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INTERNATIONAL SUBSIDIARY

MANAGEMENT AND

ENVIRONMENTAL

CONSTRAINTS: THE CASE

FOR INDIGENIZATION

Laszlo Tihanyi, Anand Swaminathan

and Sarah A. Soule

ABSTRACT

We use insights from resource dependence, institutional theories andsocial movement theories to examine the indigenization of subsidiarymanagement in the multinational company (MNC). We discuss theeffects of interdependence with local organizations, access to criticalresources, and MNC legitimacy in the host country on the indigenizationof subsidiary management. We consider the impact of local and extra-local social movement activity as well as the local political opportunitystructure in the host country. The organizational variables in theframework include international strategy and experience. We suggestimplications for further international management research and practiceinvolving the operation of foreign subsidiaries.

Institutional Theory in International Business and Management

Advances in International Management, Volume 25, 373–397

Copyright r 2012 by Emerald Group Publishing Limited

All rights of reproduction in any form reserved

ISSN: 1571-5027/doi:10.1108/S1571-5027(2012)0000025021

373

LASZLO TIHANYI ET AL.374

INTRODUCTION

Previous internationalmanagement research provides convincing evidence onthe organizational benefits of placing expatriate managers in foreign subsi-diaries. Expatriate managers tend to exhibit high commitment to their parentorganization (Gregersen & Black, 1992), reduce agency costs (Gong, 2003)and facilitate knowledge transfer (Tung, 1984). As a public corporation,however, a multinational company (MNC) is ‘as much a political adaptationas an economic or technological necessity’ (Roe, 1991, p. 10). The long-termsurvival of theMNCdepends not only on its organizational efficiency but alsoon its ability to adapt to the local institutional conditions of different countries(Kostova & Zaheer, 1999). Employing indigenous managers can help MNCsto increase their understanding of the laws and value systems of differentcountries, to improve their ability to overcome the liability of foreignness andto meet the demands of different interest groups (Foster, 2000;Gaur,Delios, &Singh, 2007; Gregersen, Hite, & Black, 1996; Zhang, George, & Chan, 2006).

In this paper we explore a set of critical factors that may lead to theindigenization of subsidiary management by MNCs. Indigenization ofsubsidiary management is defined as the transfer of subsidiary managementfrom expatriate to indigenous managers of the host country where the MNC’ssubsidiary is located. Indigenous managers in our conceptualization are notsimply local nationals but professionals with strong ties to their homecountries via their education, language, culture and work experience. Whereasmost previous research considered international human resource practices tofollow: (a) uniform MNC staffing policies around the world, (b) practices ofthe MNC’s home country, or (c) policies of the host country, our frameworkacknowledges variations in country institutional conditions in which MNCsoperate. Therefore, we build on the stream of literature that has identifieddifferences in human resource management practices among the subsidiariesof MNCs (e.g. Bjorkman & Lu, 2000; Hannon, Huang, & Jaw, 1995;Rosenzweig & Nohria, 1994). We expect to see differences in subsidiarystaffing mainly because of the pressures exerted by the local institutionalenvironments in countries where the subsidiaries are located (Gooderham,Nordhaug, & Ringdal, 1999). The examination of specific environmental,institutional, and organizational factors and their effects on the level ofsubsidiary management indigenization is the goal of our paper.

Our framework of subsidiary management indigenization is built upondifferent theoretical perspectives with convergent assumptions: resourcedependence, institutional theories and social movement theories. From aresource dependence perspective, we focus on the roles of interdependence

International Subsidiary Management and Environmental Constraints 375

and critical resources in the local task environment (Hillman, Withers, &Collins, 2009; Pfeffer & Salancik, 1978). From the perspective of insti-tutional theory, we emphasize the influence of normative pressures on MNCbehaviour (Kostova & Zaheer, 1999). We also consider the effects of socialmovement activity and political opportunity structure on indigenization atdifferent levels of analysis (Davis, McAdam, Scott, & Zald, 2005; Strang &Soule, 1998).1 Social movements targeted at the MNC are powerful politicalforces that may challenge and modify the implementation of MNCstrategies (McAdam & Scott, 2005). Local social movements are the expre-ssions of a broader national movement within countries where thesubsidiaries of the MNCs are located (Beveridge, 1991; Wilson, 1990). Inaddition to social movement activity in the host country, we consider therise of movement activity around the world, including social movement inthe home country of the MNC. Increased extra-local movement activityfocusing on MNC behaviour is expected to lead to the further indigenizationof subsidiary management.

We assume that the indigenization of subsidiary management is a meansto increase the MNC’s chances of survival in uncertain host countryenvironments. Specifically, we argue that greater interdependence, a needfor critical local resources, and legitimacy in the host country require MNCsto employ indigenous managers in their local subsidiary. We theorize thatindigenization will further depend on organizational characteristics of theMNC. We expect greater levels of social movement activity in host countriesregarding the role of MNCs that will lead to increased indigenization in themanagement of the MNC’s local subsidiary.

