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Journal of Management Studies 48:2 March 2011

doi: 10.1111/j.1467-6486.2010.00969.x

Re-conceptualizing Bartlett and Ghoshals


Classification of National Subsidiary Roles
in the Multinational Enterprise
joms_969

253..277

Alan Rugman, Alain Verbeke and Wenlong Yuan


University of Reading; University of Calgary; University of Lethbridge
abstract We re-conceptualize the Bartlett and Ghoshal typology of national subsidiary roles
in the multinational enterprise (MNE), using a resource bundling perspective. Our view is that
national subsidiary roles can vary dramatically across value chain activities. We focus on the
distinction among innovation, production, sales, and administrative support activities. For each value
chain activity, the subsidiary bundles sets of internal competences with accessible, external location
advantages. We also address the effects of regional integration on national subsidiary roles. Such
schemes may affect substantially the extent to which location advantages of individual
countries can be accessed and bundled with internal competences, thereby typically altering
some national subsidiaries roles in specific value chain activities. However, such substantive
changes in specific value chain activities performed by national subsidiaries do not necessarily
lead to any move in conventional subsidiary role typologies, such as the Bartlett and Ghoshal
one, since these typologies only acknowledge aggregate subsidiary role changes, supposedly
valid for the entire value chain.

INTRODUCTION
Many multinational enterprises (MNEs) now function as differentiated networks, rather
than as hierarchically run organizations with national subsidiaries that all play similar
roles (Nohria and Ghoshal, 1994; Rugman and Verbeke, 2003). It has therefore been
argued that an MNE national subsidiary facing a specific external environment with
unique challenges, and commanding an idiosyncratic set of competences, should be
managed differently from other national subsidiaries. Specifically, MNE corporate management should allocate different charters, and therefore also resources, to different
national subsidiary types (Bartlett and Ghoshal, 1986, 1989). In addition, a number of
researchers (Birkinshaw, 1997, 2000; Cantwell and Mudambi, 2005; Paterson and
Brock, 2002; Rugman and Verbeke, 2001a; Taggart, 1997a, 1997b, 1998) have argued
that national subsidiary management may sometimes have considerable latitude to
Address for reprints: Alan Rugman, Henley Business School, University of Reading, Greenlands, Henley-onThames, Oxfordshire RG9 3AU, UK (a.rugman@henley.reading.ac.uk).
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A. Rugman et al.

pursue its own initiatives as it sees fit, thereby driving the subsidiarys charter enhancement. MNE national subsidiaries, conventionally viewed as mere operational instruments of their parent companies, have thus emerged as a relevant unit of analysis in their
own right in international strategic management studies (e.g. Birkinshaw, 2000; Davis
and Meyer, 2004).
Researchers focusing on the study of national subsidiaries have developed several
subsidiary role typologies, similar to the categorization of MNEs into distinct types,
such as global, international, multinational, and transnational firms (Bartlett and
Ghoshal, 1989). Starting with the early work of White and Poynter (1984), more than a
dozen original papers developing distinct national subsidiary role classifications have
been published in refereed journals, or equally credible outlets, during the past 25 years
(Bartlett and Ghoshal, 1986; Benito et al., 2003; Birkinshaw and Morrison, 1995;
Cantwell and Mudambi, 2005; DCruz, 1986; Delany, 2000; Enright and Subramanian,
2007; Gupta and Govindarajan, 1991; Hogenbirk and Kranenburg, 2006; Homburg
et al., 1999; Jarillo and Martinez, 1990; Taggart, 1997a, 1997b, 1998; White and
Poynter, 1984). The most influential among the above typologies is undoubtedly the one
developed by Bartlett and Ghoshal (1986), mainly because of the success of both the
authors bestselling book Managing Across Borders: The Transnational Solution (Bartlett and
Ghoshal, 1989), which has largely defined the new field of international strategic management, and the related, highly popular textbook with cases (Bartlett et al., 2003, 2007).
This view of the MNE as a portfolio of differentiated, but interdependent subsidiaries
assumes that the firm commands sets of resources that are distributed geographically.
Here, each subsidiary controls part of the firms overall resources reservoir. However, the
uniqueness of the MNE is that each subsidiary is not just defined by the internal
resources it commands, but also by the external resources it can access in specific
locations, a perspective consistent with the modern resource bundling theory of the
MNE (Hennart, 2009; Meyer et al., 2011, this issue). The idiosyncratic bundling of
internal and external resources ultimately determines each subsidiarys role.
The Bartlett and Ghoshal (1986) typology is based on two dimensions: the strategic
importance of the local environment (location advantages), and the competences (firmspecific advantages) held by the national organization, whether transferred from inside
the MNE network or developed/acquired autonomously by the subsidiary itself. The
strategic importance of the local environment depends on its potential significance to
overall MNE strategy and performance. Markets that are large or particularly sophisticated (e.g. technologically advanced), are the most likely to have high strategic importance to an MNE (Meyer et al., 2011). As regards national subsidiary competences,
Bartlett and Ghoshal (1986, p. 90) acknowledge that these can be in technology,
production, marketing, or any other area. Building upon these two parameters, Bartlett
and Ghoshal (1986) define four generic roles of national subsidiaries (see Figure 1):
strategic leader (strong location advantages and competences), implementer (weak location advantages and competences), contributor (weak location advantages, but strong
competences), and black hole (strong location advantages, but weak competences).
These roles reflect the functioning of the transnational solution (Bartlett et al.,
2003): national subsidiaries have diverse but interdependent roles within the MNE
network depending upon access to country-specific location advantages and internal
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Re-conceptualizing Bartlett and Ghoshal

High

Black hole

Strategic leader

Implementer

Contributor

255

Strategic
importance of
local
environment

Low

Low

High

Competence of local organization

Figure 1. The generic roles of foreign subsidiaries in Bartlett and Ghoshal (1986)

competences, that jointly determine their charter and relative autonomy. Rugman and
Verbeke (1992) have provided an internalization theory interpretation of the above
typology: here, the bundling by each subsidiary of internally held resources with accessible external ones is critical to performance. In the case of black hole subsidiaries, no
such bundling can occur, meaning that the mere location of the subsidiary in a particular
geographic space is insufficient for it to access and utilize the valuable external resources
present in that space.
Despite the popularity of the Bartlett and Ghoshal typology and its seemingly general
applicability, the recent international business literature (e.g. Anand and Delios, 1997;
Benito et al., 2003; Bouquet and Birkinshaw, 2008; Kedia and Mukherjee, 2009;
Mudambi, 2008) has documented some major changes in the international business
environment that suggest the need for further conceptual improvement. First, several
facilitators of internationalization such as advanced information and communications
technology (ICT) and supply chain management now allow (a) easier MNE access to
and bundling of internal resources with the distinct location advantages of a larger
number of host countries, and (b) improved internal coordination among specialized
subsidiaries. Hence, firms can now more easily fine-slice value chain activities, optimize
the location of specific, narrow activity sets and coordinate these across borders, and
de-internalize business functions considered less critical or where bundling is more
difficult (Dicken, 2007; Kedia and Mukherjee, 2009; McLaren, 2000; Mudambi, 2008).
Many national subsidiaries therefore specialize in rather narrow activity sets in the
MNEs value chain, where bundling of internal competences with external resources is
feasible and effective, and may thus perform different roles in each value chain activity
( Jensen and Pedersen, 2011, this issue). This important point is not recognized in the
Bartlett and Ghoshal typology shown in Figure 1, which only acknowledges aggregate,
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A. Rugman et al.

