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Does the Interactive Use of Headquarter Performance

Measurement Systems in Foreign Subsidiaries Endanger the


Potential to Profit from Local Relationships?

Utz Schaffer,
WHU-Otto Beisheim School of Management
Matthias D. Mahlendorf, WHU-Otto Beisheim School of Management
Jochen Rehring, Otto Beisheim School of Management
Managing distant subsidiaries is a challenge for headquarters of multinational companies. Performance
measurement systems (PMS) can assist in this task. Taking a business network perspective, we study the
moderating effect of the interactive use of PMS implemented by headquarters at subsidiaries on the relationship
between subsidiary embeddedness and subsidiary performance. We test our hypotheses using survey data from
110 subsidiary managers in China. The results suggest that the multinational network surrounding the
subsidiary affects overall headquarter control possibilities. Specifically, while interactive use may be helpful in
situations of low local embeddedness of the subsidiary, it seems to have negative side effects on the subsidiaries
ability to benefit from high local embeddedness.

he role and use of performance measurement systems (PMS)1 in multinational companies has received a great deal of scholarly attention recently.
Studies have focused on the contribution of PMS to
dialogue and learning in the relationship between headquarters and subsidiaries (Chow et al. 2000; Dossi and
Patelli 2008, 2010; Moilanen 2007; ODonnell 2000;
Prahalad and Doz 1987), multinational integration
(Busco et al. 2008; Ghoshal and Bartlett 1988;
Mahlendorf et al. 2012), and multinational planning and
control (Dent 1996). The results of these studies suggest
that PMS that are typically designed by headquarters
and implemented at subsidiaries (parent PMS) are suitable control mechanisms in multinational companies
(MNCs), since they allow headquarters to monitor subsidiary performance and influence decisions, as well as to
assist in managerial decision making (Busco et al. 2008;
Dossi and Patelli 2008). One aspect which is fundamental in explaining managerial uses of such PMS is the
multinational network surrounding MNC subsidiaries;
it has been suggested that this network determines the
use of parent control systems like PMS: [T]he use of
PMS appears to be mainly explained by the relational
attributes of the multinational network as suggested by
International Business Studies (Dossi and Patelli 2008:
139; emphasis added). However, empirical evidence on
the relationship between these relational characteristics
and the use of PMS remains scarce.
Therefore, the objective of this paper is to analyse the
interaction between the multinational network and a
specific type of use of PMS: the interactive use. In par-

Australian Accounting Review No. 68 Vol. 24 Issue 1 2014

ticular, we investigate the moderating effect of the interactive use of PMS on the embeddednessperformance
relationship. We select subsidiary embeddedness as a
proxy for the multinational network due to its prominence in the international business literature in the context of describing subsidiary relationships with external counterparts. We limit our approach to external
relations as influence on subsidiary conduct in foreign
markets arises primarily from external actors (Andersson and Forsgren 1996). We chose the interactive use
due to its prominence in management accounting research, and because it has been causally linked to strategic change and organisational innovation, which can
again be related to subsidiary embeddedness (Abernethy
and Brownell 1999; Andersson et al. 2001, 2002; Bisbe
et al. 2007; Henri 2006b; Naranjo-Gil and Hartmann
2007; Widener 2007). Overall, this paper answers the
following research question: how does a central characteristic of the multinational network (subsidiary embeddedness) interact with an important use of parent PMS
(interactive use) on subsidiary performance?
Our approach builds on a recent debate in international business research which has characterised the role
of headquarters in the contemporary MNC on the basis of two theoretical viewpoints: bounded rationality
Correspondence: Matthias D. Mahlendorf, Institute of Management Accounting and Control, WHU Otto Beisheim School
of Management, Burgplatz 2, 56179 Vallendar, Germany. Tel:
+49 (0) 261 9509 482; fax: +49 (0) 261 9509 709; email:
matthias.mahlendorf@whu.edu
doi: 10.1111/auar.12019

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and sheer ignorance (Ciabuschi et al. 2012; Forsgren


and Holm 2010). We focus on the latter perspective to
contribute to the recent discussion on headquarters suffering from uncertainty regarding the business activities of the subsidiaries and the potentially negative outcomes of headquarter involvement at the subsidiary level.
Within this line of thought we build on business network
theory, the assumptions of which are aligned with the
sheer ignorance view (Forsgren and Holm 2010).2 Business network theory argues that relationships with business actors both inside and especially outside the firm
are the most important resource for the multinational
firm (Forsgren 2008). It also states that the subsidiary
will be most affected by the characteristics of its local
business environment manifested by the relationships
it shares with local business counterparts such as suppliers, customers, or competitors which international
business research refers to as subsidiary embeddedness
(Andersson and Forsgren 1996, 2000; Andersson et al.
2001; Forsgren et al. 2005). As headquarter control possibilities decrease when subsidiaries are extensively embedded in such relations, any study of headquarters
control, to which a subsidiary is an object, has to consider this web of relationships (Andersson and Forsgren
1996: 488).
Dossi and Patelli (2008) as well as Andersson and
Forsgren (1996) are informed by business network theory and argue that the multinational network is of high
relevance when investigating managerial uses of PMS.
However, despite its relevance in the context of management control and its apparent explanatory power in the
context of managerial uses of PMS, no study to date has
analysed the interaction between the interactive use of
PMS and subsidiary embeddedness, despite several calls
to do so (Andersson et al. 2005; Dossi and Patelli 2008,
2010). This gap in the literature is noteworthy, because
headquarters compete with local counterparts (e.g., suppliers, customers, or competitors) over the influence on
their subsidiary and it has even been argued that headquarters today often overestimate their own knowledge
of the worldwide activities of the various sub-units and
that headquarters involvement in subsidiary activities
may be ineffective (Ciabuschi et al. 2012; Forsgren and
Holm 2010). This poses the questions whether PMS
which have been implemented at foreign subsidiaries
are still used by local subsidiary management at all when
embeddedness is present, and more specifically, how the
interactive use interacts with subsidiary embeddedness
on organisational outcomes such as performance.
In our model we build on previous findings from
management accounting and international business
studies and predict that an interactive use of parent PMS
negatively interacts with subsidiary embeddedness on
subsidiary performance (Andersson and Forsgren 1996;
Andersson et al. 2001, 2002; Dossi and Patelli 2008; Henri
2006a; Widener 2007). We also hypothesise a direct
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and positive effect between subsidiary embeddedness


and subsidiary performance. We test our model on data
collected from 110 subsidiary managers in the Shanghai
region of China. The hypotheses are supported.
Our contributions are twofold. First, we show how important local embeddedness is for Chinese subsidiaries of
multinational firms in order to perform well. The strong
positive relationship between subsidiary embeddedness
and subsidiary performance complements existing studies based on business network theory (Andersson and
Forsgren 1996; Andersson et al. 2002) by providing empirical evidence from China, one of the worlds most
successful emerging economies.
Second, we identify one particular challenge to
the positive embeddednessperformance relationship,
namely the effects of an interactive use of PMS that
were designed by headquarters and implemented at subsidiaries. In doing so, we contribute to the recent theoretical debate regarding the bounded rationality versus sheer ignorance perspectives (Ciabuschi et al. 2012;
Forsgren and Holm 2010) by empirically testing theoretical predictions that are in line with the sheer ignorance
view of headquarters role in the contemporary MNC.
As an interactive use of headquarter-designed PMS negatively moderates the relationship between embeddedness and performance, our results add to the literature
by considering a prominent control mechanism in the
relationship between headquarters and subsidiaries. As
the implementation of PMS at foreign subsidiaries presupposes headquarters involvement, these results add a
new perspective to the recent discussion concerning the
effects of headquarters knowledge regarding the activities of foreign subsidiaries by distinguishing between the
design of PMS at the headquarter level and its use at the
subsidiary level (Ciabuschi et al. 2012; Dossi and Patelli
2008; Forsgren and Holm 2010).
The subsequent sections are structured as follows.
We begin by presenting theoretical arguments regarding headquarters role within the MNC and subsidiary
embeddedness, the interactive use of PMS, and the interaction between the two and the effect of this interaction on subsidiary performance. This is followed by
a description of research methods. Afterwards, the results are presented and discussed. The paper concludes
by considering limitations, practical implications and
suggestions for further research.
Theoretical Development
The sheer ignorance perspective and subsidiary
embeddedness in China
The scholarly view on the role of MNC headquarters
has evolved considerably in the past few decades. Until recently, headquarters top management was centrally
and hierarchically managing worldwide activities and