In the following sections, we first review relevant research on internationalsubsidiary management. Next we consider the trade-offs in subsidiarymanagement indigenization using resource dependence, institutional per-spectives and social movement perspectives. In this section, we present ourpropositions on the relationships between relevant environmental, institu-tional, and organizational factors and indigenization. We conclude withimplications for international management theory and the practice ofsubsidiary management.

INTERNATIONAL SUBSIDIARY MANAGEMENT AND

ENVIRONMENTAL PRESSURES

A large body of literature offers insights on how the management of inter-national subsidiaries can help MNCs maintain fit with existing strategies,


improve control and acquire knowledge (Edstrom & Galbraith, 1994; Zhanget al., 2006). Models from a contingency perspective considered the fit orreciprocal interdependence between the subsidiary management and thestrategies of the MNC (Bird & Beechler, 1995; Brewster, 1995; Fey &Bjorkman, 2001; Lengnick-Hall & Lengnick-Hall, 1988). Extensions of thecontingency model, however, noted that the complexities associated with themanagement of international subsidiaries might require MNCs to lookbeyond their expatriates. Factors that can increase the complexities ofinternational subsidiary management include the need for flexibility and thedifficulties of negotiating the cross-national environment (Bouquet &Birkinshaw, 2008; De la Torre & Toyne, 1978; Milliman, Von Glinow, &Nathan, 1991).

The management of international subsidiaries presents a unique agencyproblem as well. MNCs often face high-level uncertainty in differentcountries owing to cultural and institutional variations and the divergentinterests of subsidiary and headquarter managers (Nohria & Ghoshal,1994). Some of the resultant agency costs can be reduced by implementingsuitable staffing practices and reward systems (Tan & Mahoney, 2003). Thecommitment of foreign subsidiary managers can be improved by usingappropriate incentive mechanisms, including managerial compensation(Roth & O’Donnell, 1996) and selecting expatriates with longer tenure(Gregersen & Black, 1992).

Expatriate managers are also valued because of their central role in thetransfer of knowledge and organizational capabilities between the head-quarters and subsidiaries (Beechler & Yang, 1994; Gupta & Govindarajan,1991; Kamoche, 1996; Taylor, Beechler, & Napier, 1996). Asea BrownBoveri AG (ABB), for example, employs over 500 ‘missionaries’ to get itsinternational subsidiaries in line with its worldview. Although ABB’sexpatriate managers often work with local managers to improve efficiency,their global perspective allows them to make sensitive local changes, such aslay-offs and plant closures (Guyon, 1996).

Even though the transfer of expatriates to international subsidiaries yieldsseveral benefits to MNCs, commitment by expatriates wanes as MNCs enternew countries or manage their portfolio of subsidiaries for a long period oftime (Edstrom & Galbraith, 1994; Gaur et al., 2007). For instance, someMNCs prefer host country managers because of their familiarity with thelocal task environment and lower costs. Furthermore, MNCs can avoid theadjustment problems faced by expatriates in culturally distant host countriesby hiring indigenous managers (Harzing, 2001). Conformity to the localsocio-economic environment also implies a more prominent role for


indigenous managers (Kostova & Roth, 2002). Morgan and Kristensen(2005), for example, argue that managerial authority is related to reputationin the local environment in coordinated market economies, such as Denmarkor Japan. Because they lack legitimacy, expatriate managers may triggeropposition and destroy the capabilities of their subsidiaries with their actions.Furthermore, current business opportunities for international expansion tendto be in multicultural emerging economies, such as China, India or Russia.Legitimacy in these and other emerging economies can be established throughan intimate understanding of local values, including nationalism andconcerns about foreign direct investment (Inglehart & Baker, 2000; Zhanget al., 2006). MNCs may be able to respond effectively to local institutionalconstituents, such as customers, governments, and interest groups, by hiringindigenous managers (Foster, 2000; Gaur et al., 2007).

SUBSIDIARY MANAGEMENT INDIGENIZATION:

PROPOSITIONS

The Effects of Resource Dependence in the Task Environment

From a resource dependence perspective, the basis of subsidiary survival isits access to critical resources (Casciaro & Piskorski, 2005; Hillman et al.,2009; Pfeffer & Salancik, 1978). When hiring expatriate managers, localsubsidiaries improve their access to the resources of the headquarters andother subsidiaries (Bjorkman & Lu, 2000; Newburry, 2001; Martinez &Ricks, 1989). Indigenous managers may have better skills to cope with localenvironmental contingencies (Hannon et al., 1995; Schuler, Dowling, & DeCieri, 1993). Accessing local resources and recognizing local inter-dependence are particularly difficult tasks for MNC headquarters becauseof the diversity of country environments in which subsidiaries tend tooperate. Perhaps the most complex among these interdependencies is therelationship between the MNC and the local political environment ofindividual countries (Ring, Lenway, & Govekar, 1990). The indigenizationof subsidiary management can be a means to reduce uncertainty, improveperformance and increase the chances of survival. When considering the taskenvironment of their subsidiaries in a foreign country, MNCs need toaddress conflicting demands from different actors. To examine the import-ance of subsidiary management indigenization, we consider two focal issues


in resource dependence theory: how MNCs cope with critical interdepen-dencies and how they access resources (Oliver, 1991).

