The corporate governance of subsidiaries in multinational corporations [Elektronische Ressource] : theoretical analysis and empirical evidence from Europe / vorgelegt von Jochen Alexander Brellochs

The corporate governance of subsidiaries in multinational corporations [Elektronische Ressource] : theoretical analysis and empirical evidence from Europe / vorgelegt von Jochen Alexander Brellochs

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The Corporate Governance of Subsidiaries in Multinational Corporations - Theoretical Analysis and Empirical Evidence from Europe vorgelegt von Diplom-Kaufmann Jochen Alexander Brellochs aus Stuttgart von der Fakultät VII – Wirtschaft und Management der Technischen Universität Berlin zu Erlangung des akademischen Grades Doktor der Wirtschaftswissenschaften Dr.rer.oec. genehmigte Dissertation Promotionsausschuss: Vorsitzender: Prof. Dr. Axel Hunscha Berichter: Prof. Dr. Ulrich Steger Berichter: Prof. Dr. Axel von Werder Tag der wissenschaftlichen Aussprache: 17.12.2007 Berlin 2007 D 83 iiAcknowledgements First and foremost, I want to thank my supervisor Prof. Ulrich Steger for his support, encouragement and trust throughout my entire time as Ph.D. student. It has been a tremendously enriching experience both professionally and personally, and I could not have wished for a better mentor. I would also like to thank Prof. Axel von Werder for co-supervising this thesis. This work would not have been possible without the environment at IMD in Lausanne, where the largest part of the research and writing took place. I am truly thankful for the opportunity to work in such an environment and too many people have contributed to this positive experience for me to mention here. Of particular impact, however, were Oliver Salzmann, Wolfgang Amann, George Rädler, Alyson Woolfrey, Karsten Jonsen and Christoph Nedopil.

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Ajouté le 01 janvier 2007
Nombre de lectures 22
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The Corporate Governance of Subsidiaries in Multinational
Corporations
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Theoretical Analysis and Empirical Evidence from Europe




vorgelegt von
Diplom-Kaufmann
Jochen Alexander Brellochs
aus Stuttgart


von der Fakultät VII – Wirtschaft und Management
der Technischen Universität Berlin
zu Erlangung des akademischen Grades
Doktor der Wirtschaftswissenschaften
Dr.rer.oec.

genehmigte Dissertation

Promotionsausschuss:

Vorsitzender: Prof. Dr. Axel Hunscha
Berichter: Prof. Dr. Ulrich Steger
Berichter: Prof. Dr. Axel von Werder

Tag der wissenschaftlichen Aussprache: 17.12.2007

Berlin 2007
D 83 iiAcknowledgements



First and foremost, I want to thank my supervisor Prof. Ulrich Steger for his support,
encouragement and trust throughout my entire time as Ph.D. student. It has been a
tremendously enriching experience both professionally and personally, and I could not
have wished for a better mentor. I would also like to thank Prof. Axel von Werder for co-
supervising this thesis.

This work would not have been possible without the environment at IMD in Lausanne,
where the largest part of the research and writing took place. I am truly thankful for the
opportunity to work in such an environment and too many people have contributed to this
positive experience for me to mention here. Of particular impact, however, were Oliver
Salzmann, Wolfgang Amann, George Rädler, Alyson Woolfrey, Karsten Jonsen and
Christoph Nedopil.

I thank my brother, Michael, for the inspiration his development path has given me. My
thoughts are also with my late grandmother, Lisa. I am grateful for the influence she had
on my life.

My final thoughts go to my parents, Ursula and Werner. Both of you have contributed in
manifold ways to me reaching this point, each of you in your own way. I will always be
grateful for all you have given me, and it is to you that I dedicate this thesis.





