1 2 THE REGIONAL STRATEGIES OF BRITISH MULTINATIONAL SUBSIDIARIES IN SOUTH EAST ASIA Quyen T.K. Nguyen (Ph.D) (Corresponding author) Lecturer in International Business and Strategy Henley Business School International Business and Strategy University of Reading Whiteknights Campus, Reading England RG6 6AH E-mail: t.k.q.nguyen@henley.ac.uk Version: December 1, 2012.AcceptedforpublicationinthespecialissueofBritishJournalofManagement,forthcoming (2013).3 THEREGIONALSTRATEGIESOFBRITISHMULTINATIONALSUBSIDIARIESIN SOUTH EAST ASIA ABSTRACT Wecomparethestrategiesofmanufacturingandservicemultinationalenterprise(MNE)subsidiaries inSouthEastAsiatoinvestigatewhethertheyfollowglobalversusregionalstrategy.Weexamine foreigndirectinvestment(FDI)motives,typesofFDI,productandserviceofferings,andsales strategies of these two groups. Using a unique primary dataset of 101 British MNE subsidiaries in six SouthEastAsiancountriesoverafive-yearperiod(2003-2007),wefindthatmanufacturingand service subsidiaries pursue regional strategies. Both groups have a strong regional focus in their sales. We explore the possible reasons for the relative lack of global strategy of these subsidiaries.Key words: MNE subsidiary; regional strategy; FDI motives; subsidiary-level firm-specific advantages (FSAs); host country-specific advantages (CSAs); South East Asia. 4 INTRODUCTION Emergingempiricalevidenceindicatesthateconomicintegrationofnationalmarketsismoreofa regionalthanaglobalphenomenon,bothatcountry-levelandfirm-level.Mostmeasuresofmarket integration on country-level data have fallen far short of economic theory's ideal of perfect integration, Ghemawat(2003).Hereferstothisphenomenonassemi-globalization,whichisdefinedasa conditionofincompletemarketintegrationacrossborderswhereneitherthebarriersnorthelinks amongmarketsindifferentcountriescanbeneglected.Usingfirm-leveldata,RugmanandVerbeke (2004) and Rugman (2005) provide the first empirical evidence that firms pursue regional rather than globalstrategy.ThemajorityofthefirmssalesaregeneratedwithinthehomeregionoftheTriad (broadlydefinedasNorthAmerica,EuropeandAsia-Pacific).Similarly,themajorityofthefirms assets are located within the home region (Rugman and Verbeke, 2008a; Rugman and Oh, 2012).RugmanandVerbeke(2004)developatheorytoexplainwhyfirmsinternationalactivitiesare principallyconcentratedin the home region.Theinability of the MNEs tocreate, deploy, recombine, utilize and profitably exploit their firm-specific advantages (FSAs), even the non-location bound NLB FSAsacrosstheworldisduetotheirhome-regionboundednessofFSAs(RugmanandSukpanich, 2006). The transferability of the firms FSAs is highly restricted beyond the home region (Rugman and Verbeke,2004).Thisisexplainedbythesignificantdifferenceinexpansioncosts,inwhichthe liabilityofintra-regionalexpansionappearstobemuchlowerthantheliabilityofinter-regional expansion (Rugman and Verbeke, 2007). Most recently, Rugman et al. (2011) have demonstrated that the challenges become compounded as distance increases, whether economic, cultural, institutional or merelygeographic.Theneedtomanagevariousdistancedimensionssimultaneouslyreallyexplains the regional nature of the firm. 5 WemakeanempiricalcontributionbyinvestigatingthedegreeofregionalizationofBritishMNE manufacturingandservicesubsidiaries.Thisisthefirststudyonglobalversusregionalstrategyat subsidiarylevel.Todate,therehasbeennopreviousstudyonregionalorientationofsubsidiariesin other parts of the world. This study is the first in regional context - the Association of South East Asian Nations(theASEAN).ThedecisionofMNEstotransfertheirresourcesbycreatingaproprietary network of foreign subsidiaries is one of the most intensively researched areas of international business (Dunning, 1980). Given this critical role of the subsidiary, the focus of this study is on MNE strategy at subsidiary level. By examining the new primary dataset of a sample of 101 British subsidiaries in six out of ten ASEAN countries, we determine the degree of regionalization of manufacturing and service subsidiaries of the two groups.Second,weextendpreviousstudiesbyRugmanandVerbeke(2004),Rugman(2005),andRugman and Verbeke (2008a) on the regional strategy of the MNE in several new dimensions. We investigate FDI motives, types of FDI, product and service offerings, and sales strategies between manufacturing andservicesubsidiaries.Wedrawupontheoriesofinternationalbusiness,managerialinsightsand especiallyinternationalaccountingstandardsinourresearchdesign.Weexaminethelinksbetween FDImotivesandtypesofFDI(horizontal,verticalandcomplexFDI)ofthetwosetsofsubsidiaries. WestudythelinksbetweenFDImotivesandregionalsalesstrategiesofsubsidiarybyfollowingthe international accounting standards. We adopt this new approach and managerial insights (Oesterle and Wolf, 2011) to position our innovative survey data.Third, we contribute to theorizing the regional nature of the MNE. While Rugman and Verbeke (2004) have developed a theory to explain the home region concentration of the MNEs international activities atparentlevel,wehavedemonstratedtheregionalorientationatsubsidiarylevel.Thus,ouranalysis provides new insights which should be integrated in the regional theory of the MNE. 6 Thefollowingsectionoutlinesthetheoreticalbackground,whichisthenspecifiedinrelationstothe hypotheses in the subsequent section. This is followed by the empirical material in the data and method section. The results from the statistical analysis are presented. The paper discusses the result and ends with conclusions. THEORETICAL SYNTHESIS AND HYPOTHESES DEVELOPMENT The regional strategy of the MNE at parent level Thedebatesontheglobalizationandregionalizationstrategiesemergeinthecontextofearlier attentiontolocal-globaldistinctions,inwhichPrahaladandDoz(1987)andBartlettandGhoshal (1989)demonstratetheneedforMNEstocombineglobalintegrationandnationalresponsiveness. Globalintegrationisdefinedastheproductionanddistributionofproductsandservicesofa homogenous type and quality on a worldwide basis. National responsiveness is the ability of MNEs to understanddifferentconsumertastesinsegmentedmarketsandtorespondtothedifferentnational standardsandregulationsimposedbyautonomousgovernmentsandagencies.Themorerecent evidence on the existence of incomplete cross-border integration, which Ghemawat (2003) refers to as semi-globalization, thus requires regionalization (Kolk, 2010).Empirically,RugmanandVerbeke(2004,2007,2008,a,b,c);Rugman(2005);Rugmanetal.