The Relevance of Subsidiary Initiatives for Brazilian Multinationals the Relevance of Subsidiary Initiatives for Brazilian Multinationals a Relevância Das Iniciativas De Subsidiárias Para as Multinacionais Brasileiras

The purpose of this paper is to analyze relationship patterns between headquarters and subsidiaries of Brazilian Multinationals Enterprises (BrMNEs). The key construct for that investigation is Subsidiary Initiative, which comprises Subsidiary Entrepreneurial Orientation, Autonomy, Integration, Local Competitive Context and Business Network. A survey was carried out in a sample of 65 subsidiaries of 29 BrMNEs. The main outcome is that subsidiaries are highly integrated and receive Entrepreneurial Orientation from Headquarters (HQs), but Initiative is limited. Actually, the main determinants of subsidiary’s initiatives are Local Context and Business Networking in the host country. This apparent paradox may be explained by what we call ‘rebellious subsidiaries’, which take initiatives based on their business environment and connections, regardless of their HQs’ directions or delegation of autonomy. Felipe Mendes Borini Professor do Departamento de Administração, Escola Superior de Propaganda e Marketing – SP, Brasil [email protected] Maria Tereza Leme Fleury Diretora da Escola de Administração de Empresas de São Paulo, Fundação Getulio Vargas – SP, Brasil e Professora da Faculdade de Economia, Administração e Contabilidade, Universidade de São Paulo – SP, Brasil [email protected] Afonso Carlos Corrêa Fleury Professor do Departamento de Engenharia de Produção da Escola Politécnica, Universidade de São Paulo – SP, Brasil [email protected] Moacir de Miranda Oliveira Junior Professor da Faculdade de Economia, Administração e Contabilidade, Universidade de São Paulo – SP, Brasil [email protected] Recebido em 06.09.2008. Aprovado em 29.05.2009 Avaliado pelo sistema double blind review Editor Científico: Rodrigo Bandeira-de-Mello RESUMO O objetivo deste trabalho é analisar as subsidiárias de multinacionais brasileiras (BrMNEs), investigando as condições em que se desenvolvem iniciativas. Um survey foi realizado em uma amostra de 65 filiais, de 29 BrMNEs. O principal resultado é que a Iniciativa das filiais das BrMNEs ainda é limitada. As filiais são caracterizadas por elevada integração com a matriz e forte orientação empreendedora. Entretanto, os principais determinantes das iniciativas são o contexto competitivo e a rede de negócios no país estrangeiro. Este aparente paradoxo pode ser explicado por aquilo que estamos chamando de “filiais rebeldes”, aquelas que tomam iniciativas com base no seu ambiente empresarial, independentemente do consentimento da matriz ou delegação de autonomia. Este resultado é suportado pela análise dos dados, que mostra que as filiais empreendedoras têm baixa autonomia concedida pela matriz. kEYwORDS Initiatives, subsidiaries, Brazilian multinationals, internationalization, organizational strategy. palavras-chave Iniciativas, subsidiárias, multinacionais brasileiras, internacionalização, estratégia organizacional. 009-021 (253-265).indd 253 7/20/09 4:01 PM artigos • THE RELEVANCE OF SUBSIDIARY INITIATIVES FOR BRAZILIAN MULTINATIONALS 254 • ©RAE • São Paulo • v. 49 • n.3 • jul./set. 2009 • 253-265 ISSN 0034-7590 multinationals from developed countries. To test it, we depart from the same theoretical assumptions already used to study developed countries’ MNEs and then analyze the case of Brazilian MNEs. THEORETICAL FRAMEWORK In the late 1990s, studies started to discuss subsidiaries from a less static, headquarters-centered point of view, focusing more on the emerging concept of the role of subsidiaries (BIRKINSHAW, MORRISON, 1995; BIRKINSHAW, 1997; BIRKINSHAW, HOOD, 1997; BIRKINSHAW, HOOD, JONSSON, 1998). Studies found that subsidiaries could take on different roles, depending on the function performed (FROST, BIRKINSHAW, ENSIGN, 2002; HOLM, PERDERESEN, 2000) and the resources and capabilities developed (BIRKINSHAW, HOOD, 1998; BIRKINSHAW, HOOD, JONSSON, 1998). The initiative dimension in the theory of subsidiaries Initiative is a discrete, proactive undertaking that advances a new way for the corporation to use and expand its resources (BIRKINSHAW, 1997). It is an entrepreneurial process, beginning with the identification of an opportunity and culminating in commitment of resources to that opportunity (BIRKINSHAW, 1997). This concept emerges to the extent that one considers that MNEs are organized as differentiated networks (BARTLETT, GHOSHAL, 1998; NOHRIA, GHOSHAL, 1997); it