Stuttgart, December 2007 Jochen A. Brellochs

iiiTable of Contents


Table ofcontes I
Index of abbreviations III
Index of tables IV
Index of figures VI


1. INTRODUCTION 1
1.1 THE SUBSIDIARY GOVERNANCE PROBLEM 1
1.2 OBJECTIVE AND INTENDED CONTRIBUTIONS 8
1.3 COURSE OF THE INVESTIGATION 12
2. KEY CONCEPTS AND THEORETICAL FOUNDATIONS 16
2.1 CORPORATE GOVERNANCE EVOLUTION AND MODERN UNDERSTANDING
2.2 SUBSIDIARY GOVERNANCE IN MULTINATIONAL CORPORATIONS 24
2.2.1 CORPORATE ORGANIZING AND CORPORATE GOVERNANCE
2.2.2 SUBSIDIARY CORPORATE GOVERNANCE 30
2.3 MECHANISMS OF CLASSICAL CORPORATE GOVERNANCE 34
2.3.1 APPLICATION TO SUBSIDIARY GOVERNANCE
2.3.2 INTERNAL GOVERNANCE MECHANISMS
2.3.3 EXTERNAL GMS 41
2.4 SUMMARY AND CONCLUSION 48
3. RESEARCH FIELD AND FURTHER RESEARCH STEPS 55
4. THEORETICAL ANALYSIS AND FRAMEWORK 56
4.1 THEORETICAL CONSIDERATIONS ON SUBSIDIARY GOVERNANCE
4.2 AGENCY THEORETICAL ANALYSIS OF SUBSIDIARY GOVERNANCE 62
4.2.1 EMERGENCE AND NATURE OF AGENCY THEORY 62
4.2.2 ANALYSIS AND TESTING OF AGENCY THEORY ASSUMPTIONS 64
4.2.3 AGENCY PROBLEMS AND AGENCY COST OF SUBSIDIARY GOVERNANCE 71
4.2.4 AGENCY MECHANISMS FOR SUBSIDIARY GOVERNANCE 76
I4.2.5 EVALUATION AND LIMITATIONS OF AGENCY THEORY FOR SUBSIDIARY GOVERNANCE 80
4.3 COMBINATION WITH CONTINGENCY THEORY 86
4.4 DEDUCTION OF HYPOTHESIZED RELATIONSHIPS 90
4.4.1 INTRODUCTION 90
4.4.2 GOVERNANCE MECHANISM-BASED PROPOSITIONS 94
4.4.3 CONTINGENCIES OF SUBSIDIARY GOVERNANCE 109
5. METHODOLOGY OF THE INVESTIGATION 119
5.1 FRAMEWORK 119
5.2 SAMPLING 122
5.3 ORGANIZATION OF THE RESEARCH PROJECT 129
5.4 OPERATIONALIZATION 132
5.5 METHODS OF DATA ANALYSIS AND EVALUATION 143
5.6 EVALUATION OF RESEARCH METHODOLOGY 154
6. EMPIRICAL EVIDENCE 160
6.1 RESPONDENTS SAMPLE ANALYSE AND DESCRIPTION
6.2 DESCRIPTIVE STATISTICS ON RESPONDING MNCS 166
6.3 DSSUBSIDIARY GOVERNANCE 171
6.4 SUBSIDIARY GOVERNANCE MECHANISMS AND CONTINGENCIES 181
6.4.1 GOVERNANCE MECHANISM-BASED ANALYSIS 181
6.4.2 CONTINGENCY-BASED ANALYSIS 255
7. SUMMARY AND CONCLUSION 283
7.1 SYNOPSIS OF THEORETICAL AND EMPIRICAL FINDINGS
7.2 CONTRIBUTIONS TO THE LITERATURE 286
7.3 LIMITATIONS AND RESEARCH SUGGESTIONS 293
7.4 CONCLUSION 300



Apendices VI
Biblography VI
Further figures and tables XXXIII

IIIndex of abbreviations


CEO Chief Executive Officer

df degrees of freedom

EU European Union

FDI Foreign direct investment
FN Footnote

GB Great Britain

LLP Limited Liability Partnership

MNC Multinational Corporation
MNCs al Corporations
MNE Multinational Enterprise
MIS Management Information System

p. page
pp. pages
PLC Public Limited Company
P Proposition number x x

R&D research and development (department)
2R R-squared

SE Societas Europaea (European public company)
SPSS Statistical Package for the Social Sciences