national subsidiary roles. Thus, the typology does not allow for scenarios whereby, for
example, a particular national subsidiary acts as a strategic leader for sales activities, but
is little more than an implementer at the R&D side (or even lacks altogether a role in the
innovation area). This new landscape of fine-sliced value chains calls for a better understanding of the processes of bundling location advantages in host environments with
national subsidiary internal competences, thereby suggesting that the Bartlett and
Ghoshal (1986) typology, which only acknowledges aggregate subsidiary roles and a
singular bundling process spanning the subsidiarys entire value chain, may need to be
refined.
Second, Bartlett and Ghoshals (1986) study, though recognizing the possibility of
changes in subsidiary roles, in terms of a subsidiary moving from one type to another in
their framework, did not include an in-depth analysis of the influence of environmental
changes that foster semi-globalization, meaning the importance of geographic areas
different from the national level, but below the global level. For example, regional
integration, which has become increasingly important during the past three decades, and
has reduced the constraints imposed by national borders on international business
transactions, was largely neglected in Bartlett and Ghoshals framework. Regional integration can be defined in terms of the abolition of discrimination between economic
units belonging to different national states (Nye, 1968). It therefore reduces institutional
distance among countries (Ghemawat, 2001; Hutzschenreuter et al., 2011, this issue).
This typically leads to a strengthening of the competences of some national subsidiaries.
These subsidiaries can now more easily access a broader set of location advantages
present in the region, bundle their internal resource base with these external resources,
and leverage the extant set of location advantages across a broader geographic space
(Tallman and Chacar, 2011, this issue). Here, substantive changes in a subsidiarys
accessing, bundling, and leveraging location advantages for specific value chain activities
do not necessarily translate into a change in aggregate status in Bartlett and Ghoshals
subsidiary typology. Examples of increased semi-globalization, aimed at improved
accessing, bundling, and leveraging location advantages throughout the region include
the formation of the EU (European Union), NAFTA (North American Free Trade
Agreement), and ASEAN (Association of Southeast Asian Nations) (Benito et al., 2003).
The question we address in the present paper is whether regional integration affects the
usefulness of a national subsidiary role classification at the aggregate level (i.e. across
value chain activities), whereby regional integration typically implies that the location
advantages of any country in the region can now more easily be accessed, bundled with
internal resources, and leveraged throughout the region by MNE subsidiaries operating
in that region.
The remainder of the paper explores the implications of the two omissions above, and
suggests a substantive extension of Bartlett and Ghoshals (1986) subsidiary role typology,
in order to increase its relevance to future international business research and managerial
practice. In the next section, we discuss what we view as the missing dimension of
both location advantages and subsidiary competences, namely the requisite value chain
decomposition to determine actual resource bundling and related subsidiary roles,
thereby extending Bartlett and Ghoshals (1986) subsidiary typology. In the third section,
we describe the potential impacts of regional integration on accessing, bundling, and
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leveraging national location advantages by specific subsidiaries and the impact on their
competences within the firm. We demonstrate that simply assessing aggregate national
subsidiary roles and changes therein, as suggested by Bartlett and Ghoshals (1986)
typology, may become a rather futile exercise.

AUGMENTING THE BARTLETT AND GHOSHAL (1986) TYPOLOGY:


VALUE CHAIN UNBUNDLING
Rationale for Augmenting the Bartlett and Ghoshal (1986) Typology
Bartlett and Ghoshal (1986) based their subsidiary typology on two dimensions: the
strategic importance of the local environment (location advantages), and the competences (firm-specific advantages) held by the local organization. However, as far as the
strategic importance of the local environment is concerned, this typology does not allow
differentiating among location advantages, and the potential for bundling thereof with
internal resources, in different parts of the value chain. Porter (1985) represents the
best-known decomposition of value chain activities in the strategy field. He distinguishes
among nine activity sets, which we have reclassified into four main sets, thereby allowing
more parsimonious analysis in the remainder of the paper: (1) innovation (technology
development); (2) production (including procurement, inbound logistics, and operations);
(3) sales (including outbound logistics, marketing and sales, and service); and (4) administrative functions (firm infrastructure including financial and legal services, etc. and
human resources management).
The MNE subsidiarys role in innovation is largely determined by location advantages
in a variety of input markets providing critical external resources to R&D. In contrast,
location advantages at the output market side in terms of high or sophisticated demand
for end products, as well as local market knowledge and transferable general market
knowledge that is accessible through external contracting, will largely determine the
subsidiarys role in sales. For example, in lead markets with sophisticated customers and
competitors, where new global trends are known to emerge, the MNE may locate a
listening post subsidiary to enhance its company-wide marketing skills (Mudambi and
Navarra, 2004; Porter, 1990, 1998), thereby reflecting a subsidiary leadership role in a
very narrow subset of the sales activities, with shallow resource bundling.
Production has conventionally been tied closely, in terms of co-location, to either
innovation or sales but the recent off-shoring wave suggests that these activities can now
often be physically entirely separated from both, as with Apple products designed in
California, and sold primarily in highly developed markets, but assembled in Taiwan.
Finally, many critical administrative functions were in the past either concentrated in the
home country, as an expression of the MNEs administrative heritage closely aligned
with its home country location advantages or largely decentralized to allow national
responsiveness and improved bundling of internal resources with host country location
advantages.
In the context of fine slicing value chains, the strength of any single countrys
location advantages and the opportunities for bundling these with internal resources,
may be very different for each of the above value chain activity sets. It may therefore
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be inappropriate to assess the strength of a countrys location advantages, and a