Firms can reduce uncertainty by developing links with other organiza-tions. Their involvement with others, however, leads to increasedinterdependence with limited freedom for future decisions (Provan, 1982).Interdependencies emerge ‘whenever one actor does not entirely control allof the conditions necessary for the achievement of an action or for obtainingthe outcome desired from the action’ (Pfeffer & Salancik, 1978, p. 40).Interdependencies can be competitive and symbiotic (Pfeffer & Nowak,1976). Competitive interdependence exists between functionally similarfirms in terms of markets, products, or services. Symbiotic interdependencecan arise along the vertical value chain, including interdependencies betweenthe firm and its buyers and suppliers. Although interdependence isimportant in any environment, it tends to increase as MNCs cross borders.Thompson (1974), for example, suggests that within nation-states, the politycan guarantee a relative stability of the infrastructure and thus impedeinterdependence. Such guarantee is often lacking between nations leading toincreased interdependence for MNCs operating in different countries. Usingexpatriates to manage local subsidiaries under conditions of highinterdependence with other native organizations may lead to a reductionin decision-making autonomy (Provan, 1982). Indigenization can helpMNCs to effectively cope with interdependence within different countriesand increase the autonomy of the subsidiary. Indigenous managers may beable to reduce the MNC’s uncertainty by their knowledge of the local taskenvironment.

Proposition 1. The greater the degree of interdependence with localorganizations in a host country, the higher the need for indigenization inthe MNC’s subsidiary management.

Indigenization may also help MNCs to improve their subsidiary’s accessto critical resources in the local environment. As MNCs enter internationalmarkets, they face increased uncertainty and instability regarding steadyresource inputs for their operations. Beyond the growing difficultiesassociated with the intra-organizational resource flows, MNCs’ access totheir existing suppliers may become limited (Martin, Swaminathan, &Mitchell, 1998). Furthermore, the discretion of MNCs over the acquisitionand allocation of resources is often restricted in foreign countries. MNCsoften operate with shared discretion because of the variety of laws andnorms and the high density of organizations and interest groups. Limitedcontrol over resources in the international environment is another factor


that can adversely influence MNC subsidiaries in different countries. Toexert control over their resources, MNCs need to rely on the social systemsof foreign countries, which form the basis of ownership rights protection(Pfeffer & Salancik, 1978). On the one hand, subsidiaries staffed withexpatriates may have problems forming relationships with local suppliers orbuyers. For instance, expatriates may have limited knowledge about localproperty laws and thus can only partially control the intellectual propertyrights of their MNC. On the other hand, indigenous managers in the localsubsidiary can facilitate the MNC’s access to critical resources by securingsupplies from local firms. They can also improve discretion and control overthe MNC’s existing skills and knowledge.

Proposition 2. The greater the need for local resources in a host country,the higher the need for indigenization in the MNC’s subsidiary management.

The Effects of Normative Pressures in the Institutional Environment

In addition to the importance of local resource dependence, managerialpractices across subsidiaries within the MNC likely vary because of thecross-national differences in institutional structures (Gaur et al., 2007;Gooderham et al., 1999; Rosenzweig & Singh, 1991). The local insti-tutional environment often mandates cultural requirements, regulations,manufacturing, and accounting practices (Rosenzweig & Nohria, 1994).The adaptation of local subsidiaries is complicated by the diverse interestsof constituents, including the state, public opinion and local and externalinterest groups (Scott, 1987). The environment of the local subsidiary is‘the dynamic outcome of the actions of many formal organizations seekingtheir own interests’ (Pfeffer & Salancik, 1978, p. 190). Legitimacy in thelocal environment reflects the acceptance of the subsidiary’s actions byother local societal actors and thus is highly influenced by constituentsoutside the MNC organization, such as customers, suppliers and govern-ments (Pfeffer & Salancik, 1978; Polos, Hannan, & Carroll, 2002). MNCscan justify the operation of their local subsidiary if they can demonstratethat the subsidiary’s existence is consistent with the goals of localconstituents in a country.