is a corporation with subsidiaries that adopt different strategies according to their competence and to their location and relationship with the headquarter. However, even when there is no network organization, the initiative may result from enterprising behavior that is not actively encouraged by senior management at headquarters, but, rather, performed by subordinates because of the senior management’s inability to lead, direct and evaluate all the actions of its executive board (BOWER’S, 1970). There are cases in which an initiative may fail to be recognized by headquarters; yet it did occur, often with positive results that added to MNEs competitive advantage (BIRKINSHAW, 1996; BIRKINSHAW, 1997; BIRKINSHAW, HOOD, 1997; BIRKINSHAW, HOOD, 1998). Burgelman (1983) proposes that initiatives can be coordinated by the corporation or generated within the subsidiary itself. The subsidiary operates in a local external market comprised of consumers, suppliers, competitors INTRODUCTION Research into subsidiaries of multinational enterprises (MNEs) has been multiplied over the last few years, revealing the phenomenon’s complexity and diversity of analytical approaches (WERNER, 2002). The construct that is emerging as the most relevant in terms of conveying its different dimensions is “Subsidiary Initiative” (BIRKINSHAW, 1997). This article aims at making a contribution to this debate, by focusing on the role of the subsidiaries of MNEs from emerging countries, particularly Brazilian Multinational. Brazilian Multinationals are international companies that originated from emerging markets and are engaged in outward Foreign Direct Investments (FDI), where they exercise effective control and undertake valueadding activities in one or more foreign countries (LUO, TUNG, 2007). Most studies on the role of subsidiaries and their evolution focus on MNEs from developed countries (PATERSON; BROCK, 2002; WERNER, 2002), since there were few MNEs from emerging countries. However, as the new Multinationals from emerging countries are becoming important global players (BCG, 2009; SANTISO, 2007), some pioneering studies about their subsidiaries recently appeared in the specialized literature, based on evidences or case studies (CUERVO-CAZURRA, 2008; BONAGLIA, GOLDSTEIN, 2007; MATHEWS, 2006; BARTLETT, GHOSHAL, 2000). Therefore, the originality of this article is associated not only to the development of a theme that is still rare in the literature but also to the novel methodological approach which was applied, based on quantitative data analysis. This paper aims at adding to this debate; its objective is to analyze the role of the subsidiaries of Brazilian MNEs, by means of investigating the conditions under which these subsidiaries develop initiatives vis-à-vis their headquarters. Its original aspects are its focus, in an emerging country, on issues already explored in connection with developed countries and its quantitative methodology. The initial assumption for the development of this article is that the role of subsidiaries of Brazilian MNEs should be different from the role of subsidiaries of developed countries. The fact that the Brazilian MNEs are late entrants into the international arena has strategic implications: since they are followers and originated in less developed countries, subsidiaries should play a key strategic role in their internationalization process. Therefore, we hypothesize a higher level of Initiative for the subsidiaries of Brazilian MNEs as compared to 009-021 (253-265).indd 254 7/20/09 4:01 PM 253-265 • jul./set. 2009 • n. 3 • v. 49 • São Paulo • ©RAE • 255 Felipe Mendes Borini • Maria tereza leMe Fleury • aFonso Carlos Corrêa Fleury • MoaCir de Miranda oliveira Junior ISSN 0034-7590 and regulating institutions. The initiatives that result from opportunities born out of the relation with these agents are called local market initiatives. The internal market consists of those elements that headquarters and other subsidiaries demand from the subsidiary under scrutiny. The demands may range from importing a product as a part of a global production chain to coordinating the activities of other foreign subsidiaries. Internal market initiatives result from opportunities created within the MNEs international network. The global market includes competitors, consumers and suppliers that do not belong to the two former markets; in other words, those elements which are located in other countries and that are not part of the MNE itself. The subsidiaries’ global market might grow to the extent that the subsidiary