subsidiarys opportunities for bundling these with internal resources, through a single,
aggregate assessment that does not recognize differences across value chain activity sets.
A similar comment holds when evaluating the subsidiary competences themselves: these
should not be assessed in aggregate terms only, without differentiating among various
value chain components.
Mainstream international business theory has a long tradition of distinguishing among
various types of location advantages. For example, the internalization/eclectic paradigm
view of the MNE (Buckley and Casson, 1976; Dunning, 1988; Rugman, 1981, 1999)
explains how location advantages reflect the relative attractiveness of alternative FDI
recipient countries, and determine where firms will invest. The four major FDI types,
namely natural resource seeking, market seeking, efficiency seeking, and strategic asset
seeking (Dunning, 1993), are each associated with specific subsidiary types, set up to
bundle idiosyncratic internal competences with particular location advantages.
Natural resource seeking FDI leads to developing subsidiaries whose primary purpose
is tapping into host country location advantages in the production sphere with a focus on
sourcing. In contrast, market-seeking FDI focuses on accessing location advantages at the
output side, thereby fostering sales. Efficiency seeking FDI, geared towards rationalizing
existing foreign operations and concentrating activities in a smaller number of locations,
usually emphasizes one value chain activity. Such rationalizing may therefore take
various forms centralizing R&D in the innovation sphere; streamlining component
supply in production; closing local distribution centres at the sales side; or amalgamating
head office activities at a higher geographic level for the administrative function in each
case improving the efficient bundling of internal competences and external resources.
Finally, the main driver of strategic asset seeking FDI is usually the presence of
sophisticated assets and skills critical to one particular value chain activity set, often in the
realm of innovation, though this may include more than conventional R&D. FDI of this
type sometimes takes the form of a merger or acquisition to allow bundling, since the
coveted assets and skills are often tightly held by companies, though generally available
location-advantages may have been critical to developing these proprietary assets and
skills. One example is the Silicon-Valley-type, generally available dense pool of scientists
with advanced research and engineering knowledge present in local technology clusters
(Verbeke, 2009).
Irrespective of specific FDI motivations, most MNE subsidiary operations do perform
a number of administrative functions such as human resources management. However,
some locations such as cosmopolitan cities appear particularly attractive for establishing
key administrative functions often referred too as head office activities (Sassen, 2001).
The general point we try to make here is that the strength of location advantages and the
opportunities for bundling these with internal competences should be assessed separately
for each part of the value chain targeted.[1]
An analysis similar to the one above can be performed starting from the subsidiary
competences. Macro-environmental changes such as advances in physical transport possibilities and ICT have reduced the cost of coordinating cross-border activities, thereby
sometimes decreasing the need for internalization, but mostly allowing a more finegrained allocation of value chain activities to optimal locations (Kedia and Mukherjee,
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2009). This spatial disaggregation of the value chain implies the presence of specialized
subsidiary competences in narrow activity sets rather than general competences covering
the entire value chain. Such specialization and narrowing of subsidiary competences has
distinct effects on subsidiary roles. For example, Bouquet and Birkinshaw (2008) have
suggested that sales-related competences at the subsidiary level tend to be localized and
are often viewed as relatively unimportant by the MNE head office. In contrast, the head
office mostly does attend to subsidiary initiatives if the relevant subsidiary competences
involve innovation activities and related bundling processes with external resources.
The above analysis suggests the relevance of augmenting explicitly the Bartlett and
Ghoshal (1986) typology by disaggregating subsidiary roles along key value chain activities. One implication is that a subsidiary may face extreme localization and have strong
competences in one part of the value chain, e.g. in the realm of sales activities, while at
the same time experiencing extreme globalization, and a lack of competences relative to
other affiliates, e.g. in the realm of innovation (Mudambi, 2008). In fact, innovation activities
may even be absent if opportunities for bundling with external resources are lacking.
In terms of location advantages, an MNE may view North America and Europe
critically important as loci for innovation, sales, and administrative functions, even in the
absence of significant advantages as loci for production. This same MNE may be heavily
reliant on Asian countries such as China or India for such production, even if it has only
a limited presence there as regards the other value chain activity sets. The point is that
positioning subsidiaries on the location advantages (vertical) axis of the Bartlett and
Ghoshal (1986) matrix may lead to very different outcomes depending upon whether
location advantages related to innovation, production, sales, or administrative support are
considered.
Subsidiary competences can be location-bound or non-location-bound (Rugman and
Verbeke, 2001b). Non-location-bound competences can be transferred relatively easily
across borders and do not need to be adapted to local market specificities, i.e. bundling
occurs naturally. Production competences are usually less location-bound and more
deployable across geographic space than, for instance, sales competences, and a subsidiary usually needs substantial time to develop the latter competences in a specific location
and to become an insider through intricate resource bundling processes (e.g. Anand and
Delios, 1997; Johanson and Vahlne, 2009; Rugman and Verbeke, 2004). Thus, relatively
easy transferability of production competences among subsidiaries, and the related bundling with external resources, is more likely to lead to intra-firm competition among
subsidiaries to capture more important charters in the MNE than for the other activity
sets (Birkinshaw and Lingblad, 2005; Cerrato, 2006; Fong et al., 2007). However, it
should be recognized that some sales competences may also be non-location bound,
such as knowledge on how to perform market research, routines allowing efficient
distribution, etc.
An Extension of the Bartlett and Ghoshal (1986) Typology
To capture fully the significance of distinguishing between location advantages and
subsidiary competences in the realm of different value chain activity sets, Bartlett and
Ghoshals (1986) typology can be extended, as visualized in Figure 2a. As noted above,
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(a)

Innovation

Production

Value chain
activities
Sales

Administrative
support

Black hole

Implementer

Strategic leader

Contributor

Subsidiary roles in Bartlett and Ghoshal (1986)


(b)

Innovation

Production

Roche in the US

SGS-Thomson in
China

Main Japanese auto


makers in the US

Roche in the US

Levi Strauss in
North America

Main Japanese auto


makers in the US

Blank (no role in


production)

Value chain
activities
Main Japanese auto
makers in the US

Sales

Administrative
support

Blank (no role in


administrative support)

HSBC in Britain
Main Japanese auto
makers in the US
Black hole

Implementer

Strategic leader

Contributor

Subsidiary roles in Bartlett and Ghoshal (1986 )

Figure 2. (a) Unbundling subsidiary roles by Bartlett and Ghoshal (1986). (b) Unbundling subsidiary roles by
Bartlett and Ghoshal (1986): five examples

the original typology (Bartlett and Ghoshal, 1986; Rugman and Verbeke, 1992) assumed
that aggregate subsidiary roles can be determined, whereby national subsidiaries would
cover the entire value chain and would occupy the same role throughout the chain
(e.g. strategic leadership of Philips UK subsidiary versus implementer status of P&Gs
subsidiaries in Australia, Belgium, the Netherlands, and Spain). Ultimately, Bartlett
and Ghoshal applied their framework primarily to the context of sales-related location
advantages and subsidiary competences at the national level as the critical conditions for
success in spite of some elements in the 1986 article describing the other value chain
functions.
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In reality, Bartlett and Ghoshals subsidiary roles at the sales side are mirrored
by equivalent but often completely different subsidiary roles for innovation, production, and
administrative functions, as shown in Figure 2a. On the horizontal axis of Figure 2a we
have positioned the four original subsidiary roles, namely black hole (column 1), implementer (column 2), strategic leader (column 3), and contributor (column 4), respectively. The
four columns are the equivalent of the four cells in Figure 1. However, the vertical axis
of Figure 2a makes a distinction among the value chain activities discussed above,
namely innovation, production, sales, and administrative support activities. Figure 2a suggests
that a single subsidiary might indeed perform the same role across all four value chain
activities, as assumed in Figure 1. For example, a large, home base operation may be
a strategic leader for each row of Figure 2a, i.e. for each value chain activity, and
therefore fill the entire third column of this figure. Similarly, a miniature replica set up
to overcome trade barriers might be an implementer for each value chain activity,
thereby filling the entire second column of the figure. However, the more common case
may well be some divergence in roles. A typical market-seeking subsidiary in a large
host economy may lack any innovation activity, meaning that the innovation row would
remain blank. This is a typical occurrence for isolated subsidiaries, i.e. affiliates that
experience few, if any, intra-firm knowledge inflows or outflows (Monteiro et al., 2008),
and have few internal competences that could be usefully bundled with external
resources. Such subsidiaries would typically also be implementers for production and administrative activities, but might be strategic leaders in sales. In the extreme case, the subsidiary
may perform only one value added activity (meaning three blank rows), ranging from
being a centre of excellence (e.g. a strategic leader in innovation in the form of a high tech
lab embedded in a localized research cluster) to having a mere operational function
in a national market (e.g. an implementer in sales such as operating a distribution centre
in a small national market).
Even though Figure 2a represents only a stylized and simplified representation of
reality, the general implication is that a single subsidiary may perform several Bartlett
and Ghoshal roles, depending upon the value chain activity considered. The managerial
relevance of Figure 2, is demonstrated by Cantwell and Mudambis (2005) insightful
typology of MNE subsidiaries. This typology focused primarily on the development of
innovation competences. In their framework, competence-creating subsidiaries source
technological knowledge locally and focus primarily on complex resource bundling in the
context of sticky technologies. They represent strategic leaders for innovation in Figure 2a. In
contrast, competence-exploiting subsidiaries largely source slippery technology from their
parents, and thus represent implementers for innovation with only limited needs to access
external resources in Figure 2a. These two types of subsidiaries are thus fundamentally
different in the innovation sphere, but may be very similar as far as the other activity types
are concerned.
When assessing the role of a subsidiary, it is thus important to investigate separately
the strategic importance of its local environment in terms of location advantages for each
value chain activity set, as well as the subsidiarys competences in each activity set. The
critical point is that the location advantages instrumental to foreign subsidiary creation
and development through resource bundling are unlikely to be identical for all four value
chain activity sets in any given country. The same comment holds for subsidiary
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competences themselves. As a result, a single subsidiary may perform various roles


