AND THE THERMOSAFE
BRANDS (TSB) SUBSIDIARY2
SCA is one of the largest pulp and paper producers
in the world, with annual sales of over h11 billion
and about 50,000 employees. One of its business
divisions, SCA Packaging, is a leading producer of
corrugated board and containerboard in Europe,
and one of the world leaders in customized
packaging solutions, delivering about 40 million
packaging units daily from more than 250 plants
worldwide. In 2003, SCA Packaging set up a US unit
specializing in temperature assurance solutions
(e.g., gels, insulation, and containers), the TSB
unit.3 TSB is the US market leader in its segment,
with total sales of over US$100 million. TSB is a
subsidiary of SCA Packaging Division, and reports
to the SCA Packaging HQ in Brussels.
TSB’s technology and competence is unique
within the SCA group. In fact, the temperature
assurance business was new to SCA, and many of its
customers and competitors are not regular custo-
mers (or competitors) of any other SCA unit. This
also means that TSB is not competing directly
with its sister units. Moreover, with respect to the
other SCA packaging units, TSB’s business model is
also unique. Typical packaging units have a B2B
approach, and packaging solutions are generally
marketed as commodities, whereas TSB has a B2C
approach based on strong branding and higher
value-added. These circumstances contributed to
the fact that, although HQ was aware of TSB’s
unique competence, it did not assign to it any clear
strategy or role.
However, TSB realized soon after its start-up that
some of the SCA Packaging units in Europe were
already serving potential temperature assurance
Francesco Ciabuschi et al
965
customers, albeit occasionally, and their customers
were not yet considered as a different type of
business. Thus the idea of transferring TSB technol-
ogy and know-how to these units began to emerge.
A TSB manager commented: “When traveling to
meet representatives of the European organization
we got to know some of the projects that were
going on overseas. Particularly, we detected a great
potential for competence synergies”. However, at
that time, none of the other packaging units ever
contacted TSB, or showed interest in TSB business
and competence. This was also true for the top
management, as indicated by a TSB manager: “SCA
top management does not see that they already
have a sort of raw TSB business in Europe which
could be easily pulled together, shaped up and
rendered as an official business segment”.
Thus TSB managers seeking to grow outside the
US started to meet with some local subsidiary
managers of SCA Packaging in Europe and tried to
promote the idea that a temperature assurance
business should be formed within Europe. Accord-
ing to TSB managers, local European SCA managers’
reactions were not positive. Some managers,
despite agreeing with the idea, did not want to be
involved. Others claimed that there was not
enough business in the region. Some were simply
against change of any kind. One TSB manager
further commented: “European subsidiaries seem to
have their own issues and they don’t tell us what
these issues are”.
Therefore, TSB turned to SCA corporate HQ and
asked for a direct intervention. Since the creation of
TSB through the acquisition of four US companies,
corporate HQ has not been involved with the TSB
business. According to managers at corporate HQ,
TSB has never been at the top of the priority list,
since it is profitable in their business, and SCA had
to face other issues much more urgent. As corporate
HQ did not react to TSB’s request, the Packaging
HQ in Brussels was contacted. SCA Packaging HQ
did not respond immediately. However, in 2005 the
CEO of SCA Packaging finally decided to support
the idea of somehow transferring TSB competence
to Europe. Although not familiar with TSB and its
business, the CEO felt the pressure to act on the TSB
request, since this was becoming an increasingly
critical issue for TSB’s potential growth and, hope-
fully, an opportunity for the other packaging units.
Although championed by the CEO in Brussels,
the process of exploiting TSB competence in the
wider organization was not taking shape. Brussels
HQ was finally supporting TSB, but the European
Journal of International Business Studies
 Rationality vs ignorance
966
packaging units continued to put up strong resis-
tance. The CEO in Brussels became concerned, and
did not want to damage the existing equilibrium in
the European packaging organization. TSB trusted
Brussels to channel it into Europe, but in the end
they never actually succeeded. As a TSB manager
commented: “People in Brussels have been pro-
mising support, but during the years we never
succeeded in making any concrete step to bring TSB
technology and products overseas”.
After some time, TSB decided to act autono-
mously, using only its own resources. The acquisi-
tion of a local firm within the temperature
assurance business would avoid direct contact and
potential problems with the existing European SCA
organization. In 2006, TSB acquired Cool Logistics,
a UK-based company with operations in both the
UK and France. At first, TSB’s cooperation with
sister units overseas remained limited. The presi-
dent of TSB commented: “Probably the most risky
thing that we at TSB have ever done is to move
somewhat against the SCA organization and take
the first step into Europe through an acquisition
and by aiming at making TSB a global venture”. In
this way, TSB managed to market its temperature
assurance business through its UK subsidiary, and it
also started to negotiate with some of the other
SCA units regarding potential opportunities to
cooperate in some niches of the temperature
assurance business.
