Global Strategy Journal

Global Strat. J., 1: 362–376 (2011)

Published online in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1111/j.2042-5805.2011.00018.x

THE PROBLEM OF CONTROL AND THE ROLE

OF HOME–HOST TIES IN EXPLAINING
MULTINATIONALS’ FOREIGN OPERATIONS,
COMPETITIVENESS, AND PERFORMANCE gsj_

18 362..376

SUBRAMANIAN RANGAN1* and ALDEMIR DRUMMOND2

1
INSEAD, Fontainebleau, France
2
Fundação Dom Cabral, Nova Lima, Brazil

The existing multinational enterprise (MNE) literature has focused on capabilities and value
creation challenges, including related to cultural and other distance. To better understand
heterogeneity in the foreign country performance of MNEs, however, we need to go beyond the
global strategy challenges of capabilities and coordination. Specifically, we need to explore
MNEs’ value capture challenges abroad and attend to control as a chronic dilemma that is
inadequately addressed by internalization. In operating in foreign host countries, MNEs are
chronically exposed to two types of largely uninsurable discretion: sovereign discretion of host
governments and delegated discretion of host country employees, partners, suppliers, and
such. The problem in the first case relates to power; and in the second it relates to information.
Power and information are the sine qua non of effective control. Control is a prerequisite for
anticipated value capture, which influences the extent of MNEs’ capability transfer, input
localization, and output adaptation in a given host country. Transfer, localization, and adpa-
tation are the essence of host country value creation, which influences competitiveness and
performance there. Accordingly, beyond differences in MNE capabilities, heterogeneity in
access to credible power and reliable information in a focal host country predicts heterogeneity
in MNEs’ competitiveness and relative performance there. This is why and how heterogeneity
in macro-level home–host ties (HHTs) explains durable performance differences among foreign
MNEs operating in a focal host country. In terms of global strategy research and practice, this
turns the spotlight on macro-level HHTs, nonmarket strategy, and, eventually, focused inter-
nationalization. It also argues for more microfoundations research on the limits and actual
control benefits of internalization. Copyright © 2011 Strategic Management Society.

INTRODUCTION 1994, Autolatina was dissolved at the behest of

During the late-1980s, to address efficiently the
emerging auto market in Brazil, the car companies
Ford and Vollkswagen created a manufacturing joint
venture called ‘Autolatina.’ Just a few years later, by
Keywords: control; MNE home–host ties; performance
*Correspondence to: Subramanian Rangan, INSEAD, Fon-
tainebleau, France 77305. E-mail: subramanian.rangan@
insead.edu
Volkswagen (VW). VW had begun introducing
better ‘tropicalized’ products and demonstrating
greater commitment to Brazil. The market was notic-
ing and responding accordingly. Today Volkswagen
is a profitable leader in the booming Brazilian auto
industry (accounting for a quarter of the market),
whereas Ford, which entered Brazil decades prior to
VW, still strives to register double-digit market share
there. The contrasting performance in Brazil can
hardly be explained as a result of VW’s general