simultaneously, depending upon the value chain activity considered.
Even within a single value chain activity, the processes of bundling location advantages and subsidiary competences that ultimately determine the subsidiarys role may be
subtle and complex. In Figure 2b we visualize a number of case examples making this
point. First, the examples of SGS-Thomson and Roche demonstrate that subsidiaries
can take on idiosyncratic roles in individual value chain activities. Second, the examples
of Levi Strauss and HSBC illustrate the dynamics of subsidiary roles in a single value
chain activity in a location, with a focus on resulting blank cells, a scenario neglected
by Bartlett and Ghoshal (1986). Third, the example of the Japanese automobile manufacturers in the United States suggests the importance of linkages among value chain
activities.
First, consider the case of a subsidiary with weak production competences, but located in
a strategically important market as far as production is concerned, and therefore positioned
as a black hole for production in Figure 2b since no resource bundling opportunities exist.
Why would this subsidiary be categorized as a black hole for production? One example is the
case of SGS-Thomson in China. When SGS-Thomson opened its Shenzhen factory, its
first one in China in 1996, the expectation was that production costs would be very low.
Unfortunately, the lower salaries at this plant as compared to the salaries received by the
same workers when they were trained in Malaysia led to a strike, which embarrassed the
local government. As a result, the local government in China required that the plant
house and feed its 600 workers, and provide increased salaries. Expecting initially to
benefit from lower wages, SGS-Thomson ultimately found the unit cost for chips out
of the Shenzhen plant was about 10 per cent higher than the cost at its Malaysian
counterpart (The Economist, 1998, p. 60), though it noted that 100 km from here (in
Guangdong province) the costs are 40% less (The Economist, 1998, p. 61). The above is
one example of a firm-level failure to benefit from allegedly generally available location
advantages in production in a low-cost country such as China, due to poor management
of local relational networks. In this case, the MNE was unable to access the relevant
national location advantages it needed and to bundle these with its internal resources,
because it did not invest sufficiently in location-bound competences, or at least did
not spend wisely in this area, and this prevented the subsequent exploitation and
leveraging of company-wide competences. The outcome was a black hole subsidiary for
production, structurally unable to access and utilize optimally Chinas location advantages
in manufacturing.
As another example, but this time in the innovation sphere, in the 1980s the Swiss
pharmaceutical giant Roche was not very successful in recombinant technology in the
United States (Teece, 1992, p. 91), even with its operating labs in New Jersey because it
could not access the local knowledge embedded in local firms and their privileged
relational networks, with few biotech scientists prepared to move to big pharma so as to
allow the requisite resource bundling. This weak technological position of Roche in
biotech in the United States resulted in this MNE purchasing in 1990 a major share in
Genentech, the leading US biotech firm, as acquiring US biotech firms was the cheapest
way . . . to catch up (Teece, 1992, p. 94). Thus, Roches US operations in the 1980s
were originally a black hole for innovation, characterized by weak innovation competences in
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this industrys lead country for technology development, but a focused acquisition move
helped the firm to position at least some American operations as a strategic leader for
innovation (Zeller, 2004).
Second, from a dynamic perspective, subsidiaries in the black hole position for any value
chain activity set may still want to upgrade their competences through learning how to
access host country location advantages and how to bundle these with their internal
resources, so as to bolster their own competitiveness. Although it makes sense to locate
subsidiaries in strategically important markets, prior research suggests that MNEs may
need to accumulate sufficient experience in the host country to gain full access to this
countrys location advantages and to achieve resource bundling. For example, in the
innovation sphere, the subsidiary must assimilate new technologies (e.g. Cantwell and
Mudambi, 2005; Chetty et al., 2006). In this context, MNEs often appear to prefer
mergers, acquisitions, or strategic alliances (rather than greenfield investment) to facilitate the resource bundling process in strategically important markets (Dunning and
Lundan, 1998).
Pursuing further this dynamic perspective, Figure 2b can accommodate the situation
whereby a subsidiary performs a value chain activity in a location viewed relatively
unimportant to MNE competitiveness, and whereby the subsidiarys distinct competences in this activity set are also weak, so that little opportunity exists for creative
resource bundling. The long-run outcome may be that such activity will be relocated
inside the MNE network, leading to a blank for that activity in Figure 2b, a common
scenario not considered in Bartlett and Ghoshals (1989) aggregate assessment. For
example, in the production sphere the shutdown of all the manufacturing factories in North
America by Levi Strauss & Co. represented the desire to move these high cost production
activities to other countries, but this did not hold for the other value chain activities such
as sales (Levi, 2003). Viewing ownership and operation of North American and European manufacturing plants in an environment of increased outsourcing of manufacturing
to lower-cost countries and continuing apparel price deflation (Levi, 2004, p. 4) as one
of the major reasons of declining profits, Levi had initiated extensive restructuring of its
production activities as early as 1997. Between 1997 and 2004, it closed 42 owned-andoperated manufacturing plants in North America and Europe. Levis management
stated that this approach shifted the vast majority of our production to independent
contract manufacturers to enable us to reduce our cost of goods and maintain a more
variable cost structure (Levi, 2004, p. 5). As a result, in 2004, Levi sourced approximately 50.3 per cent of total production from its contractors in South and Central
America, and 32 per cent from Asia, though the North American region (including the
USA, Canada, and Mexico); Europe accounted for 59.6 and 25.6 per cent, respectively,
of total sales (Levi, 2005). By late 2005, Levi only operated five manufacturing plants,
with two in Europe (Hungary and Poland), two in Asia, and one in South Africa
(Levi, 2006). For Levi, production in North America had become a deterrent to its overall
competitiveness.
Another example, but in the realm of the administrative function, is the transfer of
logistics, technology support, and data centres from Britain to Asia, specifically to
mainland China and India by HSBC Banking Group, thereby reducing the overall
service costs and improving overall competitiveness.
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In the above Levi and HSBC cases, the United States and the United Kingdom were
no longer viewed as strategically important countries for the production and administrative
functions, respectively, thereby triggering a change in activity location and a blank on
these two rows of Figure 2b, given the lack of sufficiently strong, compensating strengths
held by the local affiliates.
Third, in contrast to the above examples, many foreign MNE activities in North
America can now be positioned as contributors for production, reflecting a host country
environment that does not aid MNE competitiveness at the production side (weak opportunities for creative resource bundling). Here, production related competences held by
the MNE affiliates themselves, such as proprietary manufacturing systems and highly
efficient international sourcing compensate for this deficiency. This situation is illustrated by the case of the main Japanese automobile manufacturers in the United
States. The United States do not complement these firms subsidiary-level competences
with strong US-based location advantages for innovation, production, and administrative
functions, but US operations have still been able to stay competitive at the production end
through the (partial) transfer to the United States of Japanese Keiretsu-style management and modular production methods, as well as the use of transplanted Japanese
suppliers, whereas most innovation and key administrative activities have remained in the
home country (blank position for those activities in the United States in Figure 2b)
(Collinson and Rugman, 2008; Rugman and Collinson, 2004). This case also illustrates
the potential importance of linkages between subsidiary roles for various value chain
activity sets. In Figure 2b, the Japanese subsidiaries in the United States are largely
contributors rather than strategic leaders for production. They benefit from the transfer of
competences developed in Japan in this area, and may further develop those, but they
operate in an environment with relative location disadvantages in the United States
(as compared to Japan), providing little opportunity for resource bundling. However,
for the sake of sales, it is critically important also to produce automobiles in the United
States, and to be an insider there, rather than an outsider, far from the American
consumer, and faced with the danger of rising trade protectionism. Thus, in this case
a strategically unimportant market in terms of location advantages for innovation,
production, and administrative functions is combined with a strategically important one
for sales, and the Japanese subsidiaries involved hold both strong production and sales
competences. The outcome is that they are strategic leaders for sales, contributors for
production, and largely absent or performing the role of implementer for innovation and
administrative functions.
It is apparent from introducing the distinction among four value chain activity sets in
the discussion of national subsidiary roles that defining such roles in an aggregate fashion
through the use of the two Bartlett and Ghoshal (1986) dimensions is problematic. There
is a need to decompose subsidiary roles for each value chain component. The lack of such
decomposition may lead to a severe misunderstanding as to the actual roles of national
subsidiaries in the MNEs internal network. This is especially critical in the context
of so-called strategic leader subsidiaries, which, according to Bartlett and Ghoshal (1986),
are supposed to embody the MNEs core assets and capabilities, and are expected to
capitalize on resource bundling opportunities, but may in fact hold that position for
particular value chain activity sets only, and not for the entire value chain.
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REGIONAL INTEGRATION AS A DETERMINANT OF


