The Multinational Corporation as an Interorganizational Network Author(s): Sumantra Ghoshal and Christopher A.

Bartlett Source: The Academy of Management Review, Vol. 15, No. 4 (Oct., 1990), pp. 603-625 Published by: Academy of Management Stable URL: Accessed: 27/02/2010 09:33
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Academy of Management Review, 1990, Vol. 15, No. 4, 603-625.

The as an

Multinational Corporation Interorganizational Network

A multinational corporation consists of a group of geographically dispersed and goal-disparate organizations that include its headquarters and the different national subsidiaries. Such an entity can be conceptualized as an interorganizational network that is embedded in an external network consisting of all other organizations such as customers, suppliers, regulators, and so on, with which the different units of the multinational must interact. Based on such a conceptualization, the present authors draw on interorganization theory to develop a model of the multinational corporation as an internally differentiated interorganizational network. They propose hypotheses that relate certain attributes of the multinational, such as resource configuration and internal distribution of power, to certain structural properties of its external network. As pointed out recently by Kogut (1989), the late 1980s have witnessed a significant evolution of academic interest in the multinational corporation (MNC). An important element of this shift has been a change in the focus of research away from the dyadic headquarters-subsidiary relationship in MNCs, or the specific decision of a company to invest in a foreign location, to the coordination tasks of managing a network of established foreign subsidiaries and analysis of the competitive advantages that arise from the potential scope economies of such a network. This new research focus demands new theoretical, conceptual, and methodological anchors. Analysis of international competition, for example, has already embraced a range of new theories such as those of multiplant production, multipoint competition, and valuation of options 603 to explore the costs and benefits of the MNC's geographic scope of activities (e.g., Kogut, 1983; Ghemawat & Spence, 1986; Teece, 1980). The present authors crdvocate a similar adoption of interorganizational theory for future MNCrelated research, albeit with some modifications to reflect the ownership-based intraorganizational ties that exist between the MNC headquarters and its different foreign subsidiaries. We believe that interorganizational theory, properly adapted, can provide new insights about a complex and geographically dispersed organizational system like the MNC, and our main objective here is to propose an initial formulation regarding how the concepts and tools of interorganizational analysis can be applied to fit this slightly different but analogous case. To frame the context of our discussions, it may

1986 and 1987). or manufacturing. Philips. reflects the nature and complexity of the multinational organization and can provide a useful lens through which to examine such an entity. and marketing a diverse range of products from light bulbs to defense systems. regulators. and Fombrun (1979). Nigeria. both as a metaphor and in terms of the tools and techniques of analysis it provides. Figure 1 could also be a representation of an American multinational such as Procter & Gamble. including the headquarters and the different national subsidiaries that are collectively embedded in what Homans (1974) described as a structured context. Others are small. 1989). be sounded at this stage. V. 1987). & Zwick. a few began their organizational lives less than 10 years ago. and geographic locations (Bartlett & Ghoshal. single-function operations responsible for only R & D. fully integrated companies developing. Uruguay. 1986. 1967). In many ways our description of Philips is a generic account that characterizes many large MNCs. In some cases. suppliers. The company has its own operating units in 60 countries as diverse as the United States. we believe that the concept of a network. With only minor alterations. Japan. or marketing for only one or a few of these different businesses. A note of caution useful to begin with an illustration. Such subsidiaries might have 5. however. or another European company such as Unilever. Some of these units are large. France. and. continuing the thinking of Tichy. others enjoy relationships with the headquarters more akin to those between equal partners than those between parent and subsidiary. 1978. we visualize this context as an external network consisting of all the organizations such as customers. 1980. Some such units might employ 50 or fewer people. Our main proposal is that different attributes of a multinational such as the configuration of its organizational resources and the nature of interunit exchange relations that lead to such a configuration can be explained by selected attributes of the external network within which it is embedded and on which it depends for its survival. social. or a Japanese company such as Matsushita Electric (see descriptions of these companies in Bartlett & Ghoshal. and competitors with which the different units of the MNC must interact. and Bangladesh. it is unlikely that this initial attempt to apply network concepts to the study of MNCs . Some of these units are tightly controlled from the headquarters. As suggested by a number of authors. Robock. as a result of such dispersal and differentiation. possess internal linkages and coordination mechanisms that 604 represent and respond to many different kinds and extents of dependency and interdependency in interunit exchange relationships (Ghoshal & Nohria. South Korea. are internally differentiated in complex ways to respond to both environmental and organizational differences in different businesses. Simmons. functions. Because network analysis is a rapidly emerging and highly complex field of study and because of the considerable divergence on definitions and approaches that exists within this field. the units have been in operation for more than 50 years. also. We believe that an entity such as any of these large multinational corporations can be more appropriately conceptualized as an interorganizational grouping rather than as a unitary organization. Prahalad & Doz. We propose here a framework that conceptualizes the multinational as a network of exchange relationships among different organizational units. Tushman. Evan. Figure 1 shows the simplest possible representation of N. MNCs are physically dispersed in environmental settings that represent very different economic. Hofstede. and cultural milieus (Fayerweather. 1981. Further. manufacturing. valuable insights can be gained on the internal structures and operations of such entities from the concepts of organization sets and networks that are more commonly used for exploring interorganizational phenomena (Aldrich & Whetten. 1977). a multinational company headquartered in the Netherlands.000 or more employees and might be among the largest companies in their host countries. In particular.