(2009); RugmanandSukpanich(2006);Collinsonand Rugman(2008);RugmanandOh(2008,2010,2012); Rugman and Li, (2007); also Hejazi (2007) Sethi (2009), Yin and Choi (2005), and Grosse (2005), Oh (2009,2010),Almodovar(2011)amongothers,havedemonstratedthatMNEsareregionalintheir locationbysalesandbyassets,notglobal,despitethefactthatMNEsarethekeydriversofthe globalization process.7 The seven-year data trend from 2000 to 2007 shows a high correlation between intra-regional sales and intra-regionalassets(RugmanandOh,2012).ThetypicalFortune500averages75.86percentofits total sales in the home region of the triad and substantially less than 20 percent of its total sales in each ofthetwootherregions.Itsintra-regionalassetsareat78.09percent.RugmanandVerbeke(2004) findonlynineglobalfirms.Suchdiscrepancyinsalesandassetsisreflectedinregionallyadapted strategiesandstructures(RugmanandVerbeke,2008a).ThehomeregionorientationofmostMNEs implies that the reality of globalization has been vastly exaggerated.To explain the home-region orientation of the MNE, Rugman and Verbeke (2007) employ the liability offoreignness(LoF)concept,i.e.competitivedisadvantagesandadditionalcostsofdoingbusiness abroadcomparedtodomesticfirms(Hymer,1960;Zaheer,1995).TheLoFissmallerinthehome regionthanoutsideit,whichmeansthatadaptationcostsofintra-regionalinternationalization (regionalization) are lower than those in the case of inter-regional expansion. Within the home region, location-specific investments that are needed to exploit and develop non-location-bound firm-specific advantages (NLBFSAs) will beless substantial and/or can be deployedmore efficiently than outside the region (Rugman and Verbeke, 2004, 2005, 2008c). Allthisresearchhasalsoledtosomedebatesaboutthedefinitionandconceptualizationofhome region classification and measurements of home region sales/ assets (Stevens and Bird, 2004; Westney, 2006;Aharoni,2006;Dunningetal,2007;Asmussen,2009;OsegowitschandSammartino,2008; Seno-Alday, 2009).Weclarifythesetwoissuesastheyarerelatedtoourstudyatsubsidiarylevel.Weoffernew perspectivesfromtherequirementsofinternationalaccountingstandards,whichhavebeenlargely neglectedintheexistingliterature.Specifically,theUSGAPPFASNo.131Disclosuresabout 8 SegmentsofanEnterpriseandRelatedInformation,andIFRS8OperatingSegmentsrequirefirmsto adoptamanagerialapproach,i.e.throughtheeyesofthemanagerstoidentifyingsegments.It providesguidanceonhowsegmentsshouldbeidentified,whatarethequantitativethresholdsof reportable segments, and what information should be disclosed. It also sets out requirements of related disclosures about geographic areas and major customers, products and services.First,wediscusstheconceptofhomeregionintheworkbyRugmanandVerbeke(2004)and Rugman(2005).Ahomeregionisdefinedasthatofatriadregionwheretheheadquartersofan MNEislocated.AnMNEishomeregionorientedifithasatleast50percentofitstotalsalesand assets in the home region of the triad. A global firm is defined as a company with less than 50 percent of its total sales and assets in its home triad region and at least 20 percent of its total sales and assets in eachofthetwoothertriadregion.Bi-regionalfirmshaveatleast20percentoftheirtotalsalesand assetsineachoftworegions,butlessthan50percentinanyoneoftheregion.Host-regionoriented firms have more than 50 percent of their sales and assets in a triad market other than their home region. Within the literature, Ohmaes (1985) grouping of the core triad (North America, Europe and Japan) has been the dominant typology. Yet in international business and international management literature, thereisnouniformtypologyforgroupingcountriesintobroadregions.Thebroadtriadregionsare NorthAmerica,EuropeandAsiaPacific.Thetriadisrelevantbecauseitisthehomeofmostlarge MNEs in the world, as well as the locus for the bulk of radical innovation in most industries (Rugman and Verbeke, 2008a). Alternatively, economic/income, socio-cultural/language, institutional proximity and the United Nation geographic schemes have been suggested for clustering criteria (Aguilera et al., 2008).9 Inpractice,however,firmsclassifytheirmarketsaccordingtobroadgeographicsegmentsin compliancewithinternationalaccountingstandards.Theclassificationisbasedontheirmanagement reportingand/ororganizationalstructure.Inthisstudy,thehomeregionisdefinedasthebroadAsia Pacific region, of which the ASEAN is a part, where the British MNE subsidiaries are geographically located.Second, there are differences in measurements of home region of sales/ assets. Rugman and Verbeke (2004)measureshomeregionsales/assetsashomecountrysales/assetsplusrestofhomeregion sales/assets. This reflects the way firms report in business realities. Firms are required by international accountingstandardstoreportanddisclosesales/assetsbygeographicsegments,i.e.salesby geographic areas and major customers, and by business segments, i.e. sales by products and services. StudiesbyOsegowitschandSammartino(2008),Asmussen(2009),andBanalievaandEddleston (2011) exclude home country sales from home region sales. They neutralize substantial home country effectsbycomparinghostregionswithhomeregionnetofhomecountrysales.Theregionalization thresholds can be tweaked by normalizing the data (Osegowitsch and Sammartino, 2008). They argue thatthereisaneedtodisentanglehomecountryandhomeregionbiasesintheparentfirms internationalizationpatterns,asitisnecessarytoconceptuallydistinguishbetweenaninter-national and inter-regional liability of foreignness. Similarly, Stevens and Bird (2004) question the specification of the threshold value which demarcates the categories.Inpractice,however,firmsarerequiredtofollowinternationalaccountingstandardswhichprovide guidanceonthethresholdofreportablesegments.Accountingprinciplesandallocationsofsegments mightbeinherentlyarbitrary.Yettheyaremeaningfulbecausetheyareusedformanagement purposes.Inthisstudy,thehomeregionsalesaredefinedtobethesumofhome-salesinthelocal 10 domesticmarketsplusrestofregionsalesintheAsiaPacificgeneratedbythesubsidiary.This approachisalignedwiththefindingsbyAppleyardetal.