SUBSIDIARY ROLES
Asymmetrical Impacts of Regional Integration
McCann and Mudambis (2005) and Rugman and Verbekes (2009) analyses of the new
economic geography of MNE location behaviour suggest the importance of both the
sub-national and regional aspects of location, i.e. geographic levels beyond that of the
individual country. Regional integration in the form of trade and investment liberalization within a geographic area spanning at least two countries has been found to affect
MNE activities at the level of both new investment in the region and the reallocation of
extant value chain activities in the region. For example, Hogenbirk and van Kranenburg
(2006) found that 25 per cent of foreign owned subsidiaries in the Dutch electronics and
electrical appliances industry are actually regionally product-mandated hubs and
another 24 per cent act as export platforms (as regards the remainder, 43 per cent are
single activity satellites and 8 per cent are miniature replicas). The regional product hubs
and export platforms were generally established after the Single European Act came into
effect, suggesting that macro-level regionalization led to altered national subsidiary roles
in production, with some national subsidiaries increasing their geographic scope to the
entire European region.
The widely held and most feared prediction regarding regionalization in the form of
trade and investment liberalization though usually wrong is that lowering longestablished tariffs would lead to the elimination of the production role of national subsidiaries and the related manufacturing jobs in the smaller countries in the region, e.g.
Canada in the NAFTA context. As smaller miniature replica plants (lacking innovation
capability) set up in Canada and performing a variety of production, sales, and administrative
support functions were less efficient at the outset than larger factories in the United
States, benefiting from scale economies and lower labour costs, the expectation is that
MNEs would transfer these activities to lower-cost plants in the United States and
abroad. The reality is of course that MNEs do rethink their extant portfolio of value
chain activities within the region as a consequence of regional trade and investment
liberalization, seeking to access the location advantages of the most attractive countries
or areas within the trading and investment bloc, and to bundle these external resources
with internal competences in order to maximize efficiency. This line of reasoning suggests that MNEs would retain but rationalize their operations in the region with the
extant roles of many national subsidiaries in production and administrative support functions
being affected. In practice, this may mean that subsidiaries would manufacture or
assemble final products from core components designed and produced in one or a few
core locations (Cohen and Zysman, 1987), i.e. maintain only a part of the previously held
production and administrative support mandates. In contrast, at the sales end, local subsidiaries would continue to market and actually sell more products manufactured and
imported from abroad (McFetridge, 1989). In this context, Buckley et al. (2003) also
point out, in accordance with Rugman (1990), that even if protectionism were the initial
impetus to FDI, MNEs accrue intangible benefits from operating in host markets over
time, which confer advantages on foreign-owned firms, fuelling future competitiveness,
and expansion of their operations in the host country (Buckley et al., 2003, p. 855).
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The extant literature on the impact of regional integration on trade, FDI, and national
subsidiary roles though insightful has largely neglected the potential asymmetrical
impact on various value chain activities. MNEs are typically assumed to pursue a
homogeneous rationalization strategy across the value chain, but mainly focused on
production, as their response to macro-level, regional integration. In addition, the mainstream literature on subsidiary role changes has evaluated the effects of corporate role
assignment, subsidiary choice, and external environmental characteristics, with much
attention paid to the first two sets of variables but relatively little to the third, especially
as regards bundling opportunities of location advantages with internal resources. Even
when environmental characteristics have been considered, researchers have tended to
limit themselves to parameters such as local competition at the level of single country
(Birkinshaw et al., 1998). Meyer et al. (2009) have called for the study of direct linkages
between macro-level institutional environments and firm strategies, but we should
recognize that broader environmental factors, especially regional integration schemes
though key external drivers of strategic change in the MNE have been underemphasized and occupy only a minor position in traditional conceptual frameworks on MNE
strategy (Rugman, 2000, 2005).
When studying MNE responses to regional integration, it is important to acknowledge
its possible asymmetrical impact on the variety of location advantages accessed and
bundled with internal resources in individual countries per value chain activity. This is in
line with McCann and Mudambis (2004) insight that both changes in supply side
(i.e. primarily innovation and production related) and demand side (i.e. sales related) environmental parameters affect MNE managerial practices, including decisions to have
national subsidiaries play a particular role for specific value chain activities. Here, supply
side forces affect directly the scope and direction of technological knowledge flows and
the usage thereof inside the MNE, whereas demand considerations impose a particular
level of customization at the sales end.
None of these changes is necessarily associated with a formal subsidiary role change in
Bartlett and Ghoshals subsidiary portfolio framework if national location advantages
and subsidiary competences at the sales side (often with some co-located production) remain
largely unaltered. Even with unaltered, aggregate subsidiary roles in the Bartlett and
Ghoshal matrix (Figure 1), because of these sales activities, the real-world challenge is to
determine exactly which national subsidiaries will see their activity scope increased
versus reduced, in other activities than sales. Such change in activity scope will occur as
a result of better access to the location advantages of the most attractive geographic
places, and better bundling opportunities thereof with internal resources, for the three
other value chain activities in the more integrated regional market.
This does not necessarily imply one or a few winners and many losers as an outcome
of regional integration. As long as national subsidiary competences at the sales end are
fungible in the sense that they could potentially be applied to a large number of
emerging opportunities (Birkinshaw and Lingblad, 2005, p. 682), the subsidiary may
actively search for new output markets, even if losing other value chain activities,
relocated to other subsidiaries in the region that can now better access stronger location
advantages and bundle these with their own resources. Many subsidiary competences at
the sales end are location-bound, and the activities associated with them will still need to
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be performed locally. For example, sales activities for branded consumer goods usually
require proximity to customers, and therefore the potential for regional integration at the
firm level for sales activities may be limited.
In addition, multinational managers cognitive understanding of the significance of
regional integration must be taken into account. The MNE managers cognition represents an often-neglected factor when discussing the impact of regionalization on subsidiary roles. Multinational managers perceptions of the significance of regional integration
for location advantages and subsidiary competences held in different countries may
moderate actual effects on subsidiary role dynamics to the extent that these depend on
head office decisions. A key element in managers cognitive understanding is whether
they perceive macro-level, regional integration primarily as a risk, with a change in
strategy likely associated with losses, or rather as an opportunity, whereby a change in
strategy might lead to high benefits. In the former case, risk aversion prevails, with
expected losses looming larger than gains, whereas in the latter, risk taking is chosen as
the preferred mode of operation to capitalize on new opportunities; see Chrisman et al.
(2011) for an in-depth analysis of the impact of cognitive elements on established firms
strategies. For example, Stopford and Baden-Fuller (1987) investigated the variety of
behaviours of European appliances producers in their home region. In the production
sphere, the Italian firms engaged in an opportunity-driven, export-based strategy from
central production hubs because they believed that the European market was becoming
more integrated. In contrast, most British producers were more risk averse. They
believed that turbulence in demand, non-tariff trade barriers, and a focused strategy
would protect domestic market niches, and they therefore did not pursue a centralized,
export-based strategy, but rather decided to keep production and sales activities co-located
in various European countries.
Such perceptions of regional integration also affected Japanese manufacturing investment in Europe (Hood and Young, 1987, p. 199). The late Japanese entrants engaged in
a risk-taking strategy. They established production and sales operations geared towards
serving the future, single European market, i.e. they consciously avoided a multidomestic approach, and set up subsidiaries with strong sales competences, mainly in lead
markets, and anticipating further regional integration at the macro-level. However, the
innovation and key administrative functions conventionally assumed to be part of the role of
strategic leader in the Bartlett and Ghoshal portfolio matrix, remained entirely absent in
these strategic leader subsidiaries for production and sales in Europe, whereby risk aversion led
to the continued centralization of these activities in Japan.
Finally, the expected effects, in terms of perceived risks versus opportunities, of
deploying subsidiary competences is also likely to affect changes in subsidiary roles after
regional integration. Here, the corporate head office, subsidiary management, and
management in other affiliates assess these competences in terms of expected net contribution to resource bundling and subsequent subsidiary performance. If a subsidiary is
isolated (Monteiro et al., 2008), meaning that both the self-rating of its competences and
the rating thereof by others are low thereby implicitly suggesting that any attempts at
new, creative resource bundling are risky the subsidiary is more likely to become the
victim of risk averse behaviour. This means it may be shut down or lose activity sets if a
rationalization effort is undertaken after regional integration.
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Regional Integration Schemes and Activity-Specific Changes in