it should also be noted that the conceptual foundation for such an approach already exists in the international management literature. Further. the article also differs from these earlier pieces in two important ways. Perlmutter's (1969) scheme for categorizing MNCs as ethnocentric. Pfeffer & Salancik. In the concluding section of our article. in an era of expanding transnational linkages among individuals and organizations. 1983. polycentric. Interorganizational Theories Applied to the Multinational Corporation Much of the existing theory and almost all empirical analyses of interorganizational networks have focused on interorganizational groupings that are not connected by ownership ties (e. and the application of the resource dependency model by Herbert (1984) for explicating strategystructure configurations in MNCs have all been implicitly or explicitly grounded in the conceptualization of MNCs as interorganizational systems. Even though we believe that such a metaphorical use of the term has been useful for descriptive and normative purposes. For example. As institutional theorists have argued. as an initial attempt to identify the possibility of developing a network theory of the MNC. and geocentric organizations is clearly consistent with a network theoretic view. Our explanation focuses instead on the social and institutional structure of the environments in which the MNC operates. we discuss some of the limitations of the present effort and suggest how these might be overcome through future conceptual and empirical research. Although the attempt to formally apply the interorganizational network perspective to the study of MNCs is relatively new. the relational networks in the institutional environment play an important role in influencing the structure and behavior of organizations (Meyer & Scott. The uniqueness of the MNC as an organizational form arises from the fact that its different constituent 606 units are embedded in different national environments in which the structures of these relational networks can be and often are very different (Westney. Bacharach & Aiken. Before applying any of the concepts or empirical findings from such studies to the analysis of MNCs. A number of authors have argued that the . and reciprocal task interdependencies for effective management of MNCs. 1983) or from the administrative heritage (Bartlett. Van de Ven & Walker. 1976. Although it builds on this foundation. 1974. Similarly.will be either complete or above reproach. 1969) of its managers. the concept of a coordinated multinational system proposed by Kogut (1983). therefore. the structure and attributes of the MNC were explained as arising from the technical and economic rationality and constraints in resource allocation (Kogut.g. shared values. the stylized models of MNC organizations developed by Bartlett (1986) and Hedlund (1986). in most of these proposals. These differences industry systems and the interconnections among them are central to our explanation of both economic action and administrative coordination within the dispersed system of the MNC. it is first necessary to make a prima facie case that the ownership ties that exist within the multinational do not necessarily preclude the entire range of discretionary behaviors that are possible among interacting organizations that are not so connected. Zucker. rather than as a rigorous presentation of such a theory. Second. 1989).. 1986) and cognitive orientation (Perlmutter. 1988). First. this paper represents an effort to move to the next step of theory building by using network concepts to explain specific structural attributes of multinational organizations. 1984). This article must be viewed. the concept of a network has so far been used in this literature mostly as a metaphor to describe and categorize MNC structures and to support normative arguments on the importance of lateral relationships. these relational networks in the different countries are also increasingly interconnected among themselves in comin national plex ways.

even though the formal structure of MNCs may often resemble the unitary form or what has been described in the literature as mandated networks (Aldrich. 1977). Giordano. 1989). This was so because of its role in building the company's relationships with the Bell operating companies. Typically. To cite but one illustration. However. Such situations are relatively more common for MNCs headquartered in small countries. Warren (1967) developed a typology of interorganizational relationships that distinguished four ways in which members of an organizational field could interact: unitary. even though the parents were headquartered in large countries such as the United States and the United Kingdom (Bartlett & Ghoshal. particularly the host government. the actual relationships between the headquarters and the subsid- . more so. dispersed. or regulatory agencies. is a good example. following deregulation of the U. the multinational organization lies somewhere between Warren's unitary and federative structures. However. Clark. Granovetter. federative. For example. is the case of the British and German subsidiaries of Ruberoid that unilaterally severed all ties with the parent and. preferring instead to purchase from a Japanese archrival. Even more dramatic. is not inappropriate for the application of interorganizational theories. coalitional. Some anecdotal evidence of extreme subsidiary autonomy notwithstanding. hierarchical authority coexists with significant local autonomy and such a situation. Table 1 summarizes the different attributes of each of these different contexts of interorganizational interactions. we suggest that the existence of such hierarchical authority does not necessarily lead to fiat as the dominant or even the "last resort" mechanism of control. Case histories of extreme subsidiary autonomy have been well documented in the literature on multinationals: the refusal of North American Philips to sell the V2000 video cassette recorder developed by its Dutch parent. despite its relatively small size and short organizational life. however. many such cases also have been observed in companies such as ITTand Unilever. Subsidiary company links with local customers. We believe that this link is particularly weak in the case of MNCs because of the large physical and cultural distances between the owned and the owning units. suppliers. The efficacy of fiat is particularly limited in the case of multinationals not only because some of the subsidiaries happen to be very distant and resource-rich but. 1976. Hall. both of which admit some level of hierarchical decision making at the top of the inclusive structure. & Roekel. the Swedish telecommunications company. 499).linkage between ownership and hierarchical power ("fiat")in complex organizations is much weaker than is often assumed (e. many foreign subsidiaries of which often control more resources and contribute more revenues than the parent company. with the support of local financial institutions. and social choice. In our view. For example. in such large. we believe. or social service organizations. Further. the parent company of a multinational typically enjoys considerable hierarchical authority. and investors also contribute to the local management's automony. and interdependent organizations.g. because they control critical linkages with key actors in their local environments. which came to be viewed by NEC not only as major potential customers but also as its main contacts for joint development of new products. p. the in607 fluence of the American subsidiary of NEC expanded significantly within the company.. ultimately secured complete legal independence. the Australian subsidiary of Ericsson.S. in one of the seminal articles on the topic. We do not claim that the relationships among the parent company and the national subsidiaries in an MNC are identical to those among an interacting group of universities. telecommunications industry. 1985. accumulated a very high level of R & D resources primarily because of a coalition between the local management and the Australian Post and Telegraph authorities that had as its principal goal the creation of a major R & D center in Australia. Johnson.

issues of competency and power tend to be contested within the MNC and interdependencies among the units tend to be reciprocal as well as sequential (Ghoshal & Nohria. without restructuring Commitment only to unit leaders Minimal Social Choice No inclusive goals Locus of inclusive decision making Locus of authority Within units Exclusively at unit level No formally structured division of labor within an inclusive context Structural provision for division of labor Units structured autonomously. 1983). As such. the relationships between the diverse units of a multidivisional or . 83 in Provan. Despite the broad theoretical scope of the interorganizational perspective as shown in Warren's classification of the field. empirical applications of this perspective have so far been limited to contexts that range from federative to social choice and interaction contexts that range from unitary to federative have been excluded from the domain of interorganizational inquiry and placed in the domain of intraorganizational analysis (Cook. p. may agree to a division of labor. subject to unit ratification Primarily at unit level Coalitional Units with disparate goals. contrary to the case of both unitary and mandated networks. but some formal organization for inclusive goals At top of inclusive structure. which may affect their structure Norms of moderate commitment Moderate Commitment of a leadership subsystem Prescribed collectivityorientation of units Norms of high commitment High Commitment only to unit leaders Little or none iaries and among the subsidiaries themselves tend to be more federative because.Table 1 Different Contexts of Interorganizational Interactions Type of Context Dimension Relation of units to an inclusive goal Unitary Units organized for achievement of inclusive goals At top of inclusive structure At top of hierarchy of inclusive structure Units structured for division of labor within inclusive organization Federative Units with disparate goals. and Kruytbosch. As demonstrated by Provan. 1977). but informal collaboration for inclusive goals In interaction of units without a formal inclusive structure Exclusively at unit level Units structured autonomously. the interorganizational approach can be particularly useful for 608 analyzing such federated relationships among units when the participants have only limited option for discretionary behavior and no opportunity to terminate the relationship. may agree to ad hoc division of labor. 1989). (1980). Beyer. This claim is consistent with Provan's analysis of different kinds of federations and his observation that the network characteristics of divisionalized firms generally are similar to those of independent federations (see Table 1.