starts to perform international activities or serve its headquarters’ global clients. Global market initiatives result from opportunities that arise out of the relations with those foreign institutions (BIRKINSHAW, 1997). Therefore, three different types of initiatives might be identified: local initiatives, internal initiatives and global market initiatives (BIRKINSHAW, 1997). Local market initiatives can be characterized by the development of new products or new markets, or new processes in the subsidiary’s host country (BIRKINSHAW, 1997). The development of these initiatives is strongly linked to the subsidiary’s innovative capacity, as well as to the existence of favorable circumstances in terms of competitive context (business environment and players) (PORTER, 1990) and strategic business partnerships (ANDERSSON, FORGREEN, HOLM, 2002). Two other factors are important for the initiatives: autonomy, according to Young and Tavares (2004), is the possibility available and acquired of the subsidiary take decisions in regards its on interest, and integration, according to Bartlett and Ghoshal (1998), is the capacity of subsidiaries and headquarters to work together with the same vision and objectives changing experiences. Initially, it was assumed that the development of these initiatives might be associated with a high degree of local decision-making autonomy and strong integration in terms of shared values and of headquarters-subsidiary communication (NOHRIA, GHOSHAL, 1997). Subsequent studies showed that these initiatives, when they first start being developed, are associated with high autonomy and high integration, but after some time has passed after the development of the initiatives, the most appropriate behavior for their recognition by headquarters would be a reduction of autonomy coupled with higher integration (BIRKINSHAW, 1997). Internal market initiatives are characterized by the redistribution of activities to those subsidiaries that enjoy the requisite competence to carry out these activities, and involve transferring processes from headquarters to the subsidiaries, allocating a greater amount of investment to subsidiaries as a reward for successful results, or still, new R&D or production process investments (BIRKINSHAW, 1997). Internal market initiatives are linked to high subsidiary credibility vis-à-vis headquarters, which is a function of the high degree of integration (BIRKINSHAW, 1997). The global market initiatives are characterized by expansion of existing international responsibility, reconfiguration of domestic operations into international ones or even the creation of international activities (BIRKINSHAW, 1997). These initiatives are associated with high autonomy and low integration. Low integration does not mean a total lack of association between the subsidiary and the MNE, but, rather, a more formal relation post factum information exchange, explained, in part, by the striking presence of international responsibility as an essential global initiative factor (BIRKINSHAW, 1997). The competitive context and the business networks perform special roles. The network is very important because it can enable inclusion in a global production chain through its relationship with clients abroad. On the other hand, the domestic context may seem to have been put on a backburner because of international relationships. However, the availability of skilled labor and national competitiveness factors are important for expanding subsidiaries’ innovation capacity through the support of political and economic institutions. Exhibit 1 summarizes the types of initiatives and the factors typically associated with each one of them. Initiative dimension at subsidiaries of MNEs from emerging markets Assuming, therefore, that the initiatives are important for the subsidiaries of multinationals (BIRKINSHAW, 1997) and are fundamental elements for the understanding of the functions of these subsidiaries and for the construction of competitive advantage (BIRKINSHAW, HOOD, JONSSON, 1998) and also determine the evolution of the subsidiary role (BIRKINSHAW, HOOD, 1998), questions concerning these issues in the context of Brazilian MNEs arise. Bartlett and Ghoshal (2000) described and exemplified the main characteristics to be developed by corporations in order to become a global player. The authors discuss the strategic positioning of competitors from emerging 009-021 (253-265).indd 255 7/20/09 4:01 PM artigos • THE RELEVANCE OF SUBSIDIARY INITIATIVES FOR BRAZILIAN MULTINATIONALS 256 • ©RAE • São Paulo • v. 49 • n.3 • jul./set. 2009 • 253-265 ISSN 0034-7590 countries in the value curve. The authors propose that higher technology and/or marketing complexity, the higher margin, meaning that MNEs from emerging markets must invest in products and services that are either more complex technologically or in market terms, thereby circumventing the pressure of the low margins that commodity-type products and services tend to yield. Therefore, if we consider Brazilian MNEs like followers, in order to be able to compete vis-à-vis the global market’s major players, need to climb up the value curve be competing with products born out of new technologies and that offer greater added value; alternatively, they must break the rules of the game. In sum, Brazilian MNEs depend of innovation. Meanwhile, the Brazilian multinational besides being followers suffer l ike all other emerging multinationals for being born in the wrong place (MATHEWS, 2006). Sull and Escobari (2004) have studied Latin American enterprises and their difficulties in facing globalization. The authors have indicated that despite difficulties, a few Latin American enterprises have attained leadership in their industries and they indicated three steps for successful internationalization: commitment to a global mindset, involvement in daring decisions in order to make this commitment irreversible and realignment of the entire company to compete on a global scale. They must innovate within market niches on an incremental basis, or innovate radically in mature markets; or, additionally, maintain high flexibility, aligning themselves with daring (innovative) undertakings in order to survive in turbulent and highly competitive markets. In sum, when we consider Brazilian MNEs to be born in a wrong country the only way to win in the world competition is to innovate. Thus, Brazilian MNEs are dependent of innovation and the development of subsidiary initiatives are fundamental to overcome the set of multinationals; according to Birkinshaw and Fry (1998), initiatives are the main source of own subsidiary innovation. PROPOSITIONS Subsidiary entrepreneurial orientation (SEO) Entrepreneurship is associated with Schumpeter’s definition (1934): a predisposition to create new things and take risks with one’s own resources. Subsidiary Entrepreneurial Orientation (SEO) refers to a general positive attitude at the multinational regarding new business opportunities that may be led and implemented locally; which means, in particular, a certain level of trust and freedom not only of human but also of social capital, which will allow a degree of autonomy to the subsidiary making decisions and running risks and the headquarters ́ support (BIRKINSHAW, 1997). Entrepreneurial activities consist not only in creating new businesses, or a new mix of products and processes, but in maintaining a general proactive attitude in risky decisionmaking environments, using direct access to people or departments (BIRKINSHAW, 1997). Thus, SEO can be characterized by the firm’s predisposition to run risks, or, at least, to provide support for the running of certain types of risk. If the multinational stimulate subsidiaries to run risk there is more probability of subsidiary develop own initiatives. In this way SEO is a global guideline for entrepreneurial orientation, meanwhile initiative is a consequence of this guideline if the subsidiary is able to develop own entrepreneurial capacity. SEO is, in certain way, essential for subsidiaries to achieve development of initiatives. It is clear that, without the required degrees of freedom and support to start initiatives, sooner or later the subsidiary will lose the initiatives and SEO may disappear (BIRKINSHAW, 1997; BIRKINSHAW E HOOD, 1998). Even if the firm’s founder is an entrepreneur, his(her) views are bound to fail if they lack the support of intrapreneurs with responsibility for the execution of the overall vision and for the creation of complementary visions that support the enterprise over the course of time (FILION, 2006). That is why it is important to have not only the incentive of the firm’s upper management, but also to benefit from the subsidiary’s upper management experience Exhibit 1 – Types of initiatives and the factors associated with each one of them InITIATIVE SEO AUTOnOMy InTEGRATIOn COnTExT nETwORk Local Strong Strong (start) Weak (end) Weak (end) Strong (start) Strong Strong Internal Strong Weak Strong Moderate Moderate Global Strong Strong Weak Moderate High 009-021 (253-265).indd 256 7/20/09 4:01 PM 253-265 • jul./set. 2009 • n. 3 • v. 49 • São