Subsidiary Roles
The idiosyncratic impact of regional integration on national location advantages and
national subsidiary competences for each value chain activity and the moderating effect
of multinational managers cognition of regional integration effects, has led MNEs to
respond to regional integration in a variety of ways. We identified six common patterns
of changes in national subsidiary roles brought about by regional integration schemes
and related changes in access to national location advantages and the bundling thereof
with internal resources. Even though other patterns of change are conceivable, the key
insight gained is that the value chain activity considered indeed does matter in three of
the six patterns, and that substantive changes in subsidiary roles cannot be captured by
simple, aggregate moves in the Bartlett and Ghoshal portfolio matrix from one quadrant
of the matrix (such as implementer) to another quadrant (such as strategic leader): many
important changes in subsidiary activities appear to be unrelated to formal role changes
in terms of the Bartlett and Ghoshal typology (see Figure 3).
The main source of substantive shifts in subsidiary roles because of regional integration is changes in national location advantages vis--vis other nations in the region
(Rugman, 1990). Hence, we assess on the horizontal axis of Figure 3, whether any
strengthening or weakening or a status quo can be observed of location advantages

Innovation

I1

I2

I3

Production

P1

P2

P3

S1

S2

S3

A1

A2

A3

Value chain
activity

Sales

Administrative
support

Weakening

Status quo

Changes in national subsidiaries location


advantages after regional integration

Figure 3. Patterns of subsidiary dynamics in an era of regional integration


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benefiting national subsidiaries inside the region relative to these subsidiaries earlier
position.
The vertical axis suggests that such a change in position must again be assessed for
each activity type performed, whereby we retain our earlier distinction among innovation,
production, sales, and administrative activities. Substantive weakening implies the probable
relocation of value chain activities performed by the subsidiary. Substantive strengthening implies new activities are added. In many cases, the status quo may be observed. This
approach is consistent with McCann and Mudambis (2004, p. 502) observation that
much of the geographical relocation of activities within MNEs consists of the reallocation of activities and resources within an existing spatial configuration of establishments,
with little or no discernable external changes . . .. However, this entails much more than
simply broadening or narrowing manufacturing lines within production, which has been
the conventional focus of economics driven studies on regional integration impacts
(see the previous section).
For example, in order to serve foreign markets, MNEs may historically have engaged
in market seeking FDI in each individual host country in a region so as to overcome
tariffs, with each national subsidiary typically designed as a miniature replica of home
country operations. As a result, internal company resources transferred to subsidiaries in
different countries were often very similar in nature, though sometimes leading to
different subsidiary competences as a result of subsidiary entrepreneurial initiatives and
idiosyncratic resource bundling influenced by local environmental forces, especially
at the sales end of the value chain. Once regional integration occurs, the dispersion of
identical, company resources in innovation, production, and key administrative activities across
different countries in the same region becomes unnecessary, and actually reduces the
potential to earn scale and scope economies. As noted above, a full fledged activity
relocation programme could then be implemented, with some national subsidiaries being
closed down altogether especially if the sales competences they developed have limited
value and others given extended regional charters, as a recognition for the national
location advantages they have accessed and the related resource bundling successes, and
their observed superior competences within the region for specific value chain activities.
However, a more common alternative is often the partial reallocation of subsidiary
activities within the region, with most of these subsidiaries retaining their aggregate role
in the Bartlett and Ghoshal portfolio matrix, with little external visibility of these
changes.
Figure 3 allows visualizing, for illustrative purposes, the six discrete patterns in
subsidiary role dynamics we identified.
Pattern 1: Subsidiary shutdown or full activity swap. (Cell 1 in Figure 3 for all value chain
activities; in the case of a swap, combination with pattern 3.) This scenario occurs if
two conditions are fulfilled. First, a substantial reduction in institutional distance among
national markets in the region leads some countries to experience weakened national
location advantages relative to other countries in the region. Second, the focal subsidiarys
competences across value chain activities for a particular set of products and services
also become perceived as weaker as compared to rival subsidiaries inside the region. The
firms head office may then contemplate the new scenario of a full reallocation of all
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activities towards other national subsidiaries that represent a more attractive bundling of
at least the same perceived competences in one value chain activity with more desirable
location advantages in the region. In other words, competing affiliates in the region make
the focal subsidiary redundant. The possibility of this pattern occurring even if remote
usually causes discomfort in small open economies such as Canada when evaluating
the possible effects of joining or extending a regional economic integration scheme.
Extensive evidence shows that NAFTA did not cause a massive exodus of plants from
Canada (Blank and Haar, 1998; Krajewski, 1992), precisely because of Canadas location
advantages for co-located production and sales activities, and the bundling thereof with
the subsidiaries valuable competences at the sales side, inter alia in branding and distribution. However, such cases have occasionally occurred. For example, two US head office
respondents in the Blank and Haar (1998) study mentioned that they had closed
their Canadian operations after NAFTA.
Nevertheless, the rationale for the shutdown of such plants may go well beyond simple
rationalization considerations or internal competition (see Benito and Welch, 1997). The
related reasons may range from poor performance . . . to adverse governmental action
and inability to fulfill the expected benefits of diversification moves, acquisitions, and
cooperative ventures (Benito and Welch, 1997, p. 21). The key point to be remembered
here, is that companies do not readily entertain withdrawal (Benito and Welch, 1997,
p. 21), and there is little evidence that MNEs shut down their operations in a country
solely based on a free trade and investment agreement. As noted above, a full activity
swap might also occur, meaning the loss of a quasi-entire value chain for specific
products, combined with the replacement thereof by another value chain. Such a swap
allows retaining valuable local resources such as key personnel and organizational
capabilities, which would otherwise be lost, but can now be bundled in the production
sphere with the new location advantages of the country at hand, a situation often
observed in the consulting and engineering business, where human capital rather than