Although MNCs tend to invest significant amounts of resources toestablish their status upon their entry into foreign markets, they oftenexperience problems with respect to social justification. The perception of theMNC’s local operation by the outside constituents in a country can increase


the costs of doing business over the costs normally faced by local firms.These costs are studied under the umbrella of liability of foreignness in theinternational business literature (Zaheer, 1995; Zaheer & Mosakowski, 1997).The perceived legitimacy of a subsidiary is further complicated by legitimacyspillovers in a country environment if other subsidiaries of the MNC in thesame country experience legitimacy problems (Kostova & Zaheer, 1999).Increased level of indigenization in the subsidiary management provides anopportunity for MNCs to form their subsidiary’s goals consistent with thatof the local social system and thus effectively establish and maintain theirlegitimacy. Furthermore, indigenous managers can help to communicate withand respond to the demands of the local public during times of legitimacycrises (Kostova & Zaheer, 1999).

Proposition 3. The greater the legitimacy pressures within a host country,the higher the need for indigenization in the MNC’s subsidiary management.

THE EFFECTS OF ORGANIZATIONAL

CHARACTERISTICS

Although MNCs in general face with increased uncertainty in foreigncountries, they may cope differently based on their organizationalcharacteristics. A subsidiary can be interdependent with other subsidiarieswithin the MNC’s portfolio, can obtain resources from other units, and canbe affected by the legitimacy of other subsidiaries in the same country(Taylor et al., 1996). Variations in organizational characteristics mayinfluence the level of association between the subsidiary’s resourcedependence in the local social system and the indigenization of itsmanagement (Ferner & Quintanilla, 1998; Hannon et al., 1995). One ofthe most important variations is the place of the MNC organization on thecontinuum between global integration and local responsiveness. Subsidiariesof MNCs emphasizing global strategies tend to exhibit higher interdepen-dence with other subsidiaries (Devinney, Midgley, & Venaik, 2000; Kobrin,1991; Roth, 1995). MNCs following multidomestic strategies seek torespond to local customer needs. The subsidiaries of these MNCs need toobtain legitimacy locally and rely more on local resources (Rosenzweig &Singh, 1991). The mix of firms using global and multidomestic strategieslikely varies across industries. For instance, whereas the strategies followedby MNCs in the electronics and automobile industries tend to be more


global, the strategies of MNCs in the consumer products and food industriestend to be more multidomestic.

Subsidiaries of MNCs that follow global strategies, on the one hand, willbe less dependent on external resources and thus be able to rely more onexpatriate managers. Because of their extensive relationships with theheadquarters and other subsidiaries within the MNC, these managers canfacilitate access to intra-organizational resources (Boyacigiller, 1990;Devinney et al., 2000). Subsidiaries of multidomestic MNCs, on the otherhand, will be more dependent on local resources. Their increased reliance onlocal organizations and pressures for local legitimacy provide an enhancedrole for indigenous managers. In summary, subsidiaries of MNCs followinga more global strategy may exhibit a weaker relationship between resourcedependence and indigenization but a stronger relationship is expected forsubsidiaries of MNCs following a more multidomestic strategy.

Proposition 4. Higher levels of global strategy will moderate the relation-ship between resource dependence and subsidiary management indigeniza-tion in such a way that the resource dependence effects will be weaker onindigenization.

Proposition 5. Higher levels of multidomestic strategy will moderate therelationship in such a way that the resource dependence effects will bestronger on indigenization.

The link between resource dependence in the local environment and thelevel of the indigenization of subsidiary management may be influenced byanother important organizational context, the international experience ofthe MNC. Specifically, the lack of international experience in differentcountry environments increases the resource dependence of a new subsidiary(Fang, Wade, Delios, & Beamish, 2007). For example prior operations indeveloped country environments provide little guidance for MNCs to set upsubsidiaries in emerging economies. Coping with a higher level ofuncertainty owing to the lack of prior experience in similar environmentsmay lead to a higher demand for indigenous management.

For MNCs with extensive international experience, the need forindigenous managers to respond to higher levels of local resourcedependence may be lower. The international experience of MNCs can betransmitted to new subsidiaries by expatriate managers with longer tenure(Bjorkman & Lu, 2000; Milliman, Von Glinow, & Nathan, 1991). Despitetheir deep knowledge of the local environment, indigenous managers will beless informed about the prior experience of the MNC in other countries.


Thus, by operating in a diverse set of countries, MNCs can learn how tocope effectively with local environmental uncertainty and reduce the risk ofinternational operations (Hitt, Tihanyi, Miller, & Connelly, 2006).Furthermore, a broad scope of international operations can help establishlegitimacy in the international environment, leading to positive spillovers forthe local subsidiary (Kostova & Zaheer, 1999).

Proposition 6. Greater MNC international experience will moderate therelationship between resource dependence and subsidiary managementindigenization in such a way that the resource dependence effects will beweaker on indigenization.