(1990)onthereportingtechniquesusedby BritishMNEstocontroltheirforeignsubsidiaries.Thelatterarerequiredtofollowthegroup-wide uniformaccountingsystemintheirbooksatdetailedlevel.Theparentfirmsperformanceas documentedinannualreportsistheconsolidatedresultsfromtheirhomecountryandforeign subsidiaries worldwide.Application of the regional strategy to subsidiary levelAnMNEgoesabroadtofurtherexploititsFSAbundlesthroughinternalizationstrategyby establishingforeignsubsidiariesratherthanexportingorlicensing(BuckleyandCasson,1976; Rugman, 1981; and Hennart, 1982). The FSAs are proprietary to the firm, and they can be technology based,knowledgebasedortheycanreflectcapitalandcapitalaccesscapability,managerialandor marketingskills.Fromtheresourcebasedviewofthefirm,theFSAsareuniqueresourcesand capabilitieswhicharevaluable,rare,nonimitableandnonsubstitutable(Barney,1991;Teeceetal., 1997; and Rugman and Verbeke, 2002).Rugman et al. (2011) demonstrate that the subsidiary has emerged as a new unit of analysis due to the importance of network thinking in strategic management. Subsidiaries can develop subsidiary-specific advantages(SSAs)whichisatypeoflocation-boundLBFSAs(Birkinshaw,1996;1997;2000; Birkinshaw and Hood, 1998; and Rugman and Verbeke, 2001). An SSA results from (a) recombining knowledgetransferredfromtheMNEnetworkwithnewlycreatedknowledge;(b)autonomously assumed(extended)subsidiaryroles;and(c)subsidiaryknowledgeembeddedinidiosyncratichost country locations (Rugman et al., 2011).11 LBFSAsaredefinedasFSAswhichbenefitacompanyonlyinaparticularlocation(orasetof locations), and lead to benefits of national responsiveness. The SSAs must go beyond merely adapting FSAsfromtheparentfirmtofitthehostcountrysenvironmentasinthenationalresponsiveness strategy of Bartlett and Ghoshal (1989). The SSA requires that the subsidiary initiative be transformed within the intra-firm network of the MNE, thereby becomes a non location bound NLB FSA (Verbeke, 2009,RugmanandVerbeke,2001).NLBFSAsaredefinedasFSAswhichcanbeexploitedona worldwidebasis,andleadtothebenefitsofscale,scopeandexploitationofnationaldifferences (Rugman and Verbeke, 1992).Subsidiaries are the engines to recombine NLB FSAs transferred from the parents to subsidiaries with newly developed LB FSAs by the subsidiaries interacting with complementary resource bundles in the hostcountryenvironment(Rugmanetal.,2011).Thisresultsinsubsidiary-levelresourcesand capabilities(SSAs).Thisisconsistentwiththeresourcebundlingperspective(Hennart,2009). Ultimately, the highest-order FSA is the recombination capability, i.e., not just to combine reliably the parent firms existing resources, but to recombine its resources in novel ways, usually including newly accessedresources,whetherinalimitedforeignlocationoracrossinternationalgeographicspace (Verbeke,2009).Therecombinationcapabilityleadstoprocessesandproductswhichembody integratedbundlesofknowledge,meaningmeldedbundlesofoldandnewlyaccessedknowledge (Verbeke,2009).Birkinshaw(2000)emphasizesthatthecapabilitiesofthesubsidiaryare,tosome extent, distinct from the capabilities of the headquarters and its sister affiliates. Consequently, there is a largeliteratureonsubsidiariesasregionalhubsfordistribution,regionalmandates,regional headquarters,andregionaleffectofMNEs'foreignsubsidiarylocalization(Arregle,Beamishand Hebert, 2009) FDI motives and FDI types12 WeexaminetheMNEsfourFDImotives(Dunning,1998).DifferentFDImotivesentaildifferent subsidiarycapabilities and with different levelsof intangible assets critical to subsidiaryperformance (Verbekeetal.,2009).Inpractice,MNEspursuemultipleobjectivesandthesameinvestmentmay combine several FDI motives. Theobjectiveofmarket-seekingFDIistosellproductsandservicestonewcustomersinthehost markets or in neighbouringcountries in the caseof export-oriented platform. EfficiencyseekingFDI istotakeadvantageofdifferentfactorendowmentstoarbitragecostsandpricedifferentialswhich improveglobalefficiencyofthefirmbyconcentratingproductioninalimitednumberoflocations. ThistypeofFDIreflectsarationalizationoftheMNEsoperationsandnormallyisrelatedtoa specializationofvariousaffiliatesinitsinternalnetwork.Naturalresource-seekingFDIistohave access to specific natural resources in the host country (e.g. oil, gas, mining, etc.) at the lowest relative cost.Asset-seekingistogainaccesstotechnology,brand,andmanagerialexpertiseandtocreate synergy with the existing FSAs. Makino et al. (2002) broadly refer market seeking, efficiency seeking and natural source seeking as asset exploitation FDI motives versus strategic asset seeking. A distinction needs to be made among types of FDI as they are related to FDI motives (Verbeke et al., 2009), and the potential intra-firm trade (Ivarsson and Johnsson, 2000). Horizontal FDI arises when a parent firm duplicates its home country-based activities at the same value chain stage in a host country throughFDI.Foreignsubsidiariesproducethesameproductsorofferthesameservicesinahost countryasparentfirmsdoathome(BuckleyandCasson,1976;Caves,1982).Thisimpliesthata firmsmotivetoadoptahorizontalFDIismainlytofacilitatemarketaccessasopposedtoreducing productioncosts.Market-seekingFDItendstobethemaintypeofhorizontalFDI(Verbekeetal., 2009), which often leads to trade creation (Lipsey and Weiss, 1984; Rugman, 1990). The subsidiarys productionisusednotonlytoserveahostcountrymarketbutalsothirdcountrymarkets.Therestill 13 existsargument(AldabaandYap,2009)thathorizontalFDI(especiallybasedonmarket-seeking motive)mayalsocompensatetrade,i.e.,anMNEmaychoosetoinvestabroadtoovercometrade barriers. VerticalFDIariseswhenaparentfirmfragmentstheproductionprocessinternationally,thereby locatingeachstageofproductioninthecountrywhereitcanbedoneattheleastcost,intermsof labour,inputsupplies,andtechnology(BuckleyandCasson,1976;Caves,1982).Asubsidiaryisthe inputsuppliertotheparentfirmand/orsisteraffiliates.Thisimpliesthatafirmsmotivetoadopt verticalFDIismainlytooptimizeupstreamanddownstreamvaluechainsbyexploitingcountry