Each of the national operating units of M is embedded in a unique context and. coherent. organization chart. the group consisting of [SA. etc. 63).) and categorical (e. CA. C. etc. 1981). In keeping with Aldrich and Whetten's thinking (1981) we can define the density of [OSA] as the extensiveness of exchange ties within the elements of the organization set of A. TA. Note that H serves as a coordinating agency and plays the role that Provan (1983) described as belonging to the Federation Management Organization (FMO) and. division of responsibility. say A. F.e. regulatory agencies [rA]. that is responsible for operations in the home country of M. In contrast to these limitations of traditional intraorganizational analysis. resource scarcity. As summarized by Nohria and Venkatraman (1987). Meanwhile. D. has its unique organization set (Aldrich & Whetten. B. the unit A can have existing or potential exchange relationships with a specific set of suppliers [SA]. p. "Therefore. Different members of the organization set [OSA] can be internally connected by exchange ties. among A. and it competes for resources with an identifiable set of competitors [CA]. mechanistic versus organic. emphasis added) and therefore includes not only the flows of finances and products but also the flows of technology.g.a multinational corporation have rarely been examined from an interorganizational perspective.. D. 2). E.] constitutes what we call the organization set of A and denote by the symbol [OSA]. and F and a focal organization in the corporate headquarters H.e. 1977. differentiated versus integrated. etc.. For example. 64. let us assume that all the units of M are engaged in a single and common business (i. 1987. By the term multinational network we shall refer to all the relationships and linkages that exist among the different units of M (i. Furthermore. M is a single-industry company). people. E. service or commodity" (Cook. it is typically described in distributional (e. volatility. as Cook observed.g.. B) for mutual benefit" (Cook. 2). For the purpose of analytical simplicity. "the environment is typically viewed as an exogenous entity and is reified as a source of undefined uncertainties (e. and H). and consistent. y) between two or more actors (A. a dominant construct in most interorganizational theories is an exchange relation (e. authority. B. 64). authority" (Nohria & Venkatraman. therefore. for any specific type of exchange relationship. p.. nal flows of products.g. even though the two may be located in the same premises.. 1987. p. etc. The term resources as used in this context includes "any valued activity.) terms as opposed to relational terms that focus on the actual interaction patterns based on both internal and exterand information. p. centralized versus decentralized. C. and information. Density measures the extent to which actors . Ax and By) that is defined as consisting of "transactions involving the transfer of resources (x. The Multinational as a Network: Constructs and Terminology Let us consider a multinational corporation M with operating units in countries A.) as opposed to being seen as a field of specific interacting organizations which locate the source of those contingencies" (Nohria & Venkatraman. Collectively.g. buyers [bA]. must be distinguished from the organizational unit. "the term actor in the theory refers not only to individuals but also to 609 collective actors or corporate groups [thus making] it uniquely appropriate when organizations or subunits of organizations are used as the primary unit of analysis" (1977. 1977. It is this suggestion of Cook that we adopt and develop in this article. the limitations of applying traditional intraorganizational theory to the analysis of such complex and dispersed business organizations have become increasingly clear.. the most critical of these limitations stem from the need in such analysis to provide a relatively clear separation between the "organization" and its relevant "environment. bA. p. The organization is seen as a well-defined collective and is assumed to be internally homogeneous." As a result.

it has been shown in the management literature that within the same national environment. Following the arguments of Benson (1975). Such influence may be manifest in actions such as retaliation by rc to what is seen as protectionist action of rD.. In the same manner as we defined the construct of density for each of the different organization sets of the different units of M.e.within the set are connected. and investment banking (Eccles & Crane. The main thesis in this article is that different attributes of the MNC can be explained in terms of selected attributes of the external network within which it is embedded. p. 1987). Tushman. finance. rc) may influence the actions of their counterparts in other locations (say. and so on may vary. we can also describe the density of this external network as the ratio of actual to potential ties among all its constituents. C. B. For present purposes. technology. that is. compared to others. suppliers. the actions of regulatory agencies in one location (say. and it may have exchange linkages with its counterpart in the local environment of B. this is a focal issue for a number of essays in Porter. For example. Such linkages also may exist among suppliers and competitors. 1979) within which the multinational network is embedded. & Fombrun. 1987). the interactions within the different organizational units of the MNC are best explained at the level of resource exchange. the level of cohesiveness among customers. publishing (Powell. 1985). to one another (i. or deregulation by rD to reciprocate or just emulate similar action by rc (Mahini & Wells.g. To differentiate between these two densities. we can choose the simplest of these ways and define it as the percentage of actual to potential ties among members of [OSA]. and other relevant organizations as a key factor that does or should influence the behaviors of MNCs (e. 1985. The density of such connections within the different local organization sets of A. 1986).. 1981). such a construct of density can be operationalized in different ways.. we shall refer to the density of ties within each of the local organization sets as within density and the density of ties within the total external network. textiles (Sabel. competitors. as across density. By the term . and management capabilities may be located in any one or more of the different units of M. rD). Because of such linkages among the different local organization sets. Resource Configuration in MNCs Resources such as production equipments. 1986). much of the current literature on global strategy considers such cross610 border linkages among customers. & Deeg. For example. These two characteristics of the MNC and how they relate to within and across densities will provide the focus of our attention for the remaining part of this article. As suggested by Aldrich and Whetten. Similarly. This suggests two attributes of the MNC as particularly relevant to our analysis: (a) the distribution of resources among its different affiliated units and (b) the structural characteristics that mediate internal exchange relationships within the MNC and continually restructure the resource configuration (Zeitz. 1980). the mean relation from any one actor to any other actor). The concluding section of this article includes a more detailed discussion on identification of boundaries and measurement of densities for the different local organizations sets. it has been noted by many authors that the level of connectedness among different members of an industry group is significantly higher in Japan in comparison to some Western countries (e. all members of all the organization sets of the different units of M collectively constitute what we shall call the external network (Tichy. and so forth may be higher in certain businesses such as construction (Eccles. one of the supplying organizations in the local environment of A may be an affiliated unit of another multinational company. Similarly. Kazis. across the different organization sets. The different organization sets of the different units of M may themselves be interconnected through exchange ties. on average. see discussions and the quotation from Lohr cited in Granovetter. 497). In fact. Herrigel.g. competitors. marketing skills.