physical capital is critical to success. Such a swap reflects the simultaneous occurrence of
patterns 1 and 3 (see below).
Pattern 2: Status quo. (Cell 2 in Figure 3 for all value chain activities.) Here, regional
integration has only a limited impact on subsidiary roles, because the distance among
national markets in the region remains strong, and critical subsidiary competences are
largely location-bound, typically at the sales end. For example, Cantwell (1987) noted
that British membership of the EC (precursor to the EU) had a weak immediate impact
on MNE production networks in pharmaceuticals in Europe. Various trade barriers,
including government controls over registration of new products and national price
controls continued to exist, thereby de facto dividing the EC into separate national
markets, and preventing cross-border resource bundling. Hood and Young (1987) noted
that limited inter-plant product flows as well as subsidiary perceptions of the weak
opportunities resulting from corporate integration in European manufacturing provided
little evidence of multinational integration. Here, the product scope may be broadened
or narrowed, but no substantive change occurs in the type of value chain activities
performed, with especially production and sales activities remaining co-located in the
various national subsidiaries.
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Pattern 3: Full regional charter. (This is the strengthening of the national subsidiarys location advantages across all value chain activities; Cell 3 in Figure 3 for all value chain
activities.) This may go hand in hand with pattern 1, if subsidiaries performing similar
value added activities in other countries within the region are closed down. One example
is the rationalization of 3M in Europe, involving the centralization in one subsidiary of
the spare parts activities for the whole of Europe, rather than the use of the initial 17
depots (Ackenhusen et al., 1996a, 1996b). Another example within the same firm is the
investment in the London, Ontario plant by 3M Canada for the manufacturing of
micro-encapsulation products (Birkinshaw, 1995, pp. 29560), which used to be done at
several plants. Although the London plant had not developed stronger competences in
innovation, production, and key administrative activities than similar plants in the region, the
intention of this relocation of all activities was to allocate the charter to the subsidiary
with the hope of strengthening the subsidiarys competences and competitive position
in the relevant product domain.
Pattern 4: Partial regional charter. (This reflects the outcome of the strengthening of a
national subsidiarys location advantages in various but not all activities, typically for
innovation, production, and administrative activities, and no change for sales; combination of
Cell 3 for innovation, production, and administrative and Cell 2 for sales in Figure 3.) Here, the
chosen affiliates will benefit from the relocation of activities previously carried out by
other national subsidiaries, but with the sales side remaining largely untouched. For
example, Nestl had established non-dairy creamer operations in Thailand (Taucher
and Toh, 2003). When the Asia/Oceania division pursued growth opportunities in the
ASEAN region, the Thai operation was allocated the full charter with the exception of
sales for non-dairy creamer for the entire ASEAN region. In addition to increasing its
production capacity, the Nestl operation in Thailand had to learn how to produce
non-dairy creamer to consumers with slightly different tastes in other ASEAN countries,
and with national managers remaining in charge of sales.
The rationalization of Honeywell Homes North American operations is another
example. Among the overlapping products made by both the Canadian and US plants,
zone valves were moved to Canada, whereas the other products were moved to the
United States. Thus, each manufacturing site concentrated on specific innovation, production, and related administrative activities given its relative location advantages, which
resulted in improved efficiency at all sites (Birkinshaw, 1995). In other words, here again,
substantial activity swapping occurred but with sales remaining largely untouched. With
this pattern there need not necessarily be many or even any losers, namely if other
subsidiaries also receive a partial regional charter allowing them to specialize in different,
narrow product lines, i.e. if partial swapping occurs.
Pattern 5: Single activity specialization. (This is the weakening of the national subsidiarys
location advantages in most activities, typically innovation, production, and administrative
support, combined with the status quo for a single activity, typically sales; combination of
Cell 1 for innovation, production, and administrative support in Figure 3 with Cell 2 for sales.)
Pattern 5 represents the continued importance of national location advantages of individual host countries for sales to be bundled with location-bound sales competences held
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by the subsidiaries in these locations, even though other value chain activities are
relocated to be concentrated in core locations elsewhere (pattern 5 is therefore the mirror
image of pattern 4). Subsidiaries described by pattern 5 may seek further growth in the
national markets they serve through increased specialization and related resource bundling in the sales activities they are allowed to retain, thereby allowing more national
responsiveness and moving towards Cell 3 for sales in Figure 3. Although such cases have
not been well documented, the clear, sustained commitment to the national UK market
of foreign subsidiaries in the food industry, even after European integration (Pearce and
Papanastassiou, 1997), reflects this pattern.
Pattern 6: Added, single-activity regional charter. (This is the result of the strengthening of
the national subsidiarys location advantages for one value chain activity; combination
of Cell 3 for the relevant activity in Figure 3, with the status quo of Cell 2 for all other
activities.)
For example, in the context of Japanese manufacturing investment in Europe, Lehrer
and Asakawa (1999) observed the adding of large-scale R&D operations to particular
subsidiary activity portfolios in the MNEs internal networks, i.e. a significant departure
from their conventional, ethnocentric approach to centralizing R&D. Here, the extant
co-located production and sales activities were complemented with significant innovation as
an expression of the increased importance attached to the European region.
Pattern 6 is occasionally observed in the realm of sales (though perhaps restricted to a
subset thereof, such as strategic marketing activities), and this can go hand in hand with
swapping. The Swiss-based financial services group Credit Suisse established several
centres of excellence in 1992 to capture the expertise for pricing financial products,
further strengthening related competences at these centres while at the same time
removing these specific sales activities in other subsidiaries. Bleackley and Williamson
(1997) found that the resulting pan-European marketing programmes were directed out
of several locations, with each location being responsible for the sales activities for a
particular product category. As another example, Proctor and Gambles Euro Brand
Teams, introduced in the 1980s, reflected the allocation of the marketing leadership for
specific products in Europe to one national subsidiary (e.g. Germany) that had been
highly performing for those products in terms of bundling its location advantages with
external competences.