endowmentfactorstoreduceproductioncosts.Naturalresource-seekingandefficiency-seekingFDI motivestendtobethemaintypesofverticalFDIpattern(Verbekeetal.,2009).Therewillbeintra-firmtrade,i.e.processedinputsandprocessednaturalresourcesareshippedtoparentfirmorsister affiliates in the global production networks. Strategic asset seeking motives tend to be the main type of diversification (Verbeke et al., 2009). LanzandMiroudot(OECD,2011)usefirm-leveldataandfindbothverticalandhorizontallinks between parent firms and their foreign subsidiaries. They refer to this phenomenon as complex FDI. TheysuggestthatthelinesbetweenhorizontalandverticalFDIareblurred,andthestructureofthe global production networks is more complex than suggested by the horizontal and vertical dichotomy. Subsidiariescanhavemultipleactivities,supplyinginputsfortheirparentfirmsandsisteraffiliates while producing also the same goods as their parent firms. Theliteratureonglobalvaluechains(Beugelsdijketal.,2009;Braconieretal.,2005;Grossmanand Helpman,2003;LewinandPeeters,2006;Lewinetal.,2009)focusesonefficiency-seekingFDI motives.However,theydidnotprovideempiricalevidenceofMNEsactualFDImotive.They 14 concentrateonthepremiseofnewinternationaldivisionoflabour(Froebeletal.,1980;Zaheerand Manrakhan, 2001; Kotabe and Murray, 2004). The value chain activities of the MNE, instead of being replicated from country to country (dispersed), are concentrated (specialized) in one or a few locations (Porter, 1986; Beugelsdijk et al., 2009; Asmussen et al., 2007).Theconceptualworkontheglobalfactory(BuckleyandGhauri,2004)discussestheincreasingly sophisticated decision-making of managers in MNEs to slice more finely the value added activities of firmsintermsofthechanginglocationandownershipstrategiesofMNEs.Infindingoptimum locationsofeachcloselydefinedactivity,MNEsaredeepeningtheinternationaldivisionoflabour. Ownership strategies are also becoming increasingly complex, leading many MNEs to apply a control matrix, whereby operating strategies are decided upon location by location, and can range from wholly owned foreign subsidiary via FDI to market relationships.In contrast, we predict that market-seeking will be a more predominant motive than either of the three othermotivesofBritishMNEsinSouthEastAsia.Intherecentinternationalcontext,businessesin Western economies have been saturated. The slowdown of the BRIC (Brazil, Russia, India and China) economiesistransformingtheglobaleconomiclandscape(CNBC,June5,2012).Companiesand investors are looking the ASEAN region to expand and grow their current business and to develop new opportunities. The region has weathered the world financial crisis relatively smoothly. The broad Asia Pacific is particularly attractive, taking into account the ASEAN Free Trade Area (AFTA), ASEAN+4 (ASEAN plus Japan, Korea, China and India), ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA).Consequently,MNEswillorganizetheirsubsidiariesashorizontalFDIinorderto achieve market-seeking FDI objectives.15 Hypothesis 1: manufacturing subsidiaries in the South East Asian region will focus predominantly on market-seeking FDI as will service subsidiaries.Hypothesis2:manufacturingsubsidiariesintheSouthEastAsianregionwillbeorganizedas horizontal FDI, leading to similar FDI motives, as will service subsidiaries. Subsidiary product and service offerings Wetestthroughquestionnairesurveytheextenttowhichglobalintegrationleadstostandardization andtheextenttowhichnationalresponsivenessandregionalizationleadstocustomizationof subsidiarysproductandserviceofferings.Theactualproductandservicecharacteristicswhicha subsidiary offerscan varyat three levels: global,regional and local. Globalones are standardizedfor salestoallmarketsworldwide,whereasregionalonesarecustomizedforaspecificregionandlocal onesaretailoredforlocalmarkets(DCruz,1986).Theextenttowhichproductsandservicesare standardizedversuscustomizedrepresentstherevealedpreferencesofMNEstoinstitutionalizea particular approach at the world scale or to adapt to the requirements of regional and local markets. Levitt(1983)optimisticallyexpectglobalizationtoacceleratetheconvergenceofcultures, consumption patterns and thus of markets, due to advances in technology, communication and travel. SuchconvergenceimpliesthatMNEsshouldstandardizetheirproductsandservicesworldwidein order to achieve economies of scale. MNEs can generate superior performance by implementing highly centralizedandtrulyglobalstrategies.Astrategyofglobalproductsandbrandsacrossallmarkets ratherthanrespondingexcessivelytodistinctcustomerpreferencesinhostcountriesisthekeyto success in international markets. Customization is viewed as a sign of weakness which increases costs ratherthanasasignofstrength.DouglasandWind(1987),however,questiontheglobalstrategy. Theycriticallyexaminethekeyassumptionsunderlyingthisphilosophyandtheconditionsunder 16 whichitislikelytobeeffective.Theyhighlightthebarrierstoitsimplementation.Global standardization is one of a number of strategies in international markets.Verbeke(2009)suggeststhatfirmswhichimplementproductandservicestandardizationrisk overlooking the unique location advantages of various host markets. Such decisions curtail subsidiary initiatives, and the need for new LB FSAs as a precondition for value creation in the host markets.A balancebetweenstandardizationandcustomizationisnecessary.Actually,customizingproduct offeringsacrossgeographicmarketscanstabilizesalesvolumesandprofitability.Inmanysectors, technologyhasenabledthecustomizationofproducts,whicharedemandedandhighlyvaluedby customers.LovelockandYip(1996)advocatetotalglobalstrategyforservicebusiness.However,servicesare distinctfromproductsbecausetheirfeaturesareintangible,heterogeneous,simultaneous,and perishable, and there is no transfer of ownership. Intangibility relates to the lack of physical substance inaservice.Thiscouldbeaproblemwhenmeasuringtheoutcomesoftheserviceasthereisno tangibleevidence.Heterogeneityorconsistencyofoutputisaproblemwithservices,althoughmany service providers strive for it. Difficulties may arise with the quality of service if service staffs differ in theirlevelofexperienceinservicedelivery.Theservicequalitycanvaryacrossserviceprovider, consumer experience, and time (Zeithaml et al., 1985). Service quality can also vary across geographic space.Simultaneityreferstothemannerinwhichaserviceisconsumedatthesametimeitis produced.Difficulttomeasureserviceprovidedmightariseunlessservicestandardsweresetin advancewhichcouldbemonitored.Perishabilityreferstoservicenotlastinginthesensethatthey cannotbestored.Consequently,RugmanandVerbeke(2008)questiontheglobalizationofservices andtheyhighlighttheactualcostimplicationsandadditionalcomplexitiesinhostcountry environments. 