The Effects of Social Movement Organizations

Although MNCs’ organizational interests may dictate the use of expatriatesin local subsidiaries in some countries, local governments, interest groups,and public opinion will likely prefer the transfer of subsidiary managementfrom expatriate to indigenous managers. Indigenization in a broader contextmeans the transfer of interests from foreign to indigenous parties because oflocal pressures (Beveridge, 1991; Kobrin, 1980; Luckham, 1971; Minor,1994; Wilson, 1990). Indigenization, however, does not limit the interest ofthe MNC in the local subsidiary. Through the employment of indigenousmanagement the MNC’s commitment to long-term local operations and itsparticipation in the development of the local business environment mayincrease.

Local institutional constituents based on their shared worldview mayparticipate in social movements to influence MNC staffing policies(Simons & Ingram, 1997). Social movements are collective enterprises bymutually acquainted organizations and individuals who share theirideologies about social arrangements and accomplish collective action tochange those arrangements (Davis & Thompson, 1994). Such movementsmay originate in governmental agencies or in different interest groups. Theinterests of governments are illustrated by the following quotation.Regarding Japanese investments into its country, the prime minister ofThailand noted that, ‘Thailand has no intention of asking foreign investorswith large investments to turn over their management, or the majority oftheir equity structure, to Thai nationals. What we ask is that foreigncompanies should work here as partners, so that your investments here canbe meaningful in terms of financial gains and at the same time should


benefit my country’ (Taira, 1980, p. 389). Nevertheless, to pressure MNCslocal governments can change tax policies, modify the terms of foreigndirect investments or set up quotas for the number of expatriates MNCscan employ in the country (Biersteker, 1980). Whereas governments havethe power to directly influence MNC behaviour, interest groups canpressure MNCs to change their staffing directly (Manheim, 2001; Spar &La Mure, 2003) or by coercing governments into policy changes (Soule &Olzak, 2004).

Our approach views social movements as outsiders to the MNCs that theytarget, which adopt ‘oppositional identities’ (Taylor & Whittier, 1992) thatpit their interests against power-holders in corporations. Throughout thisprocess of challenging corporations, movements adopt ‘outsider’ tactics(Soule, McAdam, McCarthy, & Su, 1999; Walker, 1991) to complementtheir status of outsiders to the corporations. As such, we take a decentrali-zed view of power and politics in this paper – one in which movementspresent themselves as alternative democratic voices outside of the corpor-ations that they challenge.

In thinking about how movements can affect MNCs’ staffing policies, itis useful to consider the variety and magnitude of effects that movementshave on other organizational outcomes. Social movements have beenshown to affect the financial health of corporations via boycotts andthreatened boycotts (Pruitt & Friedman, 1986; Pruitt, Wei, & White, 1988)and through protest demonstrations. For example Epstein and Schnietz(2002) found that Fortune 500 firms suffered declines in equity followingthe 1999 Seattle WTO protests and that the losses were greatest amongthose firms suspected of mistreating labour and damaging the environ-ment. Social movement organizations have been shown to affect corporatepolicies regarding emissions controls (Maxwell, Lyon, & Hackett, 2000)and other issues (see review in Manheim, 2001). Social movements havealso been found to affect stock price returns in the United States (King &Soule, 2006) and to improve working conditions at factories in Mexico(Kay, 2005). These studies provide a backdrop to our arguments abouthow movements can affect the management practices of different MNCsubsidiaries.

Based on their shared interests about the MNC’s business practices, localand external organizations and interest groups may engage in socialmovements to change the practices of the MNC. Specifically, we offer threerelated propositions. First, we expect that social movement activityoccurring in the country in which the MNC subsidiary is located will havea direct effect on the management practices of the subsidiary. Social


movements about MNC local business activities tend to be based onnational interests with respect to the MNCs’ contributions to the localsociety and infrastructure. MNCs usually help the economies of foreigncountries by creating new jobs, increasing demand and by being a factor of acountry’s balance of payments (Dunning, 1993). Regardless of the positivemacroeconomic influence of MNCs, their entry is often viewed by distrustlocally, especially, if their subsidiaries are controlled by expatriates fromother countries. The entry of MNCs into a foreign market often increasescompetition and, if local firms fail, reduces tax revenue. MNCs may lay off ahigh number of local employees because of the closure of inefficient plants.Further, they may choose to repatriate their profits to their home country.Local governments, customers, firms, as well as labour unions in general,prefer MNCs to increase their commitments to the local economy. MNCscan co-opt local interest groups (Selznick, 1949) and demonstrate their long-term local commitment to a country by the indigenization of their subsidiaryoperations. Increasing the share of indigenous managers can help MNCs torespond to the concerns of native social movement organizations and betterunderstand the demands of the local social system.