1974). each basically for a local market. 1986).. We refer to this dimension of resource configuration as specialization. with identical resources being used by each unit to carry out essentially similar tasks in and for its own local environment. Matsushita's European competitor and one that Bartlett categorized as a "decentralized federation. However. 1986)..g. Porter. Electrolux's washing machine factory in France produces top-loading washing machines only and it meets the company's requirements in that product category for all of Europe. regional requirements for that activity. namely. and it represents the extent to which the resources located in each unit are differentiated from those in others. which is in the Netherlands. gaining access to new markets or desired factors of production. thereby avoiding the need for carrying out the same activity or task in multiple locations. E. self-interested considerations such as needing increasing profitability. 1981. 1982). even though the resources are dispersed. typically the parent company. Hirsch. F. 1986)-they are dispersed but undifferentiated.. Caves. or commodity". In contrast. Explanations of both dispersal and specialization have therefore focused on factors such as differences in costs of inputs (e. 1976). 1980). Dunning. 1986). impacts of transportation and other "friction" costs (e. Let us consider their resources within Europe. This difference illustrates one aspect of resource configuration in MNCs that is of analytical interest. Lessard & Lightstone. D. Magee. and H. imperfections in information and other intermediate product markets (e. typically under the assumption that resource location decisions are based on rational. Hennart. 1985. they also are very specialized. potential scale economies in different activities (e. the washing machine factory in Italy produces only 611 front-loading models to meet Europe-wide demand. Rugman. C. and no single national subsidiary has more than 15 percent of the company's worldwide assets. 64] to refer to "any valuable activity. 90 percent of the manufacturing investments of Matsushita. B. and component-producing units are all similarly differentiated and specialized. p.resource configuration we refer to the way in which the resources of M are distributed among A. the resources of Philips are dispersed on a localfor-local basis (Ghoshal. product development laboratories. (We use the word resource in the sense of Cook [1977. Its research centers. Teece. although both Philips and Electrolux (the Swedish home appliances company) have a relatively high level of dispersal in the sense that both companies have significant parts of their total assets distributed in a number of countries. defense against opportunism (e." over 77 percent of total assets are located outside the company's home. by which term we refer to the extent to which the company's resources are concentrated in one unit versus dispersed among the different units. and minimizing costs and risks (for reviews.g. dispersal. 1977.g.. service. despite considerable recent efforts to increase such specialization. Following from Granovetter's (1985) ideas. Similarly.." most of such resources may be concentrated in any one location.g. and 100 percent of its research facilities are located in Japan. in companies such as Philips. For example. protecting competitive position. In other words. For example. We present . at least. the resources and associated activities located in any one country are of sufficient scale to meet the company's worldwide or. and potential benefits of risk diversification (e. the pattern of distribution of such assets is very different in the two cases. the Japanese consumer electronics company. that is. much of this analysis can be criticized as undersocialized or oversocialized conceptualizations that ignore the important and ongoing effects that surrounding social structures have on economic behaviors of organizations. 1982. Stevens.g. Philips owns five factories in Europe that produce identical or near-identical models of television sets. see Buckley & Casson. Resource configuration in MNCs traditionally has been analyzed from an economic perspective.. For Electrolux.g.) In some companies that Bartlett (1986) described as "centralized hubs. By contrast.

some countries such as Japan are characterized by dense linkages among the suppliers. strong and multiplexed ties among the existing members of the national organization sets will lead to exclusion from the sets of those who cannot establish equally strong and multiplexed ties with each member. In locations in which the local organization sets are densely connected. interlocking boards of directors. Such linkages among the different actors may involve different kinds of exchanges such as those involving funds. cross-holding of equity. the institutional structure of the environment (i. regulators. 1983. the density of linkages among key players in a national industrial context greatly influences industry performance and company strategy. According to these authors. strong needs for legitimacy and local isomorphism in each host country environment coexist with strong demand for efficiency within its worldwide system and.e. and mediating roles of organizations such as trade associations.. therefore. people. and consultants (e. Even though they are different from traditional economic analysis. cultural. or information. the collected essays in Evan. we believe that for MNCs. Effects of Within Density in National Organization Sets As Bower (1987) has shown through his indepth study of American. but for political power and institutional legitimacy. and Japa612 nese companies in the petrochemical industry. Bower's study shows how Japanese petrochemical companies were able to capitalize on such linkages. our arguments are much more consistent with recent work of economists such as Porter (in press) and Kogut (1988). the Japanese R & D centers of some of the American computer companies could not tap into local skills and technologies because the absence of associated manufacturing and marketing activities prevented the isolated research establishments from building linkages with the local "knowledge networks" . the implications for local units of MNCs are clear. p. 1976).. the attributes of the local organization sets and the external network) plays an important role in moderating the influence of technical and economic considerations. 140). and they may be established and maintained through many different mechanisms such as integrating governmental agencies. institutionalizing systems of personnel flows. sociological. European. 1985). they are apparently not strongly so" (1983. producers. customers. for social as well as economic fitness" (DiMaggio & Powell. As argued by Granovetter (1973). but also as a means of restructuring and rationalizing the an alternative framework that relates dispersal and specialization to the densities of interactions both within and across the different local organization sets of the company. they also have contended that "while the two dimensions (technical and institutional) tend to be negatively correlated. Although Meyer and Scott have been cautious in suggesting that business organizations belong to "technical sectors" in which the economic need for efficiency and effectiveness in controlling work processes dominates institutional need for legitimacy. As suggested in the introductory section. 1983) and that "organizations compete not just for resources and customers. As suggested by Westney (1989).g. legal. both of whom have shown the importance of interinstitutional structure in determining the competitiveness of different countries and companies in different businesses. and historical reasons. not only to build entry barriers in the local market. banks. and others involved in a particular field of industrial activity (Westney & Sakakibara. p. Westney and Sakakibara's (1985) study on the R & D activities of Japanese and American computer companies illustrates this effect of within density in the local organization sets. 150). using long-term contracts and trust-based relationships. For a variety of economic. our conceptualization is strongly influenced by the work of institutional theorists who have argued that the structure and behavior of organizations are influenced by both technical and institutional factors (Meyer & Scott.