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little decision autonomy was granted to subsidiaries


(Harzing 1999). Nowadays, MNCs comprise a complex set of interdependent, globally dispersed entities,
situated in multifaceted networks (Dunning and Lundan 2008; Harzing 1999; OConnor et al. 2004). These
changes have created a controversy in academia, which
has led to the proposition of two opposing perspectives
on the role of headquarters within the MNC (for an
extensive discussion, see Forsgren and Holm 2010).
Under the conditions of bounded rationality, headquarters are viewed as largely rational actors who have
sufficient knowledge about worldwide operations. The
perspective also assumes that headquarters are able to
design and implement control systems abroad and their
involvement in subsidiary activities generally leads to
positive outcomes (Ciabuschi et al. 2012; Forsgren and
Holm 2010). In contrast, the sheer ignorance perspective believes that headquarters lack the necessary
knowledge to centrally manage worldwide operations,
and that headquarters suffer from genuine uncertainty
(Andersson et al. 2007; Ciabuschi et al. 2012; Forsgren
and Holm 2010). The conditions of sheer ignorance
have been empirically tested in a study of the effects
of headquarters involvement in subsidiary innovation
processes (Ciabuschi et al. 2012). The results support the
predictions of the sheer ignorance viewpoint as headquarters involvement was found to have a negative effect both on innovation development and on innovation
transfer at the subsidiary level.
We use business network theory, and thereby the
sheer ignorance perspective, as a theoretical basis for
our paper.3 Business network theory views the multinational firm from a network-based perspective in which
relationships both inside and outside the MNC are
at the forefront (Forsgren 2008). The concept of subsidiary embeddedness defines the environment of the
subsidiary (Andersson and Forsgren 1996). More precisely, it describes the extent to which the subsidiary
has engaged in such relationships with local counterparts (Forsgren 2008). A subsidiary acquires important
resources through relationships with local counterparts
in its host location. Several studies have analysed the relationship between subsidiary embeddedness and headquarter control possibilities (Andersson et al. 2001, 2005;
Andersson and Forsgren 1996). The theory suggests
that the intensity of subsidiary embeddedness influences
headquarter control possibilities over subsidiaries decisions and activities. Viewing MNCs as webs of relationships has generated great interest in studies of multinational firms because sources of competitive advantage
no longer reside exclusively within the boundaries of the
firm (Forsgren et al. 2005: 5; see also Santangelo 2012).
When applying business network theory to subsidiaries in an emerging economy such as China, the
specific setting in the country should be acknowledged. Chinas role in the world economy and its rel
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evance for MNCs has significantly changed in recent


decades (Bjorkman et al. 2008; Bruche 2009; Hout and
Ghemawat 2010; Lieberthal and Lieberthal 2003; NYT
2010; Park and Vanhonacker 2007; Zhang et al. 2009).
Four reasons warrant an investigation of the role of PMS
in MNC subsidiaries in China.
First, the distinctiveness of the Chinese market in
terms of the necessity to adapt products and services
to the local environment is vital for MNCs. It is essential for multinationals in China to respect the Chinese
cultural and legal customs and rules (Paine 2010; Park
and Vanhonacker 2007). Likewise, it is a necessity for
firm survival to offer products and services that fit the
requirements of the local market environment (Luo and
Park 2001). The trend for increased local adaptation has
been amplified by a growing presence of Chinese-owned
companies whose products are increasingly demanded
by Chinese consumers, in contrast to only a few years
ago when consumers in China showed an almost unconditional admiration for products offered by MNCs (Park
and Vanhonacker 2007).4
Second, the distance between MNC headquarters and
the subsidiary in China makes China a suitable setting for
this study. Conceptually, it has been argued that future
studies utilising the multinational company as a research
setting explore boundary conditions (Roth and Kostova
2003). The analysis of Chinese subsidiaries of (predominantly Western) multinationals can be viewed as such
a boundary condition given the distinctive institutional
and cultural differences between Western environments
and the local business environment of the subsidiary
in China (Fleming et al. 2009). Overall, a better understanding of the interaction between the embeddedness
of the subsidiary in China and the use of headquarterdesigned control systems (e.g., parent PMS) seems to be
meaningful for both practitioners and academics.
Third, economic reforms and continuous liberalisation of the Chinese market toward foreign investment
has now made China not only the second-largest economy in the world but also the largest recipient of foreign
direct investment (FDI) among the developing nations
(UNCTAD 2010). Thus, the Chinese market is of huge
importance for global firms. As these firms face highly
competitive and saturated markets in their home countries, China offers considerable opportunities both as a
location for production facilities as well as a market for
products (Paine 2010). This has increased the relative
importance of the Chinese subsidiary in many multinationals, which has in turn sparked interest in the control
systems used to manage the subsidiary in China and the
use of control systems such as parent PMS by managers
within the Chinese subsidiary (Chow et al. 2007; Firth
1996; Li and Tang 2009; OConnor et al. 2004; ODonnell
2000).
Fourth, it is important to note the Chinese concept of
guanxi, a cultural phenomenon that relates to a web of
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interpersonal networks fostering personal and organisational relations. Earlier studies have recognised its relevance for business practice and its potential impact on
business performance (e.g., Park and Luo 2001; Quer
et al. 2010). Due to its complexity and informality, guanxi
cannot be readily observed, but its underlying influence
on subsidiary conduct needs to be acknowledged because of its effect on personal relationships and the performance of foreign-invested firms in China (Luo 1997;
Luo and Chen 1997; Yang et al. 2011).
Theoretical reasoning for a positive effect of subsidiary
embeddedness on subsidiary performance as described
above is provided by Andersson, Forsgren and Holm
(Andersson and Forsgren 1996; Andersson et al. 2002).
Their studies are rooted in resource dependence and
network theories, and argue that relationships with local actors help subsidiaries obtain valuable knowledge to
enhance processes and products offered, which in turn
leads to better performance. Better performance is realised through cost-savings for instance, as trustful relations with local business counterparts may lead to lower
levels of inventory. In addition, close relationships may
lead to a reduction in selling or marketing costs over time
as knowledge exchange between business actors and innovation development increases (Andersson et al. 2002;
Hallin et al. 2011). In addition, several studies investigate
the relationship between managerial networking and organisational outcomes such as performance. For example, Li (2005) finds support for a positive association
between managerial networking and firm performance
among foreign-invested firms in China, and Wang et al.
(2011) conclude that managerial ties are positively related to the performance of firms operating in China. In
light of these arguments, we state our first hypothesis:
Hypothesis 1: Subsidiary embeddedness is positively related
to subsidiary performance.
Interactive use of PMS
Simons levers of control framework identifies four levers
that support managers in balancing (value) creation and
control (managing and measuring value) (Simons 1995,
2000). Belief systems emphasise the mission and vision
statements which are supposed to inspire employees to
excel according to the organisations key values and goals.
Boundary systems define the organisations acceptable
domain of activity and ensure the maintenance of an acceptable level of risk exposure. Diagnostic systems focus
on the achievement of key success factors of the organisation and compare actual with planned performance. Interactive control systems support opportunity-seeking,
creativity, dialogue and learning, and demand constant
and intense managerial attention.
We focus on interactive control and investigate PMS
as they are considered one of the main control mech24