UK United Kingdom
US States
USA United States of America
USD United States Dollars

VAT Value added tax

IIIIndex of tables

Table 1: Organization of the research project
Table 2: Organizational location of survey respondents
Table 3: Hierarchical distance of subsidiary respondents to MNC headquarters
Table 4: Responding MNCs group size
Table 5: Emergence of issues of information asymmetry
Table 6: Emergence of issues of information asymmetry: sub-sample comparison
Table 7: Emergence of conflicts of interest
Table 8: Emergence of conflicts of interest: sub-sample comparison
Table 9: Emergence of subsidiary governance problems
Table 10: Emergence of subsidiary governance problems: sub-sample comparison
1Table 11: Descriptive statistics: group-wide corporate governance body (P ) a
1Table 12: Regression analyses: group-wide corporate governanc ) b
2Table 13: Descriptive statistics: expatriates in subsidiary management (P ) a
2Table 14: Regression analyses: expatriates in subsidiary management (P ) b
3Table 15: mutual subsidiary governance (P ) a
3Table 16: Regression analyses: mutual subsidiary gov ) b
Table 17: Descriptive statistics: group-wide corporate governance
4 information system (P ) a
Table 18: Regression analyses: group-wide corporate governance
4(P ) b
Table 19: Descriptive statistics: performance-based subsidiary manager
5 compensation (P ) a
Table 20: Regression analyses: performance-based subsidiary manager
5(P ) b
6Table 21: Descriptive statistics: non-financial subsidiary manager incentives (P ) a
Table 22: Regression analyses: non-financial subsidiary manager incentives
6 (P) b
7Table 23: Descriptive statistics: group-wide corporate culture (P ) a
7Table 24: Regression analyses: group-wide corporate culture (P ) b
8Table 25: Descriptive statistics: subsidiary manager executive development (P ) a
Table 26: Regression analyses: subsidiary manager executive development
8 (P) b
9Table 27: Descriptive statistics: codes of corporate governance/conduct (P ) a
Table 28: Regression analyses: codes of corporate governance/conduct
9(P ) b
Table 29: Descriptive statistics: individual subsidiary/subsidiary manager
10 contracts (P ) a
Table 30: Regression analyses: individual s
10(P ) b
11Table 31: Descriptive statistics: formal standards (P ) a
11Table 32: Regression analyses: formal standards (P ) b
12Table 33: Descriptive statistics: subsidiary planning/budgeting/pricing system (P ) a
Table 34: Regression analyses: subsidicing
12 system (P ) b
Table 35: List of interviews
Table 36: Surveying time frame and responses
Table 37: Measurement scales and variables
Table 38: Normality tests
Table 39: Correlation matrix
Table 40: Homoscedasticity tests
IVTable 41: Durbin–Watson and variance inflation factor (VIF) test
Table 42: Tinsley¬–Weiss T index
Table 43: Kolmogorov–Smirnov and Mann–Whitney U test response bias
analysis
Table 44: Kolmogorov–Smirnov, Mann¬–Whitney U and independent samples t-
test for response bias
Table 45: Runs test for cut-off point
Table 46: Responses per MNC headquarters’ country
Table 47: MNC headquarters’ region clusters, based on Hofstede (1980, 2001)
Table 48: Subsidiary governance approach of MNCs
1Table 49: Complete enter regression model (P ) b
2Table 50: ) b
4Table 51: ) b
5Table 52: ) b
7Table 53: ) b
8Table 54: ) b
9Table 55: ) b
10Table 56: Complete enter regression model (P ) b
12Table 57: ) b
Table 58: Descriptive statistics: contingency variables
VIndex of figures