In this situation. created an environment that made it easy for Japanese producers to enter the U. the MNC's resource configuration follows the pattern we have described previously based on consideration of the within densities alone. with high across densities. they were able to obtain government support on antidumping suits. Department of Commerce's account of the television industry in the United States in the early 1970s (Paul. the social context exerts limited influence and intended economic rationality becomes dominant in resource configuration decisions. When within densities are high. when across densities are high. no such barriers are created. in this case. assembly. As a result. dispersal will increase while specialization will decrease.. If there are high interactions across members of the different national organization sets. We can. 1979) that may exist in different countries as a result of their comparative advantages (e. as shown in the U. However. the MNC will concentrate research. market with local sales offices importing finished products from the parent companies. concentration will decline resource-seeking (though not necessarily be eliminated because regulatory and other barriers may selectively prohibit certain flows of people and products). its overall resource configuration will show relatively low dispersal and high specialization. this situation changes significantly. and the company will locate its resources according to the resource niches in different countries. We have argued that low within density will lead to low dispersal and high specialization. R & D in the United States or Japan. Therefore. When interaction densities within the different national organization sets are low. Effects of Across Density in the External Network When the linkages across the different national organization sets are sparse. and their arm's-length relationships with suppliers. manufacturing in Singapore or Brazil). there is no longer any need to locate specific activities in specific locations to benefit from access to local resources. If technologies developing in one location can be accessed instantaneously from another. however. and the resulting politically negotiated import quotas forced the Japanese companies to establish local manufacturing facilities. However. Absence of ties among producers because of rivalry and antitrust laws. without the need for complementary facilities on a location- . and other similar activities based on consideration of potential scale and scope economies and locate them on the basis of resource niches (Aldrich. with high across density.that were embedded in the dense interactions among different members of the organization set for the computer industry in Japan. Where the linkages within the local organization sets are sparse. therefore. 1984). and government.S. therefore. Consider now the case of high within densities coupled with high across densities. many of these national resource niches are eliminated because of freer flows. it is no longer necessary to establish a comprehensive range of resources in each market because exchange linkages can now be established across borders. Consequently. the company will be forced to fragment its activities and locate more of the different kinds of resources in each market so as to provide the va613 riety that is necessary to match the structures of the local organization sets. production. But. Consider first the case of low within density and high across density. We have suggested that high within density will lead to high dispersal and low specialization because of the need for matching the structures of the local environments. labor.S. make the following propositions about the effects of within density on dispersal and specialization in the configuration of resources in a multinational. when the American companies responded in a unified manner through the Electronics Industry Association.g. or if excess capital available in one environment can be borrowed in markets located elsewhere. with the support of labor unions and suppliers.

the industry was highly regulated in most countries. For example. if there is high across density. and E are strongly influenced by the standards and preferences of customers in location C. (OSB). As a result. and this existence is predicted by the normative systems that Laumann. the logic of resource allocation for both high and low within densities becomes inappropriate. different locations might emerge as the nodes in the relevant external networks. and Marsden (1978) proposed as one of the modalities that influence the behaviors of members in a network. The observed consequences of this trend are entirely consistent with our arguments. and marketing. (OSC). The level of resources in C will exceed what is required to match the needs for membership of the local organization set (OSC) and will. Bartlett and Ghoshal (1986) and Prahalad and Doz (1987) have described the existence of such lead markets in many businesses. ITT provides a good illustration: Each of its national subsidiaries in Europe had its own local facilities for product development.. a completely different set of criteria emerges: In this situation. across density has increased substantially due to the emergence of digital technology and the growing trends of standardization and deregulation. Chandler (1986). the consequence of increasing across density for the resource configuration of the company will be one of moderate dispersal (i. the MNC will tend to locate a significant amount of resources in C so as to be able to sense the demands of local customers and respond to them in a fashion that attracts their patronage. resource configuration is greatly influenced by the nodal characteristics of the complex external network. Ericsson. the situation in which customers in locations A. and given that even for the same activity there might be multiple nodes instead of a single node. for example. However. and other industry participants. however. Even though the overall level of dispersal has been reduced to a limited extent. and the corporate staff including the top management of the company consisted of fewer than 100 employees. In such a situation. Instead. not as high as in the case of localfor-local distribution but higher than concentration only in countries offering specific resource niches) coupled with increasing specialization. Tasks will be divided into finer and finer segments so that each could be located at the appropriate nodal locations which. and the need to synchronize the switching equipment with the ideosyncrasies of local terminal equipments constrained opportunities for cross-border linkages. until the late 1970s. As a result. In other words. Glaskiewicz. D. resource configurations of the producers have also changed. be targeted to benefit from the greater role of C as a central node in the larger external network that is created by the linkages among (OSA). instead. Interactions among members of the industry were high within each country because of its status as a strategic industry and the resulting coordinating role of the national governments. and so on. might well be different from those that would be predicted by the traditional considerations of comparative advantages or resource niches as applicable to those tasks. for example.e. the resources of most multinational companies were highly dispersed. Consider. the telecommunications switching industry was characterized by high within and low across densities. Given that for different activities of the MNC. increasing across densities has been a dominant trend that has affected a wide range of industries in the recent past. The context of this industry has changed significantly in the 1980s: Although within densities have remained high. all of which have facilitated cross-border integration among suppliers. has closed only a few of its factories around the 614 .by-location basis. until the advent of digital technology. manufacturing. among others. B. and they had low levels of specialization. customers. has documented that because of improvements in communication and transportation infrastructures around the world. the level of specialization has increased drastically.