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anisms in the management control literature. Examples of PMS in practice range from well-known strategic
management concepts such as the Tableau de Board or
the Balanced Scorecard to more company-specific accounting systems that incorporate both financial and
non-financial performance measures. Importantly, recent studies have identified PMS as major control mechanisms in the relationship between headquarters and
subsidiaries (Busco et al. 2008; Dossi and Patelli 2008,
2010). More precisely, we focus on the interactive use of
PMS as the literature provides extensive empirical evidence and rich conceptual descriptions, which provide
a sound basis for the theoretical arguments (Bisbe et al.
2007; Simons 1995, 2000).5
According to Bisbe et al. (2007), interactive use has
some distinct features. One of its hallmarks is the active
involvement of top managers and operating managers,
who regularly and frequently engage in intense discussions and face-to-face meetings. These debates facilitated
by an interactive use of PMS challenge current action
plans and assumptions. Empirical evidence from management accounting research suggests that information
originating from PMS assists managerial making, facilitates discussions, and sends signals throughout an organisation (Abernethy and Brownell 1999; Bisbe and Otley
2004; Henri 2006a). Through these mechanisms, organisations learn about strategic uncertainties and foster an
inspirational and participative atmosphere.
In their study of Australian hospitals, Abernethy and
Brownell (1999) posit that PMS should be used interactively to enhance the ability of the organisation to
engage in or cope with strategic change. This line of
reasoning is also used by Naranjo-Gil and Hartmann
(2007), who find that heterogeneity of the top management team is positively related to an interactive use of
management accounting systems. According to Henri
(2006a), an interactive use of PMS is positively associated with capabilities such as market orientation, entrepreneurship, innovativeness and organisational learning. Likewise, Widener (2007) argues that managers
using PMS in an interactive manner profit from an
increased awareness of uncertainty, which leads to better information processing abilities and fewer information deficits. According to Bisbe and Otley (2004), an
interactive use of PMS favours innovation, but only in
low-innovating firms. In high-innovating firms, the interactive use reduces the risks associated with too much
innovation.
Taken as a whole, empirical evidence suggests that an
interactive use of PMS assists managers in making decisions in complex and dynamic scenarios by encouraging
dialogue, knowledge sharing and learning (Abernethy
and Brownell 1999; Henri 2006a; Simons 1995). It is
suggested that when PMS are used interactively, as opposed to diagnostically, managers can respond better to
the demands placed upon their organisations by certain

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events outside the organisation (Abernethy and Brownell


1999; Naranjo-Gil and Hartmann 2007).
However, the ability of interactive use has also been
shown to depend on certain characteristics both within
and outside the organisation in which it occurs. In
multinational companies, where headquarters implement PMS at subsidiaries, the ability of an interactive
use of parent PMS to assist subsidiaries in achieving
higher performance may be limited, depending on the
characteristics of that multinational network.
The moderating effect of the interactive use of parent
PMS on the relationship between subsidiary
embeddedness and subsidiary performance
At this point, we have described both independent variables (subsidiary embeddedness and interactive use) and
have elaborated on the hypothesis concerning the direct
effect between embeddedness and performance. What
follows is the development of the interaction hypothesis
between the two and the combined effect on subsidiary
performance (i.e., the moderating effect of interactive
use on the relationship between subsidiary embeddedness and subsidiary performance).6
Since business network theory proposes that headquarters control becomes more difficult when subsidiary
embeddedness increases, subsidiary embeddedness can
be causally linked to the use of parent PMS (Andersson
and Forsgren 1996; Dossi and Patelli 2008). Decision
makers in subsidiaries that are extensively embedded in
relationships with local counterparts face complex decision scenarios and are forced to manage and to make
decisions in unpredictable and complex environments
(Andersson et al. 2002). This directly relates to the information obtained from PMS, as they are viewed as
central mechanisms helping managers to implement the
strategy of the firm (Merchant and Van der Stede 2007;
Simons 2000).
According to business network theory, the subsidiary
engages in often long-term business relationships with local counterparts, thereby acquiring firsthand knowledge and strategic resources (Forsgren 2008;
Naranjo-Gil and Hartmann 2007). Yet, in large and complex MNCs, such knowledge stays primarily at the national level of the subsidiary (in our case in China). What
follows is that the headquarters ability to influence subsidiaries actions rests on its right to give formal orders
rather than on its superior knowledge about the subsidiaries conduct in the local market (Forsgren 2008).
This argument has been developed by Ciabuschi et al.
(2012), who propose that headquarters in the contemporary MNC frequently do not possess sufficient knowledge about subsidiary operations and in effect suffer
from sheer ignorance.
When headquarters lack specific knowledge about
subsidiary activities, headquarters involvement in sub
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sidiary activities may have detrimental outcomes such as


less innovation at the subsidiary level (Ciabuschi et al.
2012). This is the premise of the sheer ignorance perspective and a major assumption of business network
theory (Forsgren 2008). Concerning the stock of knowledge held by subsidiaries compared to that of headquarters, subsidiary embeddedness encourages the creation
of distance between both entities. The concept of distance in MNCs has been investigated by Helliwell (2002:
21), who argues that being further from home usually
means being less well connected to local networks, less
able to understand local norms, and less able to be sure
how much to trust what people may say (see also Bouquet and Birkinshaw 2008).
Transferring these arguments to the role of PMS implemented by headquarters in foreign subsidiaries, it can
be expected that parent PMS have little to offer with respect to idiosyncratic local conditions, because locally
relevant aspects will not be appropriately considered
when ignorant headquarters design and subsequently
implement PMS abroad. Even if unique aspects are captured by the measures of the parent PMS, the results of
Lipe and Salterio (2000) suggest that unique aspects tend
to be ignored. Under these conditions, higher interactive
use has at least two consequences for the subsidiaries
ability to benefit from local embeddedness.7 First, interactive use facilitates discussions among managers and
employees over various hierarchical levels. These debates
however are time consuming and require management
attention. Thus, there will be less time and attention
available for management activities aimed at reaping the
benefits from local subsidiary embeddedness. Second,
the interactive use of parent PMS will challenge various business ideas and strategies. However, the sheer
ignorance perspective suggests that ideas and strategies
that make sense in the unique local setting, but do not
directly translate into the performance measures of the
headquarter PMS, will be criticised while more generic
strategies will be fostered. In consequence, the interactive
use based on headquarters PMS constrains the potential
of subsidiaries to engage with the local market in a way
that caters for the needs of local business counterparts.
Taken together, the relation between subsidiary embeddedness and performance is expected to be less positive when parent PMS are used interactively by subsidiary
managers. Thus, we state our second hypothesis:
Hypothesis 2: The interactive use of parent PMS by subsidiary managers negatively moderates the positive
relationship between subsidiary embeddedness and
subsidiary performance.
Note that the focus of the theorised relationship in
H2 solely focuses on the effects of the interactive use at
the subsidiary level. We exclude the potential benefits
headquarters may have from an interactive use of PMS
with their subsidiaries. For example, the interactive use
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at the subsidiary level might improve information flows