Similarly, we expect that movement activity in other countries (to whichthe subsidiary may or may not be connected) will increase the level ofindigenization of subsidiary management in a country. That is, as the overalllevel of movement activity directed at encouraging MNCs to hire indigenousmanagers increases, we expect to see more and more subsidiaries adoptingthis management practice. At times, this can be a preemptive measure on thepart of an MNC; that is, they can hire indigenous managers to preventsocial movement activity in other countries of their operation.

Institutional constituents in the home country may also engage incollective action regarding the management practices of MNCs but fordifferent reasons. They exert pressure on MNCs to hire indigenousmanagers by targeting the MNC’s home business activities. By employingexpatriate managers in foreign countries, MNCs show their commitment toworldwide organizational integration (Boyacigiller, 1990). A higher level ofintegration may indicate that MNCs seek to exploit opportunities for costreductions and are willing to relocate their production to low-cost countries.Reduced interest in their home markets coupled with increased focus onforeign operations may prompt an increase in social movement activity by abroad range of institutional constituents at home. Labour movements forinstance may exert pressure because of their concern about plant closuresand resulting loss of employment. Social movement organizations will likelypressure MNCs to hire indigenous managers to international subsidiary


positions to reduce the dependence of foreign subsidiaries on the head-quarters and thus facilitate the integration of foreign operations into thelocal markets.

Proposition 7. The greater the local social movement activity regardingMNC behaviour, the higher the need for subsidiary managementindigenization.

Proposition 8. The greater the extra-local social movement activityregarding MNC behaviour, the higher the need for subsidiary managementindigenization.

Proposition 9. The greater the social movement activity in the MNC’s homecountry, the higher the need for subsidiary management indigenization.

The Mediating Role of the Political Opportunity Structure

The concept of the political opportunity structure (hereafter, POS) is oneelement of the broader political process model (McAdam, 1982) and may bedefined as the ‘consistent y dimensions of the political environment thatprovide incentives for people to undertake collective action by affectingtheir expectations for success or failure’ (Tarrow, 1994, p. 85). Over the pastdecade or so, researchers have identified a fairly consensual list of thedimensions of the POS in an attempt to clarify this basic definition. The keydimensions identified by this tradition include (1) the presence of dividedelites; (2) the presence of elite allies; (3) a general receptivity to challengers’claims on the part of the political elite; and (4) lower levels of staterepression against dissenters (McAdam, 1996). The key argument is thatwhen the POS is more favourable to dissenters, we ought to see either theemergence of or increases in social movement activity.

Although the concept has been used to explain protest mobilization in anumber of contexts, researchers also argue that the concept should also beused to understand policy outcomes of social movements (Andrews, 2001;Jenkins & Perrow, 1977; Kitschelt, 1986; Kriesi, Koopmans, Duyvendak, &Giugni, 1995; McCammon, Campbell, Granberg, & Mowery, 2001; Soule,2004; Soule et al., 1999; Tarrow, 1994). Essentially, the same set of factorsthat stimulate protest should, in turn, affect the outcomes sought by themovement.

Early statements about the effects of the POS on policy outcomes(e.g. Kitschelt, 1986) suggest that the political climate, quite independent


of movement mobilization, affects policy outcomes (see also Amenta,Dunleavy, & Bernstein, 1994). However, the political mediation modelsuggests that social movement mobilization will only have positive effectson policy change when mediated by an advantageous POS (Amenta,Carruthers, & Zylan, 1992; Amenta et al., 1994; Amenta & Young, 1999;Cress & Snow, 2000; Schneiberg, 2002).

Stability in POS is expected to strengthen the effect of social movementson indigenization. A political climate with shifting political power raises thebargaining power of MNCs with governments and provides an opportunityto follow their shorter term organizational considerations. A politicalclimate characterized by disagreements about national interests will alsoreduce the power of social movement organizations on MNC policies.Although concentration in political power may allow the emergence ofdifferent views by various institutional constituents, it provides a ground fora consensus on national interests and thus strengthens the effect of socialmovements on subsidiary management indigenization.

Proposition 10. The political opportunity structure of a country willmediate the relationship between social movement and subsidiary manage-ment indigenization such that the effect of local social movements will bestronger in states with higher concentrations in political power.

DISCUSSION

In this paper we develop a framework of MNC subsidiary managementfrom an indigenization perspective. Although previous internationalmanagement research has focused on organizational efficiency considera-tions, our conceptualization outlines the social context of subsidiarymanagement. We propose that local country environmental factorsinfluence subsidiary indigenization. Specifically, we suggest that the levelof indigenization in a country is influenced by the level of interdependence,the need for critical resources and the requirements of legitimacy in the localenvironment. Consistent with prior research (e.g. Devinney et al., 2000;Hannon et al., 1995; Roth, 1995) we discuss the roles of two moderators:international strategy and prior international experience. We argue thatresource dependence effects on indigenization are weaker on MNCs thatfollow global strategies. MNCs with multidomestic strategies are faced withstronger resource dependence pressures on their use of indigenousmanagers. We also propose a weaker relationship between resource


dependence and indigenization in MNCs with higher prior internationalexperience.