Provan et al. each of the laboratories of Alcatel. developing the entire range of products for their local markets. To incorporate this difference in our analysis. Effects of Within Density in National Organization Sets Applying Zald's (1970) political economy approach to the analysis of interorganizational relations. we did not address the question of how such a fit is achieved. the company created by merging 177 and CIT-Alcatel. as argued by Benson (1975). Centrality and Power Within the Multinational Network Our preceding arguments on resource configuration in MNCs were based on a notion of isomorphic fit with the characteristics of the external network. (1980) provided empirical support to this proposal when they demonstrated that power relations within the network of United Way organizations were significantly modified by the linkages between the individual agencies and other elements in their local communities upon which the United Way depended for its survival. and that the nature of resource flows generated by the resulting distribution of power leads to the pattern of isomorphic fit we have described. An MNC's configuration of resources at any point in time is the outcome of previous resource flows and. When this within density is low. but from the web of exchange relations in the local organization set of which it is a part. but it has converted many of them into focused manufacturing centers that produce a narrow range of components. however. dense exchange relationships with the members of their local organization sets can be expected to enhance the powers of the national units of the In this situation. In this section. when the subsidiary's power is not derived from an individual dyadic relationship. The dependence of the United Way on the local communities of its different organizations is in some ways akin to the dependence of the multinational on the local organization sets of its different national units: Just as dense linkages with the key elements of their communities enhanced the power of the United Way organizations. we will suggest that within and across densities in the different national organization sets of an MNC predicate the relative power of the headquarters and the national units. is the key requirement for maintaining the relation- 615 . has now been given the mandate and resources to pursue a specific and well-defined technology or development task in contrast to the earlier situation when most of them operated quite independently. We suggest that the efficacy of the hierarchical power of the headquarters to counteract the linkage-based power of the subsidiary is contingent on the density of interactions among members of the subsidiary's organization set. Remote control loses efficacy when "localness. such direct control becomes more difficult in this case. Benson (1975) suggested that an actor in such a network can enhance its power in dyadic relationships with other actors on the strength of its relationships with other organizational or social networks. Subsequently. the headquarters is more effective in counteracting the power of the subsidiary because it is potentially easier to have "direct control" over such relationships through mechanisms such as periodic visits by the headquarters staff. it is necessary to consider how hierarchical power might modify the interunit exchange patterns proposed by Benson." by itself. the flow of resources within an interorganizational network is influenced by the distribution of power within the network. the potential power of the subsidiary is derived from its individual dyadic relationships. However. to draw a direct correspondence between the United Way and an MNC because the central management organization of the United Way lacks the hierarchical power of the headquarters of the MNC. It is inappropriate. Similarly.

and so forth across different countries. For this article. 1976. The company produces and markets car and truck tires in a . 1962). Our preceding discussions on power-de616 pendency relationships within an MNC were based only on consideration of dyadic exchange between the headquarters and the national units. As an illustration. this might be called exchange power to distinguish it from the second source of power that arises from structural rather than exchange dependencies.ships. the term centrality has been defined and used in the literature in many different ways. Effects of Across Density in the External Network Existing literature on the distribution of power in social networks reveals two main sources of power in such collectivities (Fombrun. was a main reason (other than distance) that impeded closer control of the local subsidiary from Stockholm and allowed the subsidiary to build up the high level of research and other resources. Structural power emanates from the position of a member within the network. In a situation of extensive interactions among the subsidiaries. power is an antipode of dependency in exchange relations (Emerson. and we can also define the point centrality of each actor as a function of its degree (i. If all or most of the units of the MNC are located in environments of high within density. and Yamagishi (1983). the number of other actors within the multinational network with which it has direct exchange relations). customers. Gilmore. First. This explanation becomes clear from a comparison of the three network structures shown in Figure 2 (each of which is reproduced from Freeman. High across density typically implies a high level of interactions among the subsidiaries of a multinational. as shown by Lazarsfeld and Menzel (1961). Emerson. 1978). and regulators. in the case of the Australian subsidiary of Ericsson that we referred to earlier. and the resulting close relationships among equipment suppliers. the positive relationship between environmental linkages and power of the local unit of an interorganizational network proposed by Benson (1975) will remain operational in the context of an MNC under the condition of high within density. Therefore. suppliers. The situation changes when consideration of structural power is brought into the analysis. we can limit our attention to what Freeman describes as point centrality of the different actors within the multinational network. Lehman. Pfeffer & Salancik. Therefore. the headquarters enjoys the highest levels of point centrality when linkages among the subsidiaries are minimal. consider the case of a manufacturer of automotive tires such as Italy's Pirelli and Company. 1979.. 1983). the local unit will use this power to reduce its dependence on the other units of the network. Structure of the external network now enters the calculation as an important variable because different members of the multinational network can potentially develop different levels of structural power based on their positions within the larger network of interactions among customers. As pointed out by Freeman (1979). In keeping with Cook (1977). Following the arguments of Emerson (1962) and Cook (1977). extensive cross-licensing arrangements among all the producers. Ignoring for present purposes the exceptions to the rule pointed out by Cook. the consequence of this process will be a high level of dispersal of its resources on a local-for-local basis.e. and it accrues to members of the network who control critical resources required by others but do not depend on others for resources (Aldrich. it is an attribute that is induced by a member's context. the centrality of the headquarters declines relative to those of the subsidiaries. the structural power of actors in a network can be assumed to arise from their centrality within the network (Laumann & Pappi. 1979). and the centrality of the different members of the network becomes dependent on the actual structure of such linkages. 1975). it will bargain for and obtain a full range of resources so that it will be able to autonomously carry out as many of its functions as possible. For example. Following the arguments of Freeman.