between headquarters and subsidiaries by contributing
to the exchange of information or it might help headquarters to distribute resources over its various subsidiaries. However, we did not measure any of these effects, which is why we exclude them from our hypotheses
development.
Method
Data collection and unit of analysis
Data for this study were collected in Chinese subsidiaries
of MNCs in 2009 as part of a larger research project
(Mahlendorf et al. 2012). All subsidiaries were located in
the Shanghai region. As it has proven difficult to collect
reliable survey data in China, we followed the approach
of similar studies and employed an experienced independent market research enterprise for data collection,
which interviewed respondents onsite (Li 2005; Luo and
Park 2001; Quer et al. 2007; Zhang et al. 2006). The contractor contacted 846 firms from an internal database
of 1200 foreign subsidiaries operating in the Shanghai
region, the industrial, financial and commercial center
of China and one of the largest recipients of FDI in 2008
(DOC 2009).
To be included in the final sample, subsidiaries needed
to meet the following requirement. A PMS designed by
headquarters needed to have been implemented at the
subsidiary (this was defined as parent PMS). In the process of the study, the existence of a parent PMS was
checked thoroughly. On the one hand, the research company used for data collection explained the term parent
PMS and asked whether it existed in the subsidiary when
soliciting potential participants. Only in cases where it
did was the subsidiary eligible to be included in the final sample. On the other hand, after having defined the
term parent PMS in the questionnaire, a question was
included asking respondents whether the parent company had implemented a PMS (option: Yes) or whether
no formal reporting of performance measures existed
(option: No). As expected, all respondents answered
Yes, which confirms the validity of the pre-established
sampling criterion.
In the development stage, the questionnaire that
was distributed to respondents was regularly discussed
with several academics, including a bilingual (Chinese/
English) Chinese accounting professor and a bilingual
Chinese PhD student and several practitioners. As the
constructs of interest were sourced from academic papers written in the English language, and data were collected from native Chinese, a translation of the items
into the Chinese language (Mandarin) was necessary.
We organised the translation according to the backtranslation method (Brislin 1970). Thus, two bilingual
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MBA students were employed; one translated the original English questionnaire into Chinese, and the other
translated it back into English. Marginal revisions in layout and wording were implemented as a consequence
of this procedure. After the translation, we conducted a
second round of pre-tests with eight senior subsidiary
managers in China, six of whom were bilingual, who
were contacted through an alumni database. Again, minor revisions were made before the questionnaire was
used in the field.
Overall, 122 eligible respondents participated in the
study (14% response rate). Twelve questionnaires were
not acceptable for further analysis due to missing data
concerning the variables of interest to this study. Thus,
110 usable questionnaires were retained. We followed
Dillmans (2007) recommendations regarding survey design and administration as closely as possible. Thus,
we ensured an appropriate length of the questionnaire
and sufficient personalisation, and provided respondents
with an incentive (an executive summary of the results).
The cover page of the questionnaire reassured participants that the project was completely anonymous and
non-commercial, that respondents should trust their
spontaneous intuition when answering and use the
whole width of the scale where appropriate, that honest
answers are important, and that there are no right or
wrong answers.
We selected the MNC subsidiary in China as the unit
of analysis. Following international business studies that
have argued that multinational firms are frequently divided into independent business units, we asked respondents to focus their answers on the independent
unit (e.g., strategic business unit) they work for, in case
the subsidiary was divisionalised. This approach is wellestablished in the literature on management control systems in multinational organisations (Andersson et al.
2002; Busco et al. 2008; Prahalad and Doz 1987; Venaik
et al. 2005). Subsidiary managers or employees in similar
positions with responsibilities for subsidiary operations
were chosen as key informants.

Construct measurement and control variables


Main constructs: to capture interactive use of parent
PMS, we used a slightly adapted version of an instrument
proposed by Henri (2006b), which asks respondents to
rate the extent to which the management team of the local Chinese subsidiary currently uses the parent PMS
interactively. The seven-item Likert-type instrument
(1 = not at all; 7 = to a great extent) builds on previous literature that was concerned with interactive control
systems (Atkinson et al. 1997; Burchell et al. 1980; Simon
et al. 1954; Simons 1995; Vandenbosch 1999). A sample
item is: The indicators of the parent PMS are used to
enable continual challenge and debate underlying data,

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assumptions and action plans. The scale reports satisfactory reliability values with a Cronbachs of 0.924 and a
composite reliability of 0.939.
To measure subsidiary embeddedness,8 we employed
a six-item, seven-point Likert scale (1 = not at all; 7 = to
a high extent) originally developed by Andersson and
Forsgren (1996), which determines the extent to which
existing product/service offerings have been modified
as a consequence of relationships with Chinese counterparts (customers, suppliers, competitors, others). A
sample item is: Relationships with local Chinese customers have caused changes in product/service technology. Scale reliability is satisfactory with a Cronbachs
of 0.916 and a composite reliability of 0.936.
As no appropriate financial data were available to us,
we asked respondents to evaluate the performance of
their strategic business unit (SBU) relative to the performance of the respective major competitors by three
items along the dimensions Return on Investment (ROI),
Profit and Cashflow from Operations over the last three
years. A sample item is: Please rate the performance of
your SBU compared to competitors along the following dimension: Return on Investment (ROI). The same
indicators and anchors were used to measure financial
performance in a recent study (Henri and Journeault
2009). ROI was chosen first as a measure of performance because it is a very common measure for the
success of a business (Ansoff 1965; Simons 1987). Second, a measurement of ROI can be used to compare
organisations across industries as it is a common goal
of most for-profit organisations to maximise returns on
capital employed (Kihn 2007). Similar to the findings of
other studies (Dess and Robinson 1984; Kihn 2007), the
three measures for financial performance are highly correlated, confirming a high degree of overlap among those
measures (Dess and Robinson 1984; Kihn 2007).9 Selfreported estimations of performance have potential for
bias. Nevertheless, studies point to a high degree of commonality between objective and subjective measurement
(Venaik et al. 2005; Venkatraman and Ramanujam 1986).
Moreover, using subjective performance criteria enables
the establishment of more time-consistent causal relationships among the constructs under study compared
to an (objective) assessment of performance at a certain date, for example, year-end. In addition, we assume
that respondents at the managerial level, from whom we
collected data, are able to evaluate performance levels
realistically. The Cronbach and composite reliability
values of this scale are also satisfactory with 0.928 and
0.954, respectively.
Control variables: international business research has
made a convincing case for the inclusion of a heterogeneous set of controls when researching global organisations (Bjorkman et al. 2004; Venaik et al. 2005; Zhang
et al. 2009). This approach reduces the risk of finding
spurious relationships due to the omission of important

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Headquarter Performance Measurement Systems in Foreign Subsidiaries

control variables. Therefore, we calculate our model controlling for a wide range of subsidiary-specific control
variables. As outlined earlier, the relatively large distance
(both geographically and culturally) between the subsidiary in China and the foreign headquarters makes
China a suitable setting for this study as it constitutes a
boundary condition (Roth and Kostova 2003).
In empirical terms, we account for the potential effects
of such distance by introducing two control variables.
First, we calculate the geographic distance between the
headquarters location and the subsidiary in China. Second, we control for the cultural distance between headquarters and subsidiaries. The values for the geographic
distance variable were created by calculating the natural
logarithm of airline distance between Shanghai (which
was used as a proxy for the location of the subsidiaries, all
of which are located in the Shanghai region) and the location of the headquarters (Hansen and Lvas 2004). In
cases where respondents did not provide the exact location of the headquarters, the capital or the geographic
centre in the case of very large countries (e.g., United
States) of the country of origin was used. We made
sure that the choice of either option to derive headquarters location did not affect the results of the statistical
analysis. All distance calculations were made with the
calculator available at http://www.mapcrow.info.
In addition, we control for the cultural distance between headquarters and subsidiaries. Chinas cultural
values are significantly different from those of large Western economies (Chow et al. 1999a, 1999b). Thus, we
control for the cultural distance between headquarters
and the subsidiary in China by employing the procedure
of Kogut and Singh (1988). We measured the cultural
distance between the subsidiary in China and the nationality of its headquarters by an index based on the four
dimensions suggested by Hofstede (1980). This method
has been used extensively in various research fields and
its validity in conceptualising cultural distance has been
acknowledged (see Slangen and Hennart 2008). We are
aware of the limitations and criticism that have been
expressed by some researchers (e.g., Baskerville 2003;
Harrison and McKinnon 2007). Nevertheless, Hofstedes
framework is still extensively used in both management
accounting as well as international business studies of
issues in international management (Chow et al. 1999b;
Drogendijk and Slangen 2006; Hansen and Lvas 2004;
van der Stede 2003; Williams and van Triest 2009).
In previous studies, national culture has been identified as a factor influencing the design, use and
employee perception of organisational practices such
as PMS (Chow et al. 1999a, 1999b; Fleming et al.
2009; Li and Tang 2009). In this study, headquarterdesigned PMS (parent PMS) are investigated and it
cannot be ruled out that parent national culture influences the design and use of parent PMS. Therefore,
we calculate a parent-based national culture index to
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Headquarter Performance Measurement Systems in Foreign Subsidiaries

control for the potential cultural influence on the headquarters level. Following Dossi and Patelli (2008: 137),
we calculate a component over the four dimensions of
Hofstedes cultural dimensions (i.e., individualism, masculinity, power distance and uncertainty avoidance). The
values of this component are higher when a headquarter
nationalitys culture is characterised by lower individualism, higher power distance, higher masculinity and
higher uncertainty avoidance.
The size of the subsidiary is a particularly important control variable in international business research
(Harzing 1999). We measure the size of the subsidiary
by sampling the number of full-time equivalent employees. The natural logarithm of this number was used in
the regression analysis. As respondents with a longer job
tenure might use organisational control differently from
those with shorter tenure, we introduce the number of
years in present position as an additional control variable
(Naranjo-Gil et al. 2009). We control whether the entry
mode chosen by the parent company to enter the Chinese
market affects the results by introducing a corresponding
dummy variable (Luo 2003). We also control for industry
by introducing two dummy variables specifying whether
the subsidiary was active in manufacturing, services or
retail (Abernethy and Bouwens 2005). Finally, we control for the existence of locally developed PMS to make
sure that our conclusions are not significantly affected by
the existence of local PMS that may co-exist with parent
PMS (Dossi and Patelli 2008).