Paulo • ©RAE • 257 Felipe Mendes Borini • Maria tereza leMe Fleury • aFonso Carlos Corrêa Fleury • MoaCir de Miranda oliveira Junior ISSN 0034-7590 and commitment to an entrepreneurial orientation. One example of this is the Brazilian MNE Odebrecht. The encouragement of internal entrepreneurship, or intra-entrepreneurship, which is evident in the organization, intensely aids the consolidation of this belief. Thus, the Odebrecht management model delegates decision-making power to the so-called partner entrepreneurs, functional staff with entrepreneurial characteristics, responsible for prospecting and consolidating global business, disseminating information and knowledge to the network and anticipating the requirements of the competitive environment (Oliveira Jr and Mazzola, 2007). Therefore: Proposition 1: The greater the entrepreneurial orientation of the subsidiaries of Brazilian MNEs, the more present their initiatives will be. Autonomy First of all, it is necessary to differentiate between entrepreneurship and autonomy. The two concepts are not equal. Entrepreneurship is the competence of create new things and take risks with one’s own resources. On the other hand, autonomy concerns the headquarters and subsidiary relationships and refers to the degree of freedom that the subsidiary has in order to make decisions recognized by the headquarters (YOUNG, TAVARES, 2004). Autonomy can become manifest in different ways. One of them is related with the issue of products and markets and is characterized by granting the subsidiary authorization to alter the design of the products or services offered, introduce new products or services and enter new markets as a result of its own decisions (BIRKINSHAW, 1996). This factor is very important for Brazilian MNEs, as one of the main alternatives for circumventing the lowcost and commoditization trap is to exploit market niches or create new markets, these being typical local market initiatives. A greater degree of autonomy would facilitate the realization of these opportunities within a competitive time frame (SULL, ESOBARI, 2005). Another facet of autonomy is connected with the organization’s configuration and is characterized by the capacity to deliberately decide upon outsourcing, or changes in the production processes or other managerial practices, all of which call for greater subsidiary freedom to hire its senior executives and to define a suitable allocation of its resources (BIRKINSHAW, 1996). Freedom to make these operating decisions provides the company with the advantage of implementing consecutive operational improvements (SULL, ESCOBARI, 2005) and of adjusting itself to the environment faster than external competitors, in the pursuit of local market initiatives, or of enhancing its efficiency vis-à-vis the internal competition amongst subsidiaries, thereby canvassing advantages in the pursuit of international market initiatives. Therefore, high autonomy appears to be an essential requirement for Brazilian MNEs, given their subsidiaries’ limited exposure in the global market. Of course, in order to obtain recognition for their initiative, Brazilian multinationals ́ subsidiaries should gradually reconcile a lower degree of autonomy with a higher degree of integration; however, it seems premature to require this limited autonomy from the Brazilian MNEs. However, what the Brazilian multinationals ́ cases show is that a high degree of autonomy is a major challenge they must face in going forward. The Brazilian MNEs are beginners in the global market. It was only in the late 1990s that the internationalization of Brazilian enterprises acquired pace and consistency (FLEURY and others, 2007). Given this recent internationalization, control over foreign operations is still very strong, which is explained by the fact that subsidiaries function as a unit of the corporation, in line with the assumption of extending products and businesses to subsidiaries (VERNON, 1966, DUNNING, 1993) and with a strong cognitive limitation in relation to the foreign country (JOHANSON, VAHLNE, 1977). Thus, a major dilemma hovers over Brazilian MNEs ́ subsidiaries. On one hand, their autonomy tends to be low, as they are only in the early stages of internationalization; on the other hand, a competitive position in the global market can only be built through initiatives of the subsidiaries themselves, which calls for more autonomy. This being the case, one expects the following: Proposition 2: The greater the degree of Brazilian MNEs subsidiaries’ autonomy, the more present their initiatives