Pirelli's subsidiaries also needed to enhance their internal coordination and communication on issues of quality levels. and the centrality of the headquarters declines. Italy. and so on to prevent customer dissatisfaction (see Terpstra. 1982). with minimal coordination. Note that for the star-shaped structure (Figure 2c). it can be stated 617 that as across density increases. An outcome such as the network structure shown in Figures 2b or 2c will follow from the existence of nodes in the external network. as relevant to Pirelli). In Figure 2b. multiple points can emerge within the MNC with the same or similar degree of point centrality. intersubsidiary linkages become more extensive. and Germany. however. as a general principle. however. other subsidiaries have less. the headquarters and all the subsidiaries have the same point centrality. It is more interesting to note. For . quality. whereas in the hub-shaped structure (Figure 2a). Centrality measures for three different network structures. and support provided by common vendors (thereby enhancing across density. It also supplies tires to the Ford Motor Company in each of these countries. But as the interactions and coordination among Ford's operations in these countries increased.Point Centrality (degree) NetworkStructure H D 4 1 1 1 1 A B C D A B 2ci D | H 2b C C 4 4 2 2 2 B AD 4 4 4 4 4 B 2c C Figure 2. Until such time that Ford's local units in these countries operated relatively autonomously. under this condition. leading to internal comparisons of the prices. whereas one subsidiary has the same point centrality as the headquarters. there was little need for Pirelli's local units to coordinate their own activities with regard to their supply to Ford. the headquarters has a very high level of point centrality compared to the subsidiaries. service. relative to other units. number of countries including the United States. pricing. In other words.

for any particular activity. The enormous complexity of several disparate countrylevel organization sets and the diversity of the heterogeneous international business environment were dichotomized into high-low categories of within and across densities. interactions among members within the national organization sets may be high in homogeneous societies that have a tradition of strong interinstitutional linkages. the MNC may provide all the required resources in appropriate measures so that its local unit can build and maintain linkages with key members of its own community. impeded because of societal heterogeneity. computer software technology in the United States and the United Kingdom) are some other examples of such external nodes that can affect the point centralities of different units within the MNC.g. but different elements of the local environment may be strongly connected with their counterparts in other coun- . Further. but external linkages with other organization sets may be low. a number of different locations can possess such nodal characteristics. the multinational network typically will develop multiple centers that have different internal coalitions and nodes corresponding to the different coalitions and nodes that may exist in the external network. and Germany may emerge as external nodes because the headquarters for its major worldwide customers may be located in these markets. Therefore. Similarly. particularly the more regulated and autarchic. following the arguments of Burt (1978). The organization sets in some other countries may be sparsely connected internally. a high level of specialization also will develop in the resource configuration because nodal positions within the MNC network can be expected to vary by activities and tasks as a reflection of similar variance in the external network.. In some locations internal interactions within the local organization sets may be high. for Pirelli. adoption by customers in other countries of a perfume or wine that is popular in France) and the advanced states of certain technologies in certain countries (e. ceramic technology in Japan. As a result. the nodal units of the multinational will develop structural power and use this power to attract resources from within the MNC network. Note that both the process and the outcome aspects of this conclusion resonate with some recent empirical findings such as those of subsidiaries being given world product mandates (Poynter & Rug618 man. Density of interactions across the national organization sets may be high for the developed countries. For the different activities of the MNC. In such locations. Large MNCs as Differentiated Networks Several highly simplifying assumptions were made in the foregoing discussions on resource configuration in MNCs under different conditions of local and global interlinkages. the configuration of resources in multinationals engaged in such businesses will be influenced by multiple criteria. only one of these external nodes (Italy) may coincide with the location of the company's own headquarters. but low in developing countries. the United States. 1986) for specific activities and tasks. the level of dispersal in the MNC's resources will be moderate-lower than local-for-local dispersal (because not all units will emerge as nodes) but higher than in the case of concentration in locations of specific resource niches (except for businesses where a specific country enjoys a dominant position in all activities). Further.example. in such a situation. or among regional groupings. In reality. or rendered ineffective because of poor communication infrastructures or the absence of linking institutions. Normative hierarchy in customer tastes and preferences (e. Therefore. different locations can emerge as the nodes of the external network.g. the levels of connectedness within and across the national organization sets can be expected to vary across countries and groups of countries. and it may be low in countries where such linkages are discouraged through legislation.. 1982) and global leader or contributor roles (Bartlett & Ghoshal. Consequently. Italy.

However. If within density is a country trait and across density is a world-system trait. and the observed trend of convergence to the differentiated network structure may be an outcome of these broader societal changes. the influence of structural embeddedness is low. the organization sets in a third group of countries may be characterized by high within and across linkages: In these locations. whereas in other cases the location choice may be motivated by the modalities in the external network. in the context of high within and across densities. the MNC may establish all the complementary resources for integrated operations..g. 1989).tries. In other words. NEC. When such linkages are low. product development. at least for the very large companies that have been the focus of our attention in this article. Implications for Research We have proposed a reconceptualization of the MNC as an interorganizational system rather than as an organization. and Matsushita are increasingly converging to this structural form despite the differences in their businesses and parent company nationalities (Bartlett & Ghoshal. and in some cases the location of the specialized resources may reflect the desire to access special resource niches. Following the arguments of Chandler (1986).. Elsewhere we have described such a structure as the differentiated network and have shown that a number of large multinational companies such as Procter & Gamble. This has resulted in generalized conclusions at the level of the overall company based on empirical studies that have focused on individual actors or specific dyadic links. Thus. in such situations. the global scale audio factory in Singapore). First. marketing. irrespective of their businesses. For example. and MNCs have a greater degree of freedom to locate their activities and 619 resources to benefit from local resource niches and are in line with the economic and technological characteristics of their businesses.. the MNC may create a resource structure that is concentrated and specialized. some that are concentrated in different countries to access specialized local resource pools (e. Ericsson. then. will reflect a mix of some resources that are dispersed among some units on a purely local-for-local basis (e. but it may link these locations with others so as to leverage the resources and achieve economies of concentration and specialization. one effect of worldwide improvements in communication and transportation infrastructures is the increasing interlinkages among actors. and other resources for the lighting business in India). the resource configurations of different MNCs can be expected to differ as a reflection of those differences in their businesses and as a result of their freedom to exercise strategic choices. and others that are concentrated in lead markets (e. traditional analysis has tended to assume internal homogeneity within such companies. 1983) may be getting stronger as the world jolts along to Levitt's (1983) global village. mimetic and normative forces of isomorphism (DiMaggio & Powell. a sampled group of American MNCs have been inferred to be more centralized than their Japanese and European . manufacturing. Unilever. This reconceptualization creates the possibility of applying exchange theory and network methodologies to the study of MNCs and has some important implications for future research on MNC-related issues. the pattern of linkages in the overall structure of the external network is going to be increasingly similar for large multinational companies. The overall resource configuration for a company like Philips. development and manufacturing facilities for teletext television sets in the United Kingdom). both within and across national boundaries. at the aggregate level of macrostructural differences among MNCs.g. Finally.g. Such a convergence is consistent with the theoretical arguments we have presented here. For these locations. such freedom is reduced because of the network influences: Both dispersal and specialization now become essential.