Data analysis
Hierarchical regression analysis was chosen for the following reasons. First models and measures used in international business research are considered to be at
an early stage of development and lacking a significant substance of existing empirical evidence. Therefore,
covariance-based methods may be less appropriate than
the regression-based approach (Venaik et al. 2005). Second, the hypothesised model can be adequately tested
with the hierarchical regression technique as it does not
feature complex types of relationships between exogenous and endogenous variables. Third, the sample size
is well below 200, which is often considered a minimum
threshold for using covariance-based methods (Hair
et al. 2006). In addition, many previous studies examining the interaction effects of styles of PMS use on performance have used similar procedures, which favours
comparing the results of this study with those of the literature (e.g., Abernethy and Brownell 1999; Bisbe and
Otley 2004). Overall, hierarchical regression analysis is
deemed suitable for estimating the parameters in the
research model.
Characteristics of the sample are presented in Table 1
and descriptive statistics for the variables under study can
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Table 1 Sample industry distribution and headquarter nationalities


Frequency

22
4
4
2
4
1
4
4
1
31
7
5
21
110

20.0
3.6
3.6
1.8
3.6
0.9
3.6
3.6
0.9
28.2
6.4
4.5
19.1
100%

2
1
2
1
2
1
9
14
4
2
1
2
21
3
2
2
1
1
7
1
31
110

1.8
0.9
1.8
0.9
1.8
0.9
8.1
12.7
3.6
1.8
0.9
1.8
19.0
2.7
1.8
1.8
0.9
0.9
6.4
0.9
28.1
100%

Panel A: Industry distribution


Apparel
Automotive
Business services
Chemical and allied products
Construction
Domestic appliances
Drugs, cosmetics and healthcare
Financial
Electronics
Industrial and commercial machinery
Metal product manufacturers
Retailers
Transportation
Total
Panel B: Location of headquarters
Australia
Austria
Canada
Chile
Denmark
Finland
France
Germany
Great Britain
Hong Kong
Indonesia
Italy
Japan
Korea
Singapore
Spain
Sweden
Switzerland
Taiwan
Netherlands
United States
Total

be found in Table 2. A balanced distribution of industries


and headquarter nationalities was achieved, supporting
the absence of sample bias in our study. On average,
the respondents had been in their current job position
for almost four years. Table 3 presents the correlations
among the variables. As theory guides the modelling
of the relationships among variables, there is no grave
concern about the significance of the correlation between
the moderator and predictor variables (Hartmann and
Moers 1999).
We used several procedures to validate the empirics
used in this study. To ensure content validity, established and previously validated scales were used. To ascertain construct validity, we examined Cronbach and
composite reliability with satisfactory results as all values exceed the commonly accepted cut-off values, as reported earlier (Bagozzi and Yi 1988; Nunnally 1978). The
average variance extracted (AVE) for all scales is higher

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Headquarter Performance Measurement Systems in Foreign Subsidiaries

Table 2 Descriptive statistics


Variablea
Main variables
INTERACTIVE
EMBED
PERF
Control variables
GEO_DISTANCEb
CULT_DISTANCE
CULT_NAT_HQ
SIZEb
JOBTENURE
ENTRYMODE
INDUSTRY1
INDUSTRY2
LOCALPMS

Min (actual)

Max (actual)

Mean

SD

Cronbach

110
110
110

2.00
1.00
2.00

7.00
7.00
7.00

4.66
4.62
5.24

1.03
1.38
1.09

0.924
0.916
0.928

110
110
110
110
110
110
110
110
110

6.53
2.57
2.11
0.69
1
0
0
0
0

9.84
2.20
1.29
9.21
15
1
1
1
1

8.66
1.38
0.00
4.24
3.60
0.26
0.36
0.49
0.19

0.99
0.63
1.62
1.62
2.60
0.44
0.48
0.50
0.40

a Abbreviations: INTERACTIVE = Interactive use of parent PMS; EMBED = Subsidiary embeddedness; PERF = Subsidiary performance;
GEO_DISTANCE = Airmile distance between headquarters and subsidiary; CULT_DISTANCE = Cultural distance between headquarters
and subsidiary; CULT_NAT_HQ = Headquarters nationality culture; SIZE = Size of subsidiary; JOBTENURE = Job tenure of respondent;
ENTRYMODE = Mode of establishment of subsidiary (0 = Wholly foreign-owned enterprise, 1 = Joint Venture/Acquisition); INDUSTRY1/2 = Industry dummies (manufacturing, services, retail). LOCALPMS = Existence of locally developed PMS (0 = No, 1 = Yes).
b Natural logarithm.

Table 3 Correlations
Variablea
(1) INTERACTIVE
(2) EMBED
(3) PERF
(4) GEO_DISTANCEb
(5) CULT_DISTANCE
(6) CULT_NAT_HQ
(7) SIZEb
(8) JOBTENURE
(9) ENTRYMODE
(10) INDUSTRY1
(11) INDUSTRY2
(12) LOCALPMS

(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

(9)

(10)

(11)

(12)

0.69
0.45
0.33
0.09
0.14
0.08
0.07
0.02
0.07
0.06
0.01
0.25

0.45
0.71
0.31
0.06
0.02
0.04
0.01
0.05
0.03
0.15
0.03
0.08

0.33
0.31
0.87
0.02
0.04
0.14
0.05
0.04
0.03
0.16
0.19
0.06

0.09
0.06
0.02
0.41
0.62
0.16
0.28
0.01
0.19
0.02
0.01

0.14
0.02
0.04
0.41
0.42
0.09
0.04
0.07
0.13
0.03
0.00

0.08
0.04
0.14
0.62
0.42
0.08
0.33
0.02
0.01
0.15
0.01

0.07
0.01
0.05
0.16
0.09
0.08
0.21
0.17
0.34
0.37
0.05

0.02
0.05
0.04
0.28
0.04
0.33
0.21
0.05
0.17
0.18
0.10

0.07
0.03
0.03
0.01
0.07
0.02
0.17
0.05
0.06
0.01
0.00

0.06
0.15
0.16
0.19
0.13
0.01
0.34
0.17
0.06
0.74
0.18

0.01
0.03
0.19
0.02
0.03
0.15
0.37
0.18
0.01
0.74
0.13

0.25
0.08
0.06
0.01
0.00
0.01
0.05
0.10
0.00
0.18
0.13
-

Note: Correlations greater than .25 are significant at the 1% level (two-tailed) and correlations .19 are significant at 5% level
(two-tailed). The diagonal (bold) shows the Average Variance Extracted (AVE) where appropriate.
a Abbreviations: INTERACTIVE = Interactive use of parent PMS; EMBED = Subsidiary embeddedness; PERF = Subsidiary performance;
GEO_DISTANCE = Airmile distance between headquarters and subsidiary; CULT_DISTANCE = Cultural distance between headquarters
and subsidiary; CULT_NAT_HQ = Headquarters nationality culture; SIZE = Size of subsidiary; JOBTENURE = Job tenure of respondent;
ENTRYMODE = Mode of establishment of subsidiary (0 = Wholly foreign-owned enterprise, 1 = Joint Venture/Acquisition); INDUSTRY1/2 = Industry dummies (manufacturing, services, retail); LOCALPMS = Existence of locally developed PMS (0 = No, 1 = Yes).
b Natural logarithm.