CONCLUSION
In this paper, we have addressed two key conceptual problems associated with conventional subsidiary role classifications, focusing on Bartlett and Ghoshals (1986) seminal
work. This particular classification is important because it has been (and still is being)
taught to many thousands of MBA students and senior managers in executive programmes, at leading business schools around the world, as the key actionable building
block of Bartlett and Ghoshals 1989 transnational solution framework, allowing for
variety in national subsidiary role assignments and selectivity in resource allocation to
subsidiaries.
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First, Bartlett and Ghoshals classification assumes that each national subsidiary can be
given an aggregate role, spanning the entire value chain, in terms of how internal and
external resources are bundled. In many cases, this assumption is invalid. In this context,
the Bartlett and Ghoshal typology does not provide a linkage between the major FDItypes, commonly recognized in the mainstream international business strategy literature,
and the resulting national subsidiary roles in specific areas of the value chain, each
associated with specific resource bundling processes. We have augmented Bartlett and
Ghoshals (1986) typology by adding the critical distinction among location advantages
and subsidiary competences for four, distinct value chain activity sets: innovation, production, sales, and administrative functions. This decomposition implies that individual subsidiaries can play very different roles in various value chain activities. If a subsidiary role
classification system is to describe accurately the spectrum of possible managerial role
assignments, and to provide guidance to MNE management, especially in the context of
resource allocation, the above decomposition is critical. For example, Rugman and
Verbeke (2004) have demonstrated that most large MNEs are home-region bound in
terms of sales, meaning that effective bundling of sales-related internal competences and
external resources only occurs in the home region (high revenues, a loyal customer base,
etc.). However, at the same time many of these firms rely heavily on sourcing and
production from other regions in the world. Innovation and administrative activities are also
still largely home-country based or conducted close to the home base, but the proportion
of technological activities undertaken by firms in overseas locations (e.g. Kumar, 2001)
and the number of relocations of MNE head offices to foreign locations (e.g. Benito et al.,
2011, this issue; Birkinshaw et al., 2006) have been rising. This implies that there may be
a more difficult accessing of location advantages and the bundling thereof with internal
competences, as well as a faster decay (when distance increases) of competences related
to sales activities than to any other activity set. For example, Verbeke and Yuan (2008)
demonstrated that Canadian-based subsidiaries with parent companies from outside the
NAFTA area commanded much weaker competences vis--vis insiders (with parent
companies from the United States) in the realm of sales. Such relatively weaker competences were not observed for production. Innovation and administrative functions occupied an
intermediate position, meaning that outsider subsidiaries had weaker competences than
insiders but these relative weaknesses were less pronounced than for sales.
Here, we should note one caveat. Discussions of the specific role of national subsidiary units for particular value chain activity sets may not be appropriate in all cases.
An MNE may operate several businesses in one country, administered according to
different organizing principles. An example is Nestl, which has various businesses
managed under different models, even within a single country: locally managed, regionally managed, and globally managed businesses. As a result, different businesses within
a single national subsidiary may have different roles, even in a single value chain activity.
However, it should then still be possible to position usefully each of those businesses in
the classification scheme we have proposed.
Second, after augmenting the Bartlett and Ghoshal (1986) subsidiary typology, as
outlined above, we analysed changes in subsidiary roles triggered by regional integration
programmes, as one expression of the tendency towards semi-globalization, and the
reduction of institutional distance between countries. It is sometimes argued that in
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regional economic systems such as the EU, the national subsidiary manager is dead, but
this is a mistaken perspective because all MNE activities are still performed, and many
decisions made, within the confines of national borders. What does change is obviously
what national subsidiaries actually do as compared to the situation before regional
integration. At the subsidiary level, we distinguished in conceptual terms among six
patterns of subsidiary role changes. Here, the distinction among value chain activity sets
was of critical importance in three of the six patterns identified. There appears to be
much more to actual subsidiary role changes than can reasonably be captured by formal
changes in position in Bartlett and Ghoshals (1986) typology. The question then arises
whether the analysis of subsidiary roles, using a resource bundling perspective per value
chain activity, has any implications for broader typologies at the overall, MNE level.
There actually is one key implication, which has been explored elsewhere (see Verbeke,
2009): if MNE value chains are indeed fine-sliced across borders to the extent described
in the present paper, this implies that most MNEs simply cannot fit Bartlett and
Ghoshals archetypes (global, international, and multinational), but rather are primarily international coordinators, whose main competence is to organize effectively the
idiosyncratic sets of value added activities distributed among national subsidiaries.
NOTE
[1] We obviously simplify the analysis by distinguishing only among innovation, production, sales, and administrative support activities, rather than studying the entire spectrum of possible location advantages and
value chain components. Further extensions could disaggregate further the location advantage dimension and the subsidiary competences dimension (e.g. Enright, 2005; Mudambi, 2008). We are grateful
to the JMS Special Issue editors and the reviewers for pointing out this possibility. From the perspective
of parsimony, however, our view is that the distinction we made among the above four value chain
activity sets is sufficient to capture the essence of MNE functioning, and to add important insight to the
mainstream view of subsidiary role dynamics, insight that is presently not provided by the Bartlett and
Ghoshal (1986) typology. The point is that subsidiary activities can usually be decomposed into the four
above activity sets, each associated with distinct location advantages and subsidiary competences.
In each case, the process of bundling internally held competences with externally accessible resources
is expected to be substantively different.

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