17 Moreover, Miller and Eden (2006) suggest that the key characteristic of service is the need to be close to customers. The growing presence of service firms (banking, advertising, legal and accounting firms, among others) is an example of to follow customers abroad (Knickerbocker, 1973). They set up their own subsidiaries, invest in facilities and staff in foreign locations both for credibility and for servicing their existing customers. Hypothesis 3a: service subsidiaries will have a higher proportion of local service offerings due to the nature of service than will manufacturing subsidiaries in product offerings. Hypothesis3b:servicesubsidiarieswillhavealowerproportionofglobalandregionalservice offerings than will manufacturing subsidiaries in product offerings. Subsidiary sales strategiesWeexaminesubsidiarysalesstrategiesbymarkets(domesticsalesandexportsales),bygeographic areas(salestotheAsiaPacificregionandsalestorestoftheworld),bycustomertypes(salesto externalcustomersandinternalcustomerswithintheMNEnetworks)andgeographicareasof customer types. We follow the international accounting standards of Related Party Disclosure (IAS24) andOperatingSegments(IFRS8)tocollectdatathroughquestionnairesurvey.Thisnewapproach overcomes the limitationsof previous studies using trade data of US MNE foreign subsidiaries. They didnotprovidethegeographicdirectionofUSMNEsubsidiariesforeignsales(Wiersemaand Bowen, 2011; Beugelsdijk et al., 2009). RugmanandVerbeke(2008c)demonstratethattheEUandNorthAmericaandincreasinglyAsia, intra-regional distance is decreasingly driven by a reduction of trade and investment barriers and other attemptstowardsinstitutionalconvergence.Thus,fromsubsidiarymanagersperspectives,further salesexpansionwithinthehomeregion,wheresubsidiariesaregeographicallylocated,willoften 18 continue to be easier than equivalent sales growth elsewhere in the world. Revenue growth in domestic and export markets in the broader Asia Pacific region by leveraging the regional free trade agreements willbeanimportantstrategyforsubsidiaries.Furthermore,revenuegrowthbyfocusingtowards externalcustomerswillbeakeydriverwhenMNEshaveclearobjectivesofmarket-seekingFDI through foreign subsidiary sales.Hypothesis4:manufacturingsubsidiariesintheSouthEastAsianregionwillfocuson(i)intra-regional sales and (ii) external customer sales as will service subsidiaries. METHODOLOGY Sample and data sources British MNEs have a long history of international investment. They were the first to internationalize in a number of industries, following the Empire and they have achieved significant international success (Yipetal.,2006).BritishbusinesshasbeeninAsia(Iran,India,Thailand,Malaysia,China,Russian Asia and Japan) since 1860 (Davenport-Hines and Jones, 1989). In this study, we examine the strategies of British manufacturing and service subsidiaries in Malaysia, Indonesia,thePhilippines,Singapore,ThailandandVietnam.Thebroadcoverageofsixoutoften ASEAN countries likely enhances the generalizability of the findings. The time period 2003-2007 was selected due to the confidentially and commercially sensitive nature of data collected.In the pilot test ofthequestionnaire,subsidiarymanagersweremorecooperativeinprovidingrecentdataratherthan current ones. In total, 504British MNE subsidiaries in six ASEAN countries were identified from various sources, including OneSource database by Thomson Reuters, the Financial Times top 500 UK firms, the parent 19 firmswebsitesandtheirannualreports,British,AmericanandEuropeanChamberofCommerce websites in the host countries. These subsidiaries belong to 78 public and 13 private parent MNEs.Wecollecteddatathrougha40-questionsurvey.Wetookactionstominimizepotentialcommon methodvariance(Changetal.,2010;Podsakoffetal.,2003).Tominimizepotentialconsistency,we variedscaleformatstomeasuretheconstructsandmultiple-itemconstructswereusedandquestions pertainingtothesameconstructswerespreadthroughoutthequestionnaire.Wepre-testedthe questionnairewithfiveexperiencedmanagers.Tominimizetheriskofsocialdesirabilitybias,we askedinformantstoanswersurveyquestionstorepresenttheperspectivesofagroupofsubsidiary managers.WeconductedthesurveybetweenJuly7,2010andFebruary28,2011.AlthoughsurveysofMNE executivestypicallyresultinalowresponserate(Harzing,2000),aresponserateof20%was achieved. Fifty-eight subsidiaries declined to participate in the survey (decline rate 11%). Most stated that due to company policy, confidential reasons, non-disclosure requirements on financial information atsubsidiarylevel,theheadofficereviewofthequestionnaire(beingforwardedbysubsidiary managers),theyhavenottakenpartinanystudiesofthistype.Similarfindingsarereportedby Bouquetetal.