than 0.5, which supports satisfactory levels of internal


reliability (Hair et al. 2006; Nunnally 1978). Discriminant validity was assessed by the procedure suggested
by Fornell and Larcker (1981). As shown in Table 3,
each construct extracts a higher average variance than
the variance it shares with other factors, which supports discriminant validity. Furthermore, we conducted
an oblique-rotated factor extraction over the three
main variables subsidiary embeddedness, interactive use
and performance, which identified three factors with
eigenvalues >1.0 explaining 74% of the variance. The
item-factor loadings correspond with the expectations


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2014 CPA Australia

(Podsakoff and Organ, 1986). No items needed to be


deleted.
To minimise the effects of common method bias,
dependent and independent variables were distributed
across the whole length of the questionnaire and on separate pages. In addition, the research assistants, who had
not been informed about the theoretical model of the
study, supervised the respondents to ensure that they
thoroughly read the questionnaire instrument and took
the answering process seriously. Finally, statistical examinations for common method variance using Harmans
one-factor test on all items used proved satisfactory,

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U. Schaffer,
M.D. Mahlendorf & J. Rehring

Table 4 Regression analysis modelling the dependent variable subsidiary performance


Model 1 without interaction term
Variablesa

Standardised -coefficient

Constant
Main variables
EMBED
INTERACTIVE
EMBED X INTERACTIVE
Control variables
GEO_DISTANCEb
CULT_DISTANCE
CULT_NAT_HQ
SIZEb
JOBTENURE
ENTRYMODE
INDUSTRY1
INDUSTRY2
LOCALPMS
Model fit
R2
Adjusted R2
F-statistic
R2 change

p-value

Model 2 including interaction term


Standardised -coefficient

p-value

1.806

0.074

0.225
0.264

0.030
0.014

0.177
0.330
0.208

0.089
0.003
0.029

0.447
0.983
0.187
0.840
0.952
0.568
0.344
0.679
0.274

0.116
0.012
0.172
0.042
0.026
0.037
0.114
0.067
0.106

0.341
0.908
0.162
0.683
0.794
0.687
0.422
0.631
0.257

0.763
0.021
1.329
0.202
0.061
0.572
0.952
0.416
1.100

21.6%
12.8%
2.456

0.087

1.730

 = 3.3% (p < 0.029 )

25.4%
16.1%
2.748

Significant

at the 1% level; Significant at the 5% level; Significant at the 10% level. All significance tests are two-tailed.
INTERACTIVE = Interactive use of parent PMS; EMBED = Subsidiary embeddedness; PERF = Subsidiary performance;
GEO_DISTANCE = Airmile distance between headquarters and subsidiary; CULT_DISTANCE = Cultural distance between headquarters
and subsidiary; CULT_NAT_HQ = Headquarters nationality culture; SIZE = Size of subsidiary; JOBTENURE = Job tenure of respondent;
ENTRYMODE = Mode of establishment of subsidiary (0 = Wholly foreign-owned enterprise, 1 = Joint Venture/Acquisition); INDUSTRY1/2 = Industry dummies (manufacturing, services, retail); LOCALPMS = Existence of locally developed PMS (0 = No, 1 = Yes).
b Natural logarithm.
a Abbreviations:

with no single factor explaining the majority of the variance. Common method variance is arguably of less concern when research models include interaction terms as
respondents are unable to foresee the hypothesised effects (Evans 1985). Many variables used in this study,
such as the cultural or geographical distance measures,
stem from sources other than the original response data
(Ma et al. 2001). Taken together, this provides assurance
that the results of the study are not significantly affected
by common method bias (Podsakoff et al. 2003) and the
fact that valid and reliable data were obtained.10 As described above, data were collected with the help of an independent contractor within a short period of time and
we were not informed about the order of the subsidiaries
visited, which is why potential non-response bias comparing early and late respondents cannot be calculated
(Fleming et al. 2009). This limitation is acknowledged,
albeit mitigated by the balanced sample of important industries and headquarter nationalities, which makes the
sample appropriate for the purposes of our study.

Results
We present the results in Table 4. Both hypotheses are
confirmed. The direct effect between subsidiary embed30

Australian Accounting Review

dedness and performance is significant and positive as


demonstrated in Model 1 ( = 0.177, p < 0.089). Moreover, as shown in Model 2, the interaction coefficient is
both negative and significant ( = 0.208, p < 0.029),
supporting the rejection of the null hypothesis H0 stating
that there is no interaction between subsidiary embeddedness and the interactive use of PMS. This provides evidence in favour of a significant and negative moderating
effect of an interactive use of PMS on the relationship between subsidiary embeddedness and subsidiary performance. Because the results indicate that the interaction
coefficient is negative and significantly different from
zero, it can be reasonably concluded that the slope of the
line representing the relationship between subsidiary
embeddedness and performance is significantly less positive in situations where the interactive use of parent PMS
is high relative to when it is low (Bisbe and Otley 2004;
Lam et al. 2011). We compare the explanatory power of
the model before and after the inclusion of the interaction term to confirm the presence of an interaction effect
(Hartmann and Moers 1999). As expected, the increase
in R2 is statistically significant (R2 = 3.3%; p < 0.029),
confirming the equivalence of the statistical tests (Cohen
and Cohen 2006). After the inclusion of the interaction
term, the full model explains 16.1% of the variance in
performance (Adjusted R2 ). We plot the moderating

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U. Schaffer,
M.D. Mahlendorf & J. Rehring

Figure 1 The moderating effect of interactive use of parent PMS on the embeddednessperformance relationship

effect according to established guidelines using moderator values at one standard deviation above and below
the mean (Cohen and Cohen 2006). Having analysed
these plots (see Figure 1) we conclude that interactive
use of PMS weakens the relationship between subsidiary
embeddedness and subsidiary performance. None of
the control variables become statistically significant.
Discussion
This study contributes to business network theory
and the literature by introducing an established concept of control and testing it in the context of the
embeddednessperformance relationship. It advances
knowledge about the role of PMS in MNCs by showing that interactive use of PMS negatively interacts with
the multinational network characteristics surrounding
MNC subsidiaries in China (Andersson and Forsgren
1996; Dossi and Patelli 2008, 2010; Forsgren 2008;
Forsgren et al. 2005). The results support the proposed
direct and interaction effects of PMS use on the relationship between subsidiary embeddedness and subsidiary
performance. In summary, the study offers two important contributions.
First, it is essential for Chinese subsidiaries to engage in relationships with local business counterparts, as
subsidiary embeddedness has been found to have a direct effect upon subsidiary performance. This supports
earlier studies that posit that close relations with the local business environment are essential for Chinese subsidiaries to perform well (Zhang et al. 2009). The strong
relationship between subsidiary embeddedness and subsidiary performance in China might be attributable to
the specifics of the local Chinese market and the cultural
and geographical distance between parent companies
and their subsidiary in China. This finding is a relevant contribution in light of Chinas importance in todays MNCs and for global economic development (Yang
et al. 2011).