To summarize, TSB launched the idea that its
innovations in the temperature assurance business
should be transferred to and exploited within SCA’s
European units. Corporate or divisional HQ was
expected to be a driving force by taking an active
part in the transfer process. However, HQ’s knowl-
edge about the business was extremely limited. It
had no practical or any other experience of TSB
competence in the temperature assurance business.
At first, HQ was hesitant to deal with the issue. TSB
insisted, and HQ eventually decided to intervene
by attempting to persuade the European units
to develop their competence in the field. The
European units, however, showed no interest in
the temperature assurance business, and HQ failed
to convince them of the potential benefits. In time,
HQ became increasingly concerned by the resis-
tance of the sister units, and eventually abandoned
its attempts to play an active role as a facilitator in
the transfer process. On realizing that HQ had
given up the transfer project, or at least its own role
in it, TSB decided to exploit its competence in
Europe on its own behalf.
Journal of International Business Studies
Francesco Ciabuschi et al
This case illustrates the difference between the
rationality perspective and the sheer ignorance
perspective. The former offers a limited explanation
of HQ’s behavior in the real case scenario. The
rationality perspective proposes that HQ involves
itself in the transfer processes at the subsidiary level
only to the extent that it possesses knowledge
relevant to the project. A straightforward relation-
ship can be expected between HQ’s knowledge and
the degree and character of its active involvement.
Nevertheless, HQ took an active part in the transfer
process despite its apparent lack of knowledge
about the temperature assurance field and the
core technology associated with this business. The
TSB case demonstrates that there are situations in
which there is no direct relationship between
HQ knowledge and HQ involvement. It further
demonstrates that involvement might be a conse-
quence of the expectations placed on HQ by others.
TSB insisted that the divisional HQ should use its
authority and intervene, which, finally, it did.
The rationality perspective also tells us that when
HQ chooses to intervene, innovation processes will
benefit. This is inferred from the basic assumption
that HQ designs its role to fit the competence it is
able to contribute. There are ample indications in
the TSB case, in contrast that HQ’s involvement not
only proved useless; it also delayed the process.
When TSB eventually took independent initiative,
with no interference from the SCA organization,
the transfer of the new technology from TSB into
Europe became a reality.4
FINAL COMMENTS
In this paper we have brought to the scene a rather
neglected perspective, which we have called the
sheer ignorance perspective. By comparing it with
the dominant perspective in the mainstream
literature – the rationality perspective – we have
discussed its main features as it applies to the role
played by HQ in subsidiary innovation processes.
At the core of the reasoning is the impossibility of
HQ to assess ex ante what role to play in a specific
innovation process.
Does our reasoning involve, in line with the sheer
ignorance perspective, HQ keeping its hands off
innovation processes at the subsidiary level? Not
necessarily. Authority exercised by HQ can still be
rational, even in a sheer ignorance scenario. First,
one might argue that HQ may learn over time how
much and in what way to intervene. However, the
more radical and novel the innovation, the less
applicable the practical experience gained from
 Rationality vs ignorance
previous projects. Second, when several research
projects are in progress simultaneously, a centra-
lized authority may be necessary to set priorities,
even if its knowledge about the projects is scant.
HQ may have an important role to play in the
resolution of conflicts arising from disagreements
within a specific project, between different ones, or
among subsidiaries (Goold & Campbell, 2002). HQ
might be able to play such a role even when
suffering from radical uncertainty about the pro-
jects as such. Third, when the need for decisions
and action is urgent, somebody has to decide
(Foss, 2002). The MNE, as a distributed knowledge
system, implies that nobody (neither HQ nor its
subsidiaries) has a complete overview of the situa-
tion, or the possibility to assess which competences
will be relevant in the future. In such a situation,
HQ might decide to intervene simply to make
decisions and get things done, even if nobody
knows whether this is the right decision. Fourth,
following this line of thought, it could also be
argued that involvement by HQ in a situation of
sheer ignorance might lead to a low performance in
terms of efficiency, but eventually to a better
performance in terms of effectiveness.
The purpose of this paper was to contrast two
perspectives in order to better understand HQ
behavior and its potential value-adding role. This
analysis has deliberately emphasized the differences
between the two perspectives, and may have
somewhat simplified the broad spectrum, which
would range from “pure” rationality, through dif-
ferent forms of bounded rationality, to “pure” igno-
rance. To some extent, the two perspectives also
reflect different research traditions and differences
in empirical contexts (Barner-Rasmussen et al., 2010).