(2009).Theresponserateandsamplesizeof101subsidiariescomparesfavourablyto that of past studies. Inoursurvey,93percentofthequestionnaireswereansweredbythetopmanagementteamofthe subsidiaryand7percentwereansweredbythemiddlemanagement.Bothlocalandexpatriate managers participated in the survey. The subsidiary managers are highly experienced with an average of7.8yearsofworkingintheSouthEastAsianregion.Thequalityofthedatawasquitehigh. Subsidiary managers provided data and information in full and complete.20 Thesesubsidiariesbelongto57parentMNEs(44publicand13privateMNEs).Asat2008,the averagerevenuesofthepublicparentMNEswereGBP23,906.32million,andaverageemployees were 46,909 people. Data for the private MNEs were not available due to non disclosure requirements. The statistical profile of participating subsidiaries was that the average invested capital as at the end of the financial year 2007 was US$78 million. The average age as at the time of survey was 26 years.The industries of the participating subsidiaries include chemicals; pharmaceuticalsand biotechnology (biopharmaceutical);food,drugandtobacco;computer,officeandelectronicparts;fixedline telecommunications; energy, petroleum and refining; construction, building materials and glass; motor vehiclesparts;healthcareandmedicalequipments;othermanufacturing(e.g.alcoholicbeverage); bank,otherfinancialservices(e.g.insurance);mediaandadvertising;publishing;software development;generalofficesupportservices;realestateinvestmentandservices;engineering, procurement and construction services; and other specialized services. Nonresponsebiastestshowsthattherewerenosignificantdifferencesbetweenthepublicparent MNEsoftherespondentandnonrespondentsubsidiariesacrosskeyattributes(sales,assetsand employees, data as at 2008), at a 5 percent significant level (independent t-test, 2-tailed).In analyzing the data, subsidiaries were categorized under the broad sector groupings of service (56%) andmanufacturing/processing(44%,includingenergy,petroleumandrefining).Ourfocusisto comparethestrategiesofmanufacturingandservicesubsidiaries.So,weuseANOVAtotestany significant differences between the two groups (Hair et al., 2010). FDI motives: The operationalization of this construct is to follow Dunnings four FDI motives (1998). Respondents can select all FDI motives that apply. They indicate the major FDI objectives in the host country in the South East Asian region as presented in Table 1. Then, we follow Makino et al. (2002) 21 to broadly group market-seeking, efficiency-seeking, and natural resource seeking as asset exploitation FDI versus strategic asset seeking. Types of FDI: we use multiple data sources. First, through questionnaire, respondents indicate whether theyoperateinthesameindustryastheparent,andwhethertheirsubsidiaryoutputsareusedinthe nextstageoftheproductionand/orserviceprovisionprocessoftheparentMNEsand/orsister affiliates. ThenwefollowtheLanzandMiroudot(OECD,2011)methodtotestthreetypesofFDI.Weuse information of the 6-digit NAICS industry codefrom OneSource database. Horizontal FDI is defined as the activities of foreign subsidiary in the same industryas their parent. The foreign subsidiaryand theparentfirmsharesatleastoneidenticala6-digitNAICScode.VerticalFDIisdefinedasthe activities of foreign subsidiary in industries upstream from the parent firm. The foreign subsidiary has at least one 6-digit NAICS code which is an input for the industry of the parent MNE according to the input-output matrix. Additionally, there is no domestic ultimate owner with a vertical link (Alfaro and Charlton, 2009). Complex FDI includes both a horizontal and vertical link, at least one identical 6-digit NAICS code and one that corresponds to an upstream industry. Subsidiarysproductandserviceofferings:Respondentsselecttheirsubsidiariesproductand service offerings, whether they are global, regional and local. Multiple answers are allowed (Rugman, 2005; DCruz, 1986).Subsidiarysalesstrategy:Wecollectsubsidiarysalesdatabygeographicareas,bycustomertypes andgeographicareasofcustomertypes.Respondentsself-reportthepercentage(%)ofdomestic market sales contribution to total sales for the five-year period 20032007. If the subsidiary engages in exports,itreportstheexportsalescontributionandthebreak-downbymajordestinationsofexport 22 shipments,bycustomertypes(internalandexternal),andbygeographicalareas,suchasintra-firm sales (i.e. sales to sister affiliates) in the Asia Pacific region/ total sales (%), sales to external customers in the Asia Pacific region/ total sales (%), intra-firm sales with the parents and other affiliates in rest of the world/ total sales (%), sales to external customers in rest of the world/ total sales (%).RESULTS Hypothesis 1 tests Dunnings four FDI motives and Hypothesis 2 tests the links between FDI motives andtypesofFDI.Wefindfullsupportforhypothesis1(table1)andhypothesis2(table2),ata5 percent significant level. Table 1 here First,thereisnosignificantdifferenceinmarket-seekingFDImotivesbetweenmanufacturingand service subsidiaries, at a 5 percent significant level. Market access in order to expand sales and profits, tofollowcorporateclientsabroadandtosellproductsandserviceswithintheregionaltradingblocs (AFTA,ASEAN+4,AANZFTA)arethemostfrequentlycitedFDImotivesforbotholdandyoung manufacturing and service subsidiaries.Surprisingly,accessingtolowcostlabourandestablishingasourcingnetworkinAsia(e.g. outsourcing,subcontractors,etc)arenotthefocusedFDImotivesforthesesubsidiaries.Thereisno significant difference between the two groups at a 5 percent significant level.Therearetwonotabledifferencesbetweenthetwogroupsata5percentsignificantlevel.Service subsidiariesindicatedevelopingnewproducts/servicesforlocal/regionalmarketsasthenext frequentlycitedFDImotive.Subsidiariesinenergy,petroleumandrefiningciteaccesstonatural resources.23 Overall, asset exploitation is the dominant FDI motive of British MNEs in the South East Asian region at 97 percent whereas strategic assetseekingFDI accounts for only threepercent. Subsidiarieswhich engageinstrategicassetseekingFDIaregeographicallylocatedinSingapore.Theyoperatein(i) computer,officeandelectronicparts,(ii)fixedlinetelecommunications,(iii)specializedsoftware development. Table 2Second,amongtypesofFDI,thereisnosignificantdifferenceinthehorizontalFDIformarket-seekingFDImotivesbetweenmanufacturingandservicesubsidiaries,atafivepercentsignificant level.Of the total sampled manufacturing subsidiaries, only seven percent are engaged in vertical FDI. These subsidiaries operate in (i) biopharmaceutical, and (ii) energy, petroleum and refining industries (i.e. oil andgas).Wefindthatthebiopharmaceuticalsubsidiariesbelongingtodifferentparentfirmsare located in Singapore and Malaysia. According to World Bank classification, Singapore is a non-OECD high-incomecountryandMalaysiaisanuppermiddle-incomecountry.Theenergy,petroleumand refining subsidiaries belonging to different parent firms are located in Vietnam. AlmosteverythingthattheSingaporeanbiopharmaceuticalsubsidiaryproducesisforcaptiveusein other factories. A closer