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Headquarter Performance Measurement Systems in Foreign Subsidiaries

Second, and more importantly, the interactive use of


parent PMS negatively interacts with subsidiary embeddedness, meaning that an interactive use by subsidiary
managers weakens the otherwise positive relationship as
described above. This result contributes to the theoretical
debate between the bounded rationality and the sheer
ignorance perspectives, which depicts headquarters
stock of knowledge in MNCs (Ciabuschi et al. 2012; Forsgren and Holm 2010). For the implementation of PMS in
foreign subsidiaries, headquarters need to make choices
regarding the role of PMS within the control framework
used to monitor and control foreign subsidiaries and
concerning the design characteristics of PMS. In addition to these choices, headquarters need to gain insights
into the different types of uses of PMS at the subsidiary
level. This specific distinction between the design and use
of PMS has been touched upon by earlier research, but
this study is the first to show empirically how the interactive use hinders the ability of close-knit relations at the
subsidiary level to improve performance. This is in line
with business network theory, which proposes that headquarters control becomes more difficult in the presence
of subsidiary embeddedness (Andersson and Forsgren
1996). Alongside recent observations that headquarters
in todays MNCs lack sufficient knowledge about subsidiary operations, the implementation of PMS at foreign
subsidiaries may lead to dysfunctional outcomes because
headquarters are basically ignorant about [ . . . ] local
contexts (Forsgren and Holm 2010: 427).
When managers in Chinese subsidiaries use PMS implemented by headquarters in an interactive manner,
organisational resources are bound in a way that may
be harmful to the organisation. This is manifested in
the negative interaction effect on performance. While
it would generally be in the interests of headquarters
that the control systems provided by them be used when
subsidiary embeddedness is present or increasing, an interactive use of PMS on the part of subsidiary managers
may not be in the interests of the headquarters or the
subsidiaries. At the subsidiary level, the interactive use
of parent PMS may cause confusion among managers
as this type of use implies that intense discussions and
debates take place at several levels of the hierarchy. Yet,
when the indicators of the parent PMS have been provided by distant headquarters, the outcome of using
such measures in an interactive manner has been shown
to negatively affect the potential of subsidiary embeddedness to improve performance. While this does not
necessarily imply that parent PMS are unsuitable control
systems in multinational companies, it does suggest that
certain types of use may be unsuitable in certain settings
(i.e., in our case the interactive use in its interaction with
subsidiary embeddedness). This argument is in line with
recent research on subsidiaries business networks arguing that headquarters can manage foreign subsidiaries
better when knowledge about the subsidiarys most
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Headquarter Performance Measurement Systems in Foreign Subsidiaries

important business relationships is obtained (Andersson


et al. 2007). Such knowledge may enhance design aspects
and the suitability of parent PMS to be used interactively,
thereby reducing detrimental effects of such use in embedded subsidiaries.
To explore the relationship between the local business
environment and the interactive use of parent PMS, additional analyses were conducted. Based on earlier work
by Dossi and Patelli (2008), we focus on the potential
creation of PMS that were developed locally at the subsidiary level and co-exist with parent PMS. According to
Dossi and Patelli, subsidiaries engage in the creation of
such local PMS, for instance because of the inadequacy
of parent PMS to meet the demands of subsidiary management. In order to investigate the effect of the creation
of local PMS on the interactive use of parent PMS, we
compared the mean values for interactive use of parent PMS depending on whether a local PMS had been
created or not. The results (not tabulated) show at a
statistically significant level that parent PMS are used
even more interactively when subsidiaries had in fact
developed local PMS (p < 0.01). This may point to role
conflicts experienced by subsidiary managers when they
are expected both to conform to the demands of headquarters (i.e., the requirement to use the control systems
provided) and to engage with and react to the requirements of the local business environment (i.e., creating
a local PMS to respond to local needs). While similar
propositions have been made in the psychology-based
budgeting literature (e.g., Marginson and Bui, 2009)
where role conflicts in the context of budget-goal attainment and innovation were analysed no such claims
can be made based on the data collected in this study.
Nevertheless, the findings of this study suggest that an
interactive use of PMS may have dysfunctional outcomes
as it interacts negatively with subsidiary embeddedness.

Practical implications
Our paper offers several implications for managers. To
begin with, the international business literature has provided substantial evidence for the need for global business to adapt to the local (host) country (Andersson and
Forsgren 1996; Andersson et al. 2001; Busco et al. 2008;
Forsgren and Holm 2010; Ghoshal and Bartlett 1990).
PMS seem helpful for headquarters in this context as
they are able to combine the ability of subsidiaries to
engage in local relations (which are often beneficial for
the whole MNC) and the capacity of headquarters to influence foreign decisions. In the presence of subsidiary
embeddedness, the somewhat indirect form of control
through PMS may prove more successful than a direct
form of control (for instance by installing an expatriate
at the management level of the subsidiary), which may
hinder the development of close-knit relationships be32

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tween the subsidiary and its local business counterparts.


Overall, PMS prove to be a powerful control mechanism
in headquartersubsidiary relations as they reflect the
intentions and strategic goals of headquarters.
At the same time, our study emphasises that headquarters need to know that the potential to profit from these
local relations with the business environment may be
endangered when the subsidiary uses a super-imposed
type of control system (in our case PMS) in an interactive way. Practitioners need to be aware that the use of
PMS to control foreign subsidiaries has its drawbacks in
that specific types of uses at the level of the subsidiary
may be detrimental to the global organisation. As our
analyses have shown, this is the case for the interactive
use as it binds subsidiary resources in discussions that
may in the end hinder the subsidiary to profit from
local relations.
Moreover, this study implies that it is essential for decision makers at the headquarters level to understand
their own knowledge of subsidiary activities. Having
such an understanding is important because it defines
the extent to which headquarters are able to provide
PMS that are effective at the subsidiary level. If headquarters misjudge their own knowledge situation, the
implementation of PMS abroad may have dysfunctional
effects, such as the weakening of the relationship between
subsidiary embeddedness and performance. However, if
headquarters are aware of their own knowledge position, they are given the choice to distinguish between
decisive and non-decisive knowledge, which may improve headquartersubsidiary relations (Ciabuschi et al.
2012).
Particularly in a setting where subsidiaries are extensively embedded into local relationships, headquarter
managers might choose to reduce their role in communicating and monitoring targets regarding the desired
results of subsidiary activities (e.g., revenue or profit
targets) instead of imposing PMS onto the subsidiary
(Ciabuschi et al. 2012; Foss 2002). This seems to be especially relevant when subsidiaries are situated in geographically and culturally distant markets where a significant part of the local knowledge may remain hidden
from headquarters. In this context, headquarter managers may decide to visit the subsidiary at regular intervals in order to stay informed about the relations of the
subsidiary with local counterparts. Such visits and the
discussions and meetings of headquarters management
with local management might be more effective than
autonomous discussions on the part of subsidiary managers based on outputs generated by the parent PMS.

Limitations
Although this study sheds some light on the role of
an interactive use of PMS in the context of subsidiary

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embeddedness, several limitations should be taken into


account. The studys findings are limited to a single control system, namely PMS designed by headquarters and
implemented at subsidiaries (parent PMS), even though
most firms combine several control systems into one
package (Malmi and Brown 2008). This lack of consideration for other controls corresponds to the debate opened by Malmi and Brown (2008), who propose a framework for management control systems as a
package.
While we deliberately chose this study design, it factors
out other control systems used in Chinese subsidiaries,
interactively or otherwise. In addition, data were collected in an economically advanced region of China,
so its findings might not apply to other areas of China
or elsewhere. In addition, the low response rate affects
the potential to generalise the results. Finally, this study
used three types of performance, which were subjectively
evaluated. Despite earlier findings proposing high correlations between individual performance measures and
subjective and objective evaluation (Venaik et al. 2005;
Venkatraman and Ramanujam 1986), future research
needs to adopt a more sophisticated measurement of
performance.

Future studies
In general, future studies could examine other control
systems, possibly as an overall MCS package, to improve
the understanding of the linkages between organisational
characteristics and managerial uses of PMS and MCS
more generally. Our choice of one specific control system
largely ignores other control systems used in the relationship between headquarters and subsidiaries. Researchers
interested in control within MNCs could seize the opportunity to develop the framework of Malmi and Brown
(2008) specifically for relationships between headquarters and subsidiaries or multinational firms more generally. Such a project would be a promising avenue for
further research as MNCs require distinctive setups of
management control.
Future studies could also scrutinise the web of relationships surrounding the subsidiary. While this study
measured the constructs used following established operationalisations from the literature, other measurement
options or even personal interviews might reveal the specific impact of relationships with local counterparts even
better (see Andersson et al. 2002; Yamin and Andersson
2010). Future work might extend this study into other
countries, use a multiple country setting, or investigate
relationships for different ownership types (privately
Chinese-owned, state-owned, collectively-owned).
Regarding the bounded rationality and sheer ignorance perspectives which determine the potential of
headquarters to design and implement control systems

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globally, it seems necessary to develop a precise measure for headquarters knowledge situation. While current studies have been guided by assumptions about
headquarters knowledge concerning subsidiary activities, researchers would greatly profit from an empirical
measurement of it. Such a measure would ask headquarters about its own knowledge of subsidiary operations,
the characteristics of the local business environment,
and the local network in which the subsidiary is embedded. Knowing that the knowledge situation is an
essential determinant of the outcome of headquarters
involvement at the subsidiary level, the development of
such a measure would be an important contribution to
research.