In a broader social context, the actions of institutional constituents areexpected to have important impact on the subsidiary management ofMNCs. We propose that increased local and extra-local social movementactivity is associated with higher levels of indigenization. Further, wesuggest that the POS of a country acts as a mediator in the relationship;stronger movement effects with respect to indigenization should be observedin countries with higher concentration in political power.

Theoretical Implications

The indigenization perspective provides a different explanation forsubsidiary management than previous theoretical arguments. Althoughthe trade-offs inherent in employing expatriate and indigenous managershave been discussed previously, organizational efficiency considerationshave led researchers to conclude that the transfer of expatriate managers toforeign subsidiaries is a superior solution for MNCs in most cases. Wepresent an alternative view of subsidiary management by looking atindigenization as a social process. Although we examine importantorganizational characteristics, our approach shifts the focus from theMNC’s internal mechanisms to environmental and institutional pressures.We believe that this alternative theorization may contribute to a closerstudy of the social environment in international management research, andin a broader context, advance interdisciplinary research between manage-ment and economic sociology (Baum & Dobbin, 2000; McAdam &Scott, 2005).

The indigenization perspective places the MNC’s decision making in thecontext of the society with an array of complex political and economicinterests. In addition to focusing on the quest for the MNC’s organizationalefficiency, previous international research viewed subsidiary managementstaffing as mostly a practical issue for the headquarters of the MNC. Theresults of recent studies, however, helped establish the importance ofsubsidiary staffing for successful international expansion (e.g. Gong, 2003;Zhang et al., 2006). Viewing subsidiary staffing from an indigenizationperspective takes this recent research further; it adds the influence ofdifferent constituents outside the MNC and its headquarters. According to asocial movement perspective, institutional constituents may engage incollective action over MNC staffing policies based on their political views.


Despite ideological differences among local social movement organizations,their political views have some common characteristics. For example theytend to focus on perceived national interests and they are often based onnon-economic preferences (Simons & Ingram, 1997).

Another potential contribution of the present framework is theconsideration of variations in country institutional environments.Although we examine environmental, organizational and institutionalfactors associated with the level of indigenization, our framework does notassume the same level of indigenization in every host country associatedwith the MNC’s portfolio of subsidiaries. Variations across countryenvironments, including institutional structures, are underrepresented inthe literature on international subsidiaries (Ferner & Quintanilla, 1998;Gooderham et al., 1999). Although the study of variations in the MNC’snational markets has been an increasingly popular area of research, a largenumber of prior studies on subsidiary staffing appeared to overlook thesevariations. Instead, most prior studies emphasized the benefits of globalintegration and control. Variation in the home environments of MNCs isanother, related limitation in prior research. Along this line, we argue thatsocial movement organizations in the MNC’s home country influencesubsidiary-level decisions. Furthermore, the potential variation in theportfolio of MNCs (e.g. the extra-local social movements in this paper)could be an important explanatory factor in international managementresearch.

Resource dependence theory has been used to address organizationalproblems related to international human resources (e.g. Schuler et al., 1993;Taylor et al., 1996). Resource dependence, however, tends to affectsubsidiaries within and outside the MNC’s portfolio of businesses. Whereasprior research focused on internal resource flows, our framework considersthe subsidiary’s resource dependence on its external environment. Incontrast to subsidiaries in the domestic environment, subsidiaries of MNCsare surrounded by greater environmental complexity. Understanding thebehaviour of international subsidiaries should broaden internationalmanagement research as well as contribute to the generalizability of theresource dependence perspective.

Incorporating the effects of social movements is important for theorydevelopment on MNC subsidiary management. Understanding the role ofsocial movements in relationship to subsidiary indigenization, in turn, cancontribute to recent social movement research. For example, to advanceresearch on social movements, it is critical to examine movements inconnection with organizational actions. Our framework has been developed


along this line of inquiry. Because MNC subsidiaries deal with institutionalconstituents at multiple levels, the framework included social movements inthe host and the home countries of MNCs. Further, we argue that the POSof a country should matter when the role of social movements onorganizational actions is examined.

Managerial Implications

This paper is in line with a growing body of research that recommendsMNC top managers to rethink the role of their foreign subsidiaries. Incontrast to other studies that view subsidiaries as sources of new knowledge,we argue that subsidiaries are important in terms of MNC survival in anuncertain international environment. Specifically, we suggest that subsidiarymanagement goes beyond organizational efficiency concerns. Subsidiaries inforeign environments deal with increased resource dependence and interactwith multiple institutional constituents. One of the outcomes of increasedresource dependence, liability of foreignness, has been known to MNCmanagement as a source of the increased costs of international operations.When doing business internationally, managers should also consider theenvironmental factors that impinge upon MNCs confronted with increasedinterdependence with local organizations, limited access to critical resources,and higher requirements for legitimacy. Although hiring expatriates tomanage subsidiary operations solves the initial problems of coordinationand control, such managers are less capable of managing resourcedependence in the local environment.