analysis of the parent MNE annual reports and its manufacturing and supply showthatthereare74sitesin32countriesworldwide.Thesupplychainisdividedintoaprimary chainandasecondarychain.Theprimarychainmanufacturesactiveingredientsforitsproductsand thenshipsthemtothesecondarychain,whichmanufacturestheendproducts.Theprimarychain manufacturingfacilitiesarebasedineighthigh-incomeindustrializedcountries,includingtheUnited Kingdom,Ireland,France,Italy,Spain,Canada,theUnitedStates,Singaporeandoneuppermiddle-24 incomecountryBrazil.ThisfirmhasuniquemanufacturingFSAs,especiallyitscomprehensiveanti-counterfeiting. It is an industry leader and its packaging features include holograms, security seals, and complex background patterns which are difficult to photocopy and scan.Atsubsidiary-level,themanagerinSingaporeindicatesthatthestronglegalinfrastructure,especially intellectualpropertyprotectionandpreferentialtaxincentivesfromtheSingaporeangovernment,are the key considerations in their decision to build the manufacturing facility. Finally,ofthetotalsampledmanufacturingsubsidiaries,onlyfourpercentareengagedincomplex FDI.Thesesubsidiariesoperateinenergy,petroleumandrefiningindustry(i.e.oilandgas)andthey are located in Malaysia.In short, there is a relative lack of evidence for the specialized vertical and complex FDI among British MNEsubsidiariesintheSouthEastAsianregion.Incontrast,thereisstrongempiricalevidenceof horizontal FDI with local manufacturing and service subsidiaries for market-seeking FDI motives.OurnewfindingscontradicttheungroundedassumptionsthatMNEsmainlyfocuson(i)exploiting new international division of labour in Asia because Asia has an abundance of cheap labour, and (ii) establishingasourcingnetwork(e.g.outsourcing,subcontractors,etc.)toexploitcountryfactor differentials. However, these assumptions are not supported by this empirical work. The literature on global value chains, global production networks, outsourcing, offshoring and global factoryfocusmainlyonthecountry-specificadvantages(CSAs)ratherthanthefirm-specific advantages(FSAs)ortherecombinationofCSAsandFSAs.Incontrast,ouruniqueprimarydataset showsclearlythataccessingtocheaplabour,establishingasourcingnetworkandoverallefficiency-seekingFDIaresecondarytomarket-seekingFDIforbothmanufacturingandserviceMNE 25 subsidiaries.Toachievemarket-seekingFDImotives,themajorityofmanufacturingandallservice subsidiaries are organized as horizontal FDI. Table 3 here Hypothesis 3 tests a subsidiarys product and service offerings. We find support for hypothesis 3a. On average, service subsidiaries offer 41 percent local services in their offerings, whereas manufacturing subsidiaries offer 16 percent local products in their offerings. On the other hand, there is no significant differenceintheproportionofglobalandregionalproductandserviceofferingsbetweenthetwo groups, at a five percent significant level. Our hypothesis 3b is not supported. Wefindthatpublishingistheonlyindustryoffering100percentglobalproducts.Thereisarelative lackofevidenceofgloballystandardizedproductandserviceofferings,butastrongevidenceof regionally and locally customized product and service offerings. Table 4 here Hypothesis4testsasubsidiaryssalesstrategies.Wefindsupporttohypothesis4,ata5percent significantlevel.Table4presentsthesalesbreakdownbymarketsandbygeographicareas.On average,thesemanufacturingandservicesubsidiariesgenerate68.9percentand76.6percent respectively of their total sales from local domestic markets. Export sales account for 31.1 percent and 23.4 percent respectively. The Asia Pacific region is the major export destination, accountingfor 24.2 percent and 18.7 percent respectively. Exports to rest of the world (ROW) account for 6.8 percent and 4.7percentrespectively.Overall,homeregionsalesaccountfor93.2percentand95.3percent accordingly. 26 OurfindingsconfirmthehomeregionorientationoftheworldslargestMNEsat65.6percentfor manufacturingMNEsand83.9percentforserviceMNEs(RugmanandVerbeke,2008).TheBritish parentMNEsgenerateonaverage64percentoftheirtotalsalesinthehomeregion(Rugmanetal., 2008).TheBritishSMEexportershave76percentoftheirtotalforeignsalesinthehomeregion (Beleska-SpasovaandGlaister,2009).Britishmanufacturingandservicesubsidiariesshowaneven strongerorientationtothehomeregionat93.2percentand95.3percentrespectivelyoftheirtotal sales.Table 5 TheresultinTable5revealsthattheBritishmanufacturingandservicesubsidiariesgenerateon average89.3percentand91.7percentrespectivelyoftheirtotalsalesfromexternalcustomers.The detailedsalesbreak-downshowthatsalestoexternalcustomersonhomedomesticlocalmarket account for 68.9 percent and 76.6 percent respectively, sales to external customers in the Asia Pacific regionat18.2percentand12.7percentrespectivelyandtorestoftheworldare2.2percentand2.3 percentrespectively.Again,thisisanotherempiricalevidenceofmarket-seekingFDImotives.In short, these subsidiaries have a strong focus to sell their products and services to external customers. In contrast, intra-firm sales (sales to the parent firms and sister affiliates) of manufacturing and service subsidiariesaccountforonly10.6percentand8.3percentrespectivelyoftheirtotalsales.Intra-firm sales to sister affiliates in the Asia Pacific region of manufacturing and service subsidiaries account for 6.0 percent and 5.8 percent respectively of their total sales, and intra-firm sales to the parents and other affiliates in rest of the world are only at 4.6 percent and 2.3 percent respectively of their total sales. In short, intra-firm sales do not appear to be a focus for both manufacturing and service subsidiaries.DISCUSSION 27 Implications for theoretical and empirical literature First,weoffernewempiricalevidencethatbothmanufacturingandservicesubsidiariespursue regional strategies. The in-depth analysis shows that subsidiaries have a strong regional focus in their sales. This can be explained by the MNEs geographic sales territory. Subsidiaries in South East Asia service the broad Asia Pacific markets. Products made in Asia are for sales in Asia. Services must be tailored to preferences of customers in the local markets.Second,ourstudyisthefirsttoreportthelinksbetweenFDImotivesandFDItypesandthelinks betweenFDImotivesandsubsidiarysalesofmanufacturingandservicesectorsintheSouthEast Asianregion.Beugelsdijketal.