HOW INSTITUTIONS AND RESOURCES AFFECT MULTINATIONAL

STRATEGIES, STRUCTURES, AND LEARNING

Having outlined the basic strategy/structure configurations, let us introduce how the institution-based and
resource-based views shed light on these issues (see Figure 13.6).

Figure 13.6

Institution-Based Considerations
MNEs face two sets of rules of the game: Formal and informal institutions governing (1) external
relationships and (2) internal relationships. Each is discussed in turn.

Externally, MNEs are subject to the formal institutional frameworks erected by various home-
country and host-country governments. For example, in order to protect domestic employment, the British
government taxes the foreign earnings of British MNEs at a higher rate than their domestic earnings. The
Obama administration is threatening similar moves.

Host-country governments, on the other hand, often attract, encourage, or coerce MNEs into
undertaking activities that they otherwise would not. For example, basic manufacturing generates low-
paying jobs, does not provide sufficient technology spillovers, and carries little prestige. Advanced
manufacturing, R&D, and regional headquarters, on the other hand, generate better and higher-paying jobs,
provide more technology spillovers, and lead to better prestige. Therefore, host-country governments (such
as those in China, Hungary, and Singapore) often use a combination of carrots (such as tax incentives and
free infrastructure upgrades) and sticks (such as threats to block market access) to attract MNE investments
in higher value-added areas.

In addition to formal institutions, MNEs also confront a series of informal institutions governing their
relationships with home countries. In the United States, few laws ban MNEs from aggressively setting up
overseas subsidiaries, although the issue is a hot button in public debate and is always subject to changes in
political policy. However, managers contemplating such moves must consider the informal but vocal
backlash against such activities due to the associated losses in domestic jobs.

Dealing with host countries also involves numerous informal institutions. For example, Airbus
devotes 40% of its procurement budget to US suppliers in more than 40 states. Although there is no formal
requirement for Airbus to farm out supply contracts, its sourcing decisions are guided by the informal norm
of reciprocity: If one country’s suppliers are involved with Airbus, airlines based in that country are more
likely to buy Airbus aircraft.

Institutional factors affecting MNEs are not only external. How MNEs are governed internally is also
determined by various formal and informal rules of the game. Most MNEs have systems of evaluation,
reward, and punishment in place based on these formal rules.

What the formal organizational charts do not reveal are the informal rules of the game, such as
organizational norms, values, and networks. The nationality of the head of foreign subsidiaries is such an
example. Given the lack of formal regulations, MNEs essentially can have three choices:

• a home country national as the head of a subsidiary (such as an American for a subsidiary of a US-
headquartered MNE in India)

• a host country national (such as an Indian for the same subsidiary above)

• a third country national (such as an Australian for the same subsidiary above)

MNEs from different countries have different norms when making these appointments. Most
Japanese MNEs seem to follow an informal rule: Heads of foreign subsidiaries, at least initially, need to be
Japanese nationals. In comparison, European MNEs are more likely to appoint host and third country
nationals to lead subsidiaries. As a group, US MNEs are somewhere between Japanese and European
practices. These staffing approaches may reflect strategic differences. Home country nationals, especially
long-time employees of the same MNE at home, are more likely to have developed a better understanding
of the informal workings of the fi rm and to be better socialized into its dominant norms and values.
Consequently, the Japanese propensity to appoint home country nationals is conducive to their preferred
global standardization strategy, which values globally coordinated and controlled actions. Conversely, the
European comfort in appointing host and third country nationals is indicative of European MNEs’
(traditional) preference for a localization strategy. Interestingly, some emerging MNEs from China have
chosen to appoint host country nationals to head their first overseas subsidiaries.

Beyond the nationality of subsidiary heads, the nationality of top executives at the highest level
(such as chairman, CEO, and board members) seems to follow another informal rule: They are almost always
home country nationals. To the extent that top executives are ambassadors of the firm and that the MNE
headquarters’ country of origin is a source of differentiation (for example, a German MNE is often perceived
to be different from an Italian MNE), home country nationals would seem to be the most natural candidates
for top positions.