It is critical to recognize, however, that a theoretical
conflict between perspectives can be addressed by
empirical research. This paper urges the pursuit of
this type of research. For instance, empirical ana-
lyses of the relationship between HQ actual knowl-
edge and its involvement would shed light on the
theoretical merits of the two perspectives. One way
of carrying out this kind of research would be to
examine HQ actual experience of the local context
of subsidiaries (as an indicator of HQ knowledge) in
relation to its degree of involvement in innovation
processes at the subsidiary level. Under the ration-
ality perspective, we would expect to find the rela-
tionship to be positive. From the sheer ignorance
perspective, in contrast, we would expect a non-
significant (or weaker) relationship, and factors
other than knowledge to influence HQ behavior.
Francesco Ciabuschi et al
967
Another way of comparing the two perspectives
would be to investigate the relationship bet-
ween HQ degree of involvement in specific innova-
tion projects at the subsidiary level and the
efficiency and effectiveness of these projects, in
terms both of development and of transfer. The two
perspectives lead to opposing predictions concern-
ing this relationship, and an investigation would
cast new light on the issue of the relevance of the
rationality perspective vs the sheer ignorance
perspective. If the findings show a negative sig-
nificant relationship between involvement and
performance, the dominance of the rationality
perspective in IB research should be an issue of
particular concern.
NOTES
1
On this issue, IB research does not deviate from
research on organizations in general. As pointed out
by March and others, the preeminence of rationality as
an interpretation of human action in organizations
has a long tradition (March, 2006; Olsen, 1976).
March suggests three main reasons for this. One is the
usual assumption of the pre-existence of purpose.
The second is what has been called the necessity of
consistency, namely, that the organization is seen as a
hierarchy with the obligation to coordinate and
control. The third reason is the primacy of rationality,
i.e., the assumption that people consequentially
associate outcomes to their behavior rather than
acting without fully understanding why (March,
1976).
2
This study was conducted within a large Swedish-
based MNE (SCA) by examining one specific subsidiary
(TSB) of its American venture. Interviews were con-
ducted with top executives at the HQ, and with the
subsidiary managers at TSB and other American units.
A semi-structured interview guide was used, and
modified as new insights were gathered. A total of
20 interviews were conducted in the United States and
Sweden. Interviews ranged from one to several hours
in length. Respondents were informed of the purpose
of the research before the interview. A “courtroom”
procedure was used, in which the questions focused
on facts and events rather than on respondents’
interpretations, especially of the actions of others
(Eisenhardt, 1989). All interviews were tape-recorded
and transcribed. Follow-up questions were asked via
phone and email, particularly when clarification was
necessary. Interviews ended when the researcher
determined that a satisfactory level of understanding
had been reached for the purpose of the research.
Journal of International Business Studies
 Rationality vs ignorance
968
Upon completion of the interview series, the collected
information was transformed into a case history.
3
TSB was formed in 2003 from the acquisition of
four US independent ventures (ISC Labs, Polyfoam
Packers, Mid-Lands Chemicals, and H&R Industries).
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ABOUT THE AUTHORS
Francesco Ciabuschi is an Associate Professor
in International Business at Uppsala University
(Sweden). He has published in many international
journals, and his current research focuses on
corporate strategy, management of multinationals,
firms’ internationalization, knowledge and innova-
tion management. He is a citizen of Italy, where
he was born, and of Sweden, which has been his
home for the last 15 years. He can be reached at
francesco.ciabuschi@fek.uu.se.
Mats Forsgren is Professor Emeritus in Interna-
tional Business at Uppsala University, and perma-
nent visiting professor at LUISS Business School in
Rome. His main research topics are management of
multinational firms, theories of internationaliza-
tion and business network theory. He has published
Journal of International Business Studies
 Rationality vs ignorance
970
several articles in international journals. He is a
citizen of Sweden. He can be reached at mats
.forsgren@fek.uu.se.
Oscar Martı́n Martı́n is an Assistant Professor
at the Public University of Navarre (Spain) and
Accepted by Alain Verbeke, Area Editor, 27 March 2011. This paper has been with the authors for three revisions.
Journal of International Business Studies
Francesco Ciabuschi et al
an Associated Researcher at Uppsala University
(Sweden). His research focuses on three main areas:
the internationalization process of firms, country of
origin, and MNEs. Born in and a citizen of Spain,
he has published in journals such as the Journal of
Management Studies, International Marketing Review,
and International Business Review.
Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.