Acknowledgements
We are grateful for the constructive comments of two
anonymous reviewers. We also thank Mats Forsgren for
helpful comments on an earlier version of this paper. In
addition, we are grateful to participants of workshops
at WHU Otto Beisheim School of Management, the
8th Annual Conference for Management Accounting
Research (ACMAR), and the 6th Conference on Performance Measurement and Management Control for
valuable suggestions.
Notes
1 We follow Neely et al. (2005: 1229) and define PMS as a set of
metrics used to quantify both the efficiency and effectiveness of
actions.
2 Note that business network theory is a prime example for a theory that fits with the arguments and assumptions of the sheer
ignorance perspective on headquarters role in todays MNC
(Forsgren and Holm 2010: 425).
3 Business network theory makes some important assumptions
(Forsgren 2008). First, it assumes that a multinational firm consists of several organisational entities rather than just one global
organisation. Second, each subsidiary is embedded in its own
distinct web of relationships. Third, these relationships are at the
forefront; the contacts with other parts of the MNC (other subsidiaries and even headquarters) are less important. Finally, it assumes that, ultimately, subsidiary embeddedness leads to higher
performance as close-knit relationships reduce uncertainty and
increase knowledge-building and trust. The latter assumption has
been empirically tested and supported in recent studies (Andersson et al. 2001, 2002). In our paper, business network theory
is used to model the multinational company as a web of relationships (Andersson et al. 2002; Forsgren et al. 2005; Santangelo
2012; Yamin and Andersson 2010).
4 It could be argued that the need for local adaptation can be transferred to general business conduct of subsidiaries and their relationships with business counterparts as the regional differences
in terms of customers, competitors and institutional characteristics (e.g., regional governments) are substantial (Luo and Park
2001; Zhang et al. 2009). We provide two examples for this argument. First consumers in large Chinese cities have relatively
high incomes and are willing to buy costly and technologically
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Headquarter Performance Measurement Systems in Foreign Subsidiaries

10

34

advanced products. However, as income disparity as well as general economic advancement between cities and other (especially
rural) regions in China is very high, multinationals are forced
to adapt to the characteristics of the local business environment
(Govindarjan and Gupta 2000). A second example, from the experience of German car manufacturer Audi in China, may clarify
this. From 1999 onwards, Audi had been producing and selling
its A6 limousine in China, with limited success. However, sales
of this model increased sharply after a locally adapted version
A6L replacing the previous model was introduced, which offered
backseat passengers more legroom. What Audi learned from its
experience in China and its close relationships with local business
actors was that consumers who could afford an Audi tended to
have chauffeurs, so legroom in the back was more important than
it was in the model sold in Europe (Audi 2010).
In this context, there is a multitude of other control systems at
play in the relationship between headquarters and subsidiaries
and in firms in general apart from PMS. In fact, management
accounting research has extensively researched that the various
control systems used within firms should generally be regarded
as a package, reinforcing and complementing each other (Malmi
and Brown 2008; Otley 1999). As true as this is, it is difficult to
capture this complex set of controls within a single survey study
due to the extensive differentiation in practice. Bearing this in
mind, we followed research in the field of PMS and concentrated
on one particular type of control system, and captured this by
describing it in detail to the study participants so they could relate
their answers to the experiences they made with this specific type
of control system.
The linkage between the use of PMS and organisational performance has been notoriously problematic in the management
control literature (van der Stede 2000: 614). The existence of a direct link between PMS or other MCS and performance could not
be supported in recent studies (Abernethy and Brownell 1999;
Bisbe and Otley 2004). Nevertheless, an interaction-type relationship (i.e., through moderation) regarding the use of MCS
and performance has been at least partially confirmed by
the literature (Bisbe and Otley 2004; Henri 2006a; Mundy 2009;
Widener 2007).
The characteristics of the measurement construct interactive use,
which was used in the data collection phase, can be found in the
Appendix.
Previous studies also call this construct subsidiarys external embeddedness or external embeddedness (Andersson and Forsgren 1996; Mahlendorf et al. 2012).
The correlation statistics are: ROI with Profit (r = 0.79, p =
0.000), ROI with Cashflow from Operations (r = 0.83, p = 0.000),
Cashflow from Operations with Profit (r = 0.81, p = 0.000).
Several other measures were taken to ensure reliability and validity as follows. Kolmogorov-Smirnov normality statistics were
calculated to test the normality assumption regarding the distribution of the variables. We found that the variable PERF (subsidiary performance) has moderate positive skewness. To analyse
the potential effect of this finding within the regression analyses,
we transformed this variable by conducting a square root transformation (Tabachnik and Fidell 2007: 89). Then we ran the same
regressions with the transformed variables and did not discover
any major differences in the resulting coefficients, t-statistics or
p-values. Therefore, we use the original variable in our analysis.
The predictor variables were mean-centred (mean = 0) before
creating the interaction term following the guidelines of Aiken
and West (1991). No notable influence of variance inflation was
found with no VIF value exceeding 2.6, which is far below the
critical threshold of 10 (Gujarati 1995). Also, no serious influence of multicollinearity is present as none of the correlations

Australian Accounting Review

U. Schaffer,
M.D. Mahlendorf & J. Rehring

between the variables is above 0.45 (Tabachnik and Fidell 2007:


89). The potential influence of outliers was assessed by calculating
Mahalanobis distance. No outliers were found (p < 0.001).

Appendix 1: Latent Construct Items


A headquarters-designed (parent) PMS had been implemented at all participating subsidiaries. At the beginning
of the questionnaire, a definition of PMS was provided.
Performance Measurement System (PMS): A welldefined set of financial or non-financial performance indicators. The sophistication of PMS varies; there may be only
some simple accounting numbers in use or very detailed
and linked performance indicators, which may also show
cause and effect linkages. An example of a very sophisticated PMS is the Balanced Scorecard, while reliance on
profit and loss budgets represents a very simple PMS, for
instance.
The latent constructs used were measured as follows:
Interactive use of parent PMS
Please rate the extent to which your local management
team currently uses performance measures of the parent
PMS in the following manners (1 = not at all; 7 = to a
high extent). The indicators of the parent PMS are used
to . . .
Enable discussions in meetings of superiors, subordinates and
peers.
Enable continual challenge and debate underlying data,
assumptions and action plans.
Provide a common view of the organisation.
Tie the organisation together.
Enable the organisation to focus on common issues.
Enable the organisation to focus on critical success factors.
Develop a common vocabulary in the organisation.

Subsidiary embeddedness
To what extent have relationships with the following
local Chinese stakeholders caused your SBU to change
its product/service (production) technology? (1 = not at
all; 7 = to a high extent)
Relationships with local Chinese customers have caused
changes in product/service technology.
Relationships with local Chinese suppliers have caused changes
in product/service technology.
Relationships with other local Chinese
counterparts/stakeholders have caused changes in
product/service technology.
Relationships with local Chinese customers have caused
changes in production technology.
Relationships with local Chinese suppliers have caused changes
in production technology.
Relationships with other local Chinese
counterparts/stakeholders have caused changes in
production technology.


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Performance
Please rate the performance of your SBU compared to
competitors along the following dimensions.
(1 = well below average; 7 = well above average)
Return on Investment
Profit
Cashflow from Operations

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