As MNCs enter international markets, they interact with multipleinstitutional constituents. Subsidiaries of MNCs have high failure ratesowing to the frequently hostile international environment. Local govern-ments, organizations and interest groups tend to welcome the initialforeign direct investment, but long-term MNC operations are oftenviewed with scepticism by these local constituents. Their shared view maybe explained by the traditional foci of MNC activity: governments andlocal customers. The collective actions of interest groups should be betterunderstood and addressed by MNC managers. For instance, the growingconcern about MNC behaviour in recent years is abetted by the lack ofattention MNCs pay to social movement activity through various interestgroups. Once again, we argue that indigenous managers can facilitatecommunication with local interest groups as well as governmentalagencies.


When MNC headquarters decide about the management of their foreignsubsidiaries, they tend to underestimate the value of indigenous managers.Expatriate managers can effectively transmit tacit knowledge to subsidiariesand thus can increase MNC performance during international expansion.Expatriate managers, however, may have limited knowledge about theinterests of diverse groups of local constituents. Transferring expatriates tomanage subsidiary operations, nevertheless, is normally a temporarysolution owing to the high costs and family complications. Despite theirextensive understanding of the local environment, indigenous managers mayhave poor business knowledge and a lack of understanding of the MNC’sbusiness. Hiring local managers to learn about the organizational culturefrom expatriates can help MNCs to find out more about the localenvironment while maintaining organizational control. When a mix ofexpatriate and indigenous managers is employed, MNCs should provideextensive training to indigenous managers about the aspects of theirbusiness. Furthermore, indigenous managers should be valued for theirenvironmental knowledge as well as business skills. Accordingly, incentivesystems should be designed to reduce turnover among indigenous managerswho may later develop into boundary spanners in the local environment.

Future Research Directions

Most importantly, future studies in international management shouldconduct empirical investigations of the relationships we proposed in thispaper. Such empirical research should be based on interdisciplinary groundsusing theories from management, sociology, political science and otherfields. Although our framework focused on MNC actions in relationship togeneral environmental conditions, further research could do well bystudying subsidiary management practices in different industries andcountries. We sketch several possibilities below.

First, a particularly promising context for such research exists in countriesthat are undergoing a transition to market economies. In general, theseeconomies can benefit more from foreign direct investment than developedeconomies. However, parallel with their economic development, thesecountries may develop a strong sense of national identity and thus representa fertile ground for the growth of social movement activity with respect toforeign direct investments.

Second, pressures for indigenization may also depend on the differencesbetween the home and host environments of the MNC. On one hand,


similar institutional conditions may allow MNCs to gain legitimacy withrelatively minor changes in their subsidiary management. On the otherhand, hiring indigenous managers in a country with similar culturaltraditions to the MNC’s home country does not present a trade-off fororganizational efficiency. Regional integration may also present aninteresting issue regarding the institutional differences between countries.For instance, indigenous managers are expected to provide value in themember countries of the European Union but employing them mayprovide additional benefits owing to their country’s membership in theUnion.

Third, future research should consider, in addition to the factors that wedescribe here, the diffusion of the indigenization of subsidiary manage-ment. During times of uncertainty, MNCs may monitor what other MNCsare doing with respect to indigenization of the management of theirsubsidiaries. In an attempt to attain or maintain legitimacy, MNCs mayimitate the practices of other MNCs. This kind of mimetic process maylegitimize the indigenization of management as an acceptable (or evendesirable) organizational strategy. In other words, further research couldexamine multiple levels of effects, organizational, state-level (as we describehere) and inter-state effects (Schneiberg & Soule, 2005), on managementdecisions.

Finally, prior studies have shown that social movements take place incomplex institutional environments with actions and reactions fromdifferent constituents (Meyer & Staggenborg, 1996). Since local socialmovements may focus on nationalist sentiments, collective action amongMNCs can discredit the indigenization efforts by local governments andinterest groups. If MNCs in a particular host country coordinate theiractions, they may influence legislation regarding foreign direct invest-ments. In this case, government policies influencing MNC behaviourmay be based on the outcome of movements and counter-movements.Thus, another potentially interesting area for future research is thestudy of counter-movements by MNCs opposed to the pressures ofindigenization.

NOTE

1. ‘‘A social movement is a set of opinions and beliefs in a population whichrepresents preferences for changing some elements of the social structure and/orreward distribution of a society’’ (McCarthy & Zald, 1977, pp. 1217–1218).


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