Figure 1: Structure of the investigation
Figure 2: Organizational comparison of corporate versus subsidiary governance
Figure 3: Incongruence of the legal form of the business organization
Figure 4: Comparison classical corporate governance versus subsidiary governance
Figure 5: Combined agency-contingency theory framework for subsidiary governance
Figure 6: Dimensions of governance mechanisms and contingencies
Figure 7: Methodological framework of the investigation
Figure 8: Subsidiary governance approach of MNCs
1Figure 9: Correlation and regression relationships (P ) b
2Figure 10: ) b
3Figure 11: ) b
4Figure 12: ) b
5Figure 13: ) b
6Figure 14: ) b
7Figure 15: ) b
8Figure 16: ) b
9Figure 17: ) b
10Figure 18: Correlation and regression relationships (P ) b
11Figure 19: ) b
12Figure 20: ) b
Figure 21: Correlation and regression results for organizational position
Figure 22: Correlation and regression results MNC group size
Figure 23: ession results MNC HQ region 1 (Belgium, France,
Luxemburg)
Figure 24: Correlation and regression results MNC HQ region 2 (Scandinavia)
Figure 25: Correlation and regression results MNC HQ region 4 (other countries)
Figure 26: Importance of contingencies by dimension in basic statistical analyses
Figure 27: ingencies by dimension in advanced statistical analyses
Figure 28: Frequency of occurrence of contingencies by dimension in correlation
analysis
Figure 29 ontingencies by dimension in regression
analysis
Figure 30: Correlation and regression relationships for subsidiary size
Figure 31: Correlation and regression relationships for subsidiary age
Figure 32: Correlation and regression relationships for subsidiary corporate culture
Figure 33: Correlation and regression relationships for corporate governance culture in
subsidiary countries
Figure 34: Correlation and regression relationships for legal corporate governance
environment of subsidiary
Figure 35: Correlation and regression relationships for competition in subsidiary
markets
Figure 36: Correlation and regression relationships for complexity/dynamics in
subsidiary environment
Figure 37: Correlation and regression relationships for MNC group strategy
Figure 38: tionships for strategic importance of
subsidiary for the MNC
Figure 39: Survey questionnaire
VI1. INTRODUCTION
1.1 The Subsidiary Governance Problem
Corporate governance deals with the factual and legal system of direction and control of
companies, with parties involved in and interacting within this framework, with their
interests, their legitimacy and their relationship (Cadbury Report 1992; BIGCG 2000;
GPCG 2000; Monks and Minow 2001; GCGCGC 2002; Steger 2004). The core of modern
corporate governance is the Agency Problem between outside shareholders and inside
managers (Jensen and Meckling 1976; Fama 1980; Fama and Jensen 1983a). As a
consequence of assigning a group of individuals to manage a company, the ownership of
the company was separated from the control over it, a notion grounded on Adam Smith’s
1776 work. All of a sudden, shareholders found themselves excluded from the
organization of the company (outsiders) and with little access to information about the
company’s value creation process or the efforts of its managers (Ross 1973; Jensen and
Meckling 1976; Arrow 1985a). Public listing of stock companies enabled further sourcing of
large amounts of capital, but increased the problem through the subsequent dispersion of
shareholding and, as a result, shareholders became unable to exert efficient control over
their management (Berle and Means 1932). This resulted in discussions about corporate
governance, which focuses on what mechanisms are available and effective in disciplining
corporate managers and achieving their compliance with shareholders’ interests
(governance mechanisms) (Shleifer and Vishny 1997; La Porta et al. 2000). A governance
mechanism is defined as any direct intervention of outsiders in a company that aims at
exerting supervision and control of the management and making it adhere to predefined
goals (Eisenhardt 1985; Shleifer and Vishny 1997; Luo 2005). From the classical
perception of the field,
Corporate Governance is, to a large extent, a set of mechanisms through which
outside investors protect themselves against expropriation by the insiders. (La Porta
et al. 2000, p. 4)
The antecedents of corporate governance reach back to the emergence of the first large
capital companies, but the topic has attracted the most attention from practitioners and
stresearchers only around the dawn of the 21 century (Coffee 2001; Steger 2004). A series
of severe corporate scandals shook the confidence of investors and the general public in
managerial ethics, in particular in the United States of America (USA). Prominent
examples were Enron, Tyco and WorldCom in the USA and Parmalat, Ahold and Swissair
in Europe. The different types of problems at the core of these scandals could be traced
1