(2009)indicatethatamongUSforeignsubsidiariesindeveloping countries, the proportion of host-host, intra-firm trade has increased significantly during the observed period of time (1993-2003). Conversely, the proportion of host-home, inter-firm trade has diminished. ThefindingsareinterpretedasindicationofbothvaluechainverticalspecializationandMNEs systematic exploitation of factor cost differentials across countries.In contrast, our dataset shows that thereisarelativelackofevidenceofconsistentincreasingtrendofintra-firmtradeandvertical integrationFDIamongBritishsubsidiaries.ForeignsubsidiariesareorganizedashorizontalFDIin order to achieve market-seeking FDI motives. Additionally, they focus explicitly on external customer sales rather than internal customer sales within the MNE networks. Third,weexplorethepossiblereasonsforarelativelackofevidenceofglobalstrategyatsubsidiary level.Thetwomainreasonsare(i)therequirementofadaptingseparatelyupstreamanddownstream activities in distance host country environments, and (ii) the requirement of selecting activity locations as a function of supply side criteria. This is related to the problem with technical difficulties associated withinternationalFSAtransfer,andinchallengesofeffectivedeploymentinahostenvironmentand 28 appropriaterecombinationoftheNLBFSAswithnewlycreatedornewlyaccessedLBFSAsand managerialeffectivenessinprofitablyexploitingthenewlycreatedFSAbundles(Rugmanand Verbeke, 2008a; Rugman et al., 2011). According to Rugman and Sukpanich (2006), knowledge-based FSAs such as R&D are home region bound and can be exploited more efficiently in the home region of thebroadtriad.TheR&Dactivitiesdependonthehostcountryandtheregionalregulations. Consequently,notallproductsdevelopedthroughR&DprocessintheASEANregion,forexample, can be sold in all regions around the world. Implications for subsidiary managersInthecontextoflargelyhome-regionorientedsales,bothmanufacturingandservicesubsidiary managersadoptaregionalstrategywithstrongfocusonexternalcustomersales.Thehomeregion sales,whichaccountover90percentofthesubsidiarystotalsale,arethemainsourceofcashflows forbusinessgrowthandexpansion.Managerialeffectivenesscannottoleratealackoffocusonthe subsidiarys largest markets.LIMITATIONS AND SUGGESTIONS FOR FUTURE RESEARCH Thereareseverallimitationsofthisstudy.First,thesurveydatasetmighthavesomeinherent limitations,becausetheparentfirmsofthesesubsidiariesareamongthelargestBritishMNEs. Accordingly, the analysis and interpretation of the findings reflect the views of the British subsidiaries which responded to the survey. However, the themes which emerge in this research reflect the broader populationoflargeWesternMNEsoperatinginemergingmarkets.Wesuggestfutureresearch incorporatesubsidiarieswithMNEparentsheadquarteredfromallpartsofthetriadtofurtherextend our research.29 Second, the home regionin this study is definedas the broad Asia Pacific region from the subsidiary managersperspectives.Futureresearchmayofferamoredetailedanalysis,forexample,byadding anotherlayerofanalysisattheintra-ASEANlevelandextra-ASEAN.Recently,intra-regional economic activities within the ASEAN region have become more notable In 2010, intra-ASEAN trade is25.4percentoftotaltradeandintra-ASEANFDInetflowsare16.7percentoftotalnetinflowto ASEAN (ASEAN, 2012). We suggest future research using data from multiple sources or a case study method where researchers might be able to access to a subsidiarys detailed sales data break-down. CONCLUSIONS The findings of this study contribute to the growing body of regionalization research in six areas (i) the debate on the global versus regional strategy of the MNE by new work at subsidiary level (ii) study in alargelyunder-researchedregionalcontext-theSouthEastAsianregion,(iii)clarificationonhome regionclassificationandmeasurementsofhomeregionsalesandassetsfromtheinternational accountingstandardrequirements,(iv)theuseofseveralmatricesinassessingthedegreeof regionalizationofmanufacturingandservicesubsidiaries,(v)addingseveralnewparametersto RugmanandVerbekesregionalanalysis.Specifically,wehaveclarifiedthelinksbetweenmarket-seekingFDImotivesofBritishMNEsandsubsidiarysalesstrategiesbymarkets(domesticsalesand export sales), by geographic areas (sales to in the Asia Pacific region and sales to rest of the world), by customer types (external and internal customers) and geographic areas ofcustomer types by following thedefinitionsofinternationalaccountingstandards,and(vi)acontributiontothetheoryofthe regional nature of the MNE. Ourfindingspresentstrongcorroboratingevidenceofregionalizationatsubsidiarylevel.Both manufacturing and service subsidiaries are home-region oriented in their sales within the Asia Pacific region.Theirintra-regionalsalesaccountforover90percentoftheirtotalsales.Additionally,they 30 focus their sales predominantly onexternal customers, which contribute over 90 percent of their total sales.Thisisduetoourfindingthatmarket-seekingandultimatelyassetexploitationisthe predominant FDI motives of British MNEs in South East Asia. Importantly, subsidiary managers view the South East Asian region as a high-growth marketplacerather than aplace for cheap labour.This empiricalfindingonMNEsactualFDImotivescontradicttheungroundedassumptionthatMNEs mainlyfocusonexploitingcheaplabourasreflectedinthepremiseofnewinternationaldivisionof labour. However, these assumptions are not supported by this empirical study.TheanalysisbasedontheR/TversusF/Tsalesratiostogetherwithothersalesmatrices:domestic marketsales(HOME),restofthehomeregionsales(ROR)andrestoftheworld(ROW)have presentedthefollowingobservations.First,thereisaclearempiricalevidenceofthepredominant homeregionorientationacrossallthesamplesoftheBritishparentfirms(64percent),British exporters(76percent),Britishmanufacturingsubsidiaries(93percent)andservicesubsidiaries(95 percent),theworldslargestmanufacturingMNEs(65percent)andserviceMNEs(84percent). Second, British MNE subsidiaries show the strongest home region oriented. 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