For example.. NEC.g. The network perspective is particularly suited for investigation of such differences in internal roles. 1989). in the differentiated network MNC.118) in Burt. as has been shown in some recent contributions. Finally. 1986.. Minor. there is no formal macrostructure that "fits" all parts of the company's heterogeneous environments. Yet. given such heterogeneity. such as those by Daniels. contrary to the predictions of structural contingency. choose one that appears to be simple and consistent with its own administrative heritage (Bartlett. 1983). Hulbert & Brandt. decision making. macrostructural analysis alone may not be enough and may need to be complemented with microstructural analyses of these internal differences so as to build a more nearly complete theoretical understanding of the ways in which an MNC functions. and Tretter (1985) and Egelhoff (1988) -but it might also have become a less interesting attribute to study precisely because of such indeterminateness. Procter & Gamble.counterparts based on analysis of the parent companies' relationships with their subsidiaries located in one region (e. and Unilever have not changed their macrostructures in over two decades despite some very significant changes in their business conditions.. and tasks of different affiliated units (e.or even business-level generic strategies and how they "fit"generic types of competitive structures are too far removed from the reality of highly differentiated strategic approaches that can be expected in different parts of the differentiated network organization. However. Investigation of the lateral network relations among the different subsidiaries can open up avenues for similar fine-grained analysis of both the causes and consequences of horizontal interdependencies and synergy. 1985). the interorganizational approach can be particularly useful for the study of an- . and the headquarters' control mechanisms 620 have evolved from ubiquitous "company ways" to multidimensional gestalts that are applied differently to different parts of the organization so as to respond to shifting global contexts (Bartlett & Ghoshal. 1979) or hierarchy (Coleman. and creation and diffusion of innovations in such companies (e. 1987. Instead. In this article we have focused primarily on the hierarchical network relationships between the headquarters and the national subsidiaries of an MNC. The same argument we made for structure can also be made for strategy.. Discussions on company. and Walker. the papers by Burt on "distinguishing relational contents" (pp.g. Therefore. through block modeling and analysis of functional equivalence) and of how internal coordination mechanisms might be differentiated to match the variety of subunit contexts (e. given the significant empirically induced modifications to the Stopford and Wells (1972) contingency model proposed by subsequent studies of MNC macrostructures.g. subsidiaries have assumed new and specific roles to respond to changing local conditions. 1986). quite arbitrarily. 100. as we have argued. 1983. which appear to be theoretically more appropriate for such macrostructural comparisons among internally differentiated and heterogeneous organizational systems like MNCs. and information might be more relevant for developing middle-range theories on resource commitment. normative integration. it may be more useful to explore the actual content of strategy in such complex organizational systems: Network theoretic analysis of internal flows of resources. headquarters-subsidiary relations within an MNC can vary widely from subsidiary to subsidiary. Burt. not only might macrostructure have become more difficult to predict theoretically-as seems true.g. 1980). strategic control. Pitts. the application of network analysis in Carley. people. it has to choose a formal departmental structure and might. Second. 3574) and "studying status/role-sets using mass surveys" (pp. The interorganizational network conceptualization can provide new concepts such as graph centrality (Freeman. relations. & Associates. For example. products. 1966). What have changed in these companies are the internal management processes.

and management of an MNC. each of these different kinds of exchanges can have some very different implications for the strategy. 369-379] cited in Contractor & Lorange. the contributions by Walker [pp.other MNC-related phenomenon that is assuming increasing importance (viz. 339-346]. and elaboration of these distinctions must be a priority for future research on this topic. Similarly. these densities cannot but differ for different parts of the total external network of any company. Therefore. Therefore. hierarchy. suppliers. the external organizations relevant for the R & D department of a company may be far more interconnected across national borders compared to those that are relevant for the service department. besides (indeed. First. our definitions of constructs such as within and across densities are too coarse because. those effects are also likely to be interactive. But density is not a complete description of a network. before) such extension and refinement of the concepts. and Hakausson & Johanson [pp. The necessary improvement and extension of these preliminary ideas will require both deductive theory building with more sophisticated use of network theory than has been achieved here. on average. we have focused on density as the key parameter of the external network because density appeared to relate most closely to the implications of social embeddedness described by Granovetter (1985). Finally. 1989. empirical studies are also needed to induce and test more fine-grained propositions and hypotheses. while within density. and it is possible that some other characteristics of the external network can significantly influence specific attributes of the MNC. and his work provides some interesting opportunities for modifying and extending our theoretical arguments. we have considered exchange very broadly to include many different kinds of transactions involving products. Such differences can be expected along both geographic and functional dimensions. the network analysis approach can provide both appropriate concepts and methodological tools for rigorous and theory-grounded investigation of the strategic and organizational aspects of such alliances (see. as we point out in the concluding section. information. the next phase of theory development must explicate the separate and joint effects of these different kinds of exchanges. it would be desirable to identify a set of parameters that completely and unambiguously define the external network and then to explore the impact of each of these parameters on selected attributes of the multinational. Further. for more nearly complete development of theory. and so on. affect. Krackhardt (1989) has proposed four parameters (connectedness. Third. organization. For example. for example.. 1985]). and competitors [Ohmae. without distinguishing among these different flows. leastupperboundedness. Harrigan. further. 227-240]. it might also be necessary to improve the specificity and precision in our definition of some of the con- . their forming complex webs of alliances and joint ventures with customers. By focusing on relations among actors. may be higher in Japan than in the United States. One of the main attractions of the network perspective is that the implications of such differences can be 621 explicitly included in both theoretical and empirical analyses. and graph efficiency) as necessary and sufficient descriptors of a network. there may be significant differences between the two contexts for different parts of the local organization sets. As follows from the general arguments of Mitchell (1973) and Kadushin (1978). it is also a relatively simple construct that is easy to conceptualize and to measure once the relevant organization sets and external network are identified (see below). Westney [pp. 1988). Building a Network Theory of the MNC The concepts and arguments presented here suffer from a number of shortcomings that should be overcome before the network conceptualization can yield a useful and testable theory of the MNC. Second.

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