In the eyes of stakeholders such as employees and governments around the world, however, a top
echelon consisting of largely one nationality does not bode well for an MNE aspiring to globalize everything
it does. Some critics even argue that this “glass ceiling” reflects “corporate imperialism.” Consequently, such
leading MNEs as Coca-Cola, GSK, Nissan, PepsiCo, and Sony have appointed foreign-born executives to top
posts. Such foreign-born bosses bring substantial diversity to the organization, which may be a plus.
However, such diversity puts an enormous burden on these non-native top executives to clearly articulate
the values and exhibit behaviors expected of senior managers of an MNE associated with a particular
country. For example, Procter & Gamble (P&G) appointed Durk Jager, a native of the Netherlands, to be its
chairman and CEO in 1999. Unfortunately, Jager’s numerous change initiatives almost brought the venerable
company to a grinding halt and he was quickly forced to resign in 2000. Since then, the old rule is back: P&G
has been led by an American executive (A. G. Lafley between 2000 and 2009 and Robert McDonald since
2009).

Overall, although formal internal rules on how the MNE is governed may reflect conscientious
strategic choices, informal internal rules are often taken for granted and deeply embedded in administrative
heritages, thus making them difficult to change.

Resource-Based Considerations

Shown in Figure 13.6, the resource-based view—exemplified by the VRIO framework—adds a

number of insights. First, when looking at structural changes, it is critical to consider whether a new
structure (such as a matrix) adds concrete value. The value of innovation must also be considered. A vast
majority of innovations simply fail to reach market, and most new products that do reach market end up
being financial failures. The difference between an innovator and a profitable innovator is that the latter has
not only plenty of good ideas but also lots of complementary assets (such as appropriate organizational
structures and marketing muscles) to add value to innovation. Philips, for example, is a great innovator. The
company invented rotary shavers, video cassettes, and compact discs (CDs). Still, its abilities to profit from
these innovations lag behind those of Sony and Matsushita, which have much stronger complementary
assets.

A second question is rarity. Certain strategies or structures may be in vogue at a given point in time.
So, for example, when a company’s rivals all move toward a global standardization strategy, this strategy
cannot be a source of differentiation. To improve global coordination, many MNEs spend millions of dollars
to equip themselves with enterprise resource planning (ERP) packages provided by SAP and Oracle.
However, such packages are designed to be implemented widely and appeal to a broad range of fi rms, thus
providing no firm-specific advantage for the adopting firm.

Even when capabilities are valuable and rare, they have to pass a third hurdle, namely, imitability.
Formal structures are easier to observe and imitate than informal structures. This is one of the reasons why
the informal, flexible matrix is in vogue now. The informal, flexible matrix “is less a structural classification
than a broad organizational concept or philosophy, manifested in organizational capability and management
mentality.” Obviously imitating an intangible mentality is much harder (if it is even possible) than imitating a
tangible structure.

The last hurdle is organization—namely, how MNEs are organized, both formally and informally, around the
world. One elusive but important concept is organizational culture. Culture is defined by Hofstede as “the
collective programming of the mind which distinguishes the members of one group or category of people
from another.” We can extend this concept to define organizational culture as the collective programming of
the mind that distinguishes the members of one organization from another. China’s Huawei, for example, is
known to have a distinctive “wolf” culture, whose core values center on “continuous hunting” and
“relentless pursuit” with highly motivated employees who routinely work over time and sleep in their
offices. Although rivals can endeavor to imitate everything Huawei does technologically, their biggest hurdle
lies in their lack of ability to wrap their arms around Huawei’s elusive but important “wolf” culture. As
discussed above, if MNEs are able to derive the organizational benefits of the matrix without being
burdened by a formal matrix structure (that is, building an informal, flexible, invisible matrix), they are likely
to outperform rivals.

Source: Peng, M. (2011), Global Business, Second Edition