Copyright © 2011 Strategic Management Society

 Control Role of MNE Home–Host Ties
superiority or longer experience over Ford; after all,
Ford has been and remains a major car company in
Europe (VW’s home region), whereas VW has per-
formed dismally over the past couple of decades in
North America (Ford’s home region).
To the extent strategy is a theory of performance,
global strategy is concerned with understanding and
explaining heterogeneity in firms’ performance
abroad. As in strategy, in global strategy prime
emphasis is placed on heterogeneity in firms’ capa-
bilities, which constitutes firms’ value creation
potential. However, as important as firm-level capa-
bilities and experience are (as suggested in earlier
anecdote), and, unlike in the purely domestic setting,
capabilities and experience do not adequately
explain multinational enterprises’ (MNEs’) perfor-
mance in a specific host country. MNE value cre-
ation potential, it is evident, is projected selectively
(more in some host countries and less in others), and
performance moves in correspondence.
It is conventional in the international business lit-
erature to explore this MNE foreign performance
puzzle as a problem of cultural distance and more
costly coordination (Johanson and Vahlne, 1977). In
this article, however, building on Rangan and Sengul
(2009), we deepen a less conventional line of rea-
soning. Specifically, we theorize that more than
coordination, the root problem is one of control. In
theorizing thus, we build on the fundamental eco-
nomic tenet that although the extent of an actor’s
value creation may ultimately explain the actor’s
market performance, the extent of value creation in a
given context is itself endogenous to the actor’s
anticipated value capture in that context (North,
1990). The implication in the multinational context
is that, taking an MNE’s level of resources and capa-
bilities (i.e., value creation potential) as a given, it is
the extent of the resolution of the control concerns
(i.e., value capture potential) that influences and pre-
dicts the MNE’s actual projection of its resources
and capabilities and, eventually, performance in a
host country.
Just as firm-level resources and capabilities are
heterogeneous across MNEs worldwide, host
country-level control is also heterogeneous across
MNEs in a given host country. It is important, hence,
to go beyond the conventional country risk literature
and unpack this other dimension of heterogeneity.
The global strategy literature on integration and
responsiveness (Prahalad and Doz, 1987) and more
recent work on failures in internationlization
(Cuervo-Cazurra, Maloney, and Manrakhan, 2007;
Copyright © 2011 Strategic Management Society
363
Hennart, 2009) have taught us that an MNE’s post-
entry performance in a host country is predicated on
the extent to which it transfers its capabilities, local-
izes its cost base, and adapts its products, services,
and distribution. Capability transfer, input localiza-
tion, and output adapatation are the essence of MNE
host country value creation. Yet, the extent of trans-
fer, input localization, and output adaptation are a
function not only of MNE firm-level capabilities and
experience, but also of the extent of rationally per-
ceived MNE host country-level control. This line of
reasoning promises a more satisfactory explanation
of the heteregenous host country performance of
MNEs (such as Ford and VW mentioned earlier),
and has implications for future research and practice
in global strategy.
The arguments set forth in this article should
apply as well to resource- and asset-seeking MNEs.
For concreteness, however, we develop and discuss
them largely in the context of market-seeking
MNEs. Further, because the reasoning we develop in
this article unfolds in multiple steps, we shall right
away preview the full chain of arguments.
First, given firm-specific resources and capabili-
ties, an MNE’s performance in a foreign host
country is a function of the MNE’s actual value
creation (i.e., cost and quality) in that focal host
country. Transfer, input localization, and output
adaptation determine the extent to which given MNE
firm-level capabilities are reflected in the actual cost
and quality delivered in the host country (see
Cuervo-Cazurra et al., 2007). If, in a focal host
country, hesitation rather than confidence character-
izes the MNEs’ behavior in transfering, localizing,
and adapting its global firm-level capabilities, then
host value creation suffers and will be reflected in
poor competitiveness and relative performance in the
host country.
Second, given firm-specific resources and capa-
bilities, hesitation by an MNE to commit and project
existing capabilities in a focal host country does not
imply a sentimental failure of rationality or willful
lack of effort. Rather, it likely reflects the MNE’s
concerns about control and the value capture abroad
(e.g., will host country governments or partners
misappropriate value we create?). Control concerns
constitute concerns about anticipated value capture,
reasonable assurance on which is a prerequisite for
confident value creation. Value capture concerns of
MNEs operating in foreign host countries emanate
from chronic exposure to two types of largely unin-
surable discretion: sovereign discretion of host
Global Strat. J., 1: 362–376 (2011)
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364 S. Rangan and A. Drummond
governments and delegated discretion of host
country employees, partners, suppliers and such.
Sovereign discretion refers to the (relatively wide,
yet) legitimate authority vested in governments to, at
any time, exercise power and act, within their
country, in ways that protect and advance the
national interest. Delegated discretion refers to the
(especially implicit) decision rights over use, alloca-
tion, and exchange of firm resources and capabilities
that MNEs must unavoidably delegate to and share
with host country employees, partners, suppliers,
and such (so that centralized decision making in HQ
does not become a veritable bottleneck impeding
the reasonable and responsive functioning of dis-
persed operations). In sovereign discretion, the
problem relates to an imbalance of power (e.g.,
BP’s early setbacks in Russia); and in delegated
discretion, it relates to incomplete and asymmetric
information (e.g., Daimler in Japan). Power and
information are everywhere the sine qua non of
effective control. As will be explained, internaliza-
tion (which, like capabilities, is another anchor
concept in international business) is hardly a salve.
More than in the domestic setting, in the interna-
tional setting internalization is a helpful instrument
that implies certain legal claims but that far from
assures realized control (see Mjoen and Tallman,
1997).
Third, and accordingly, resources and capabili-
ties factored in, heterogeneity in MNEs’ access to
credible power to contain sovereign discretion and
reliable information to cope with delegated discre-
tion in a focal host country predicts heterogeneity
in the extent of MNEs’ transfer, input localization,
and output adaptation. The preceding constitute
MNE commitment to a host country and influence
competitiveness and performance. Access to cred-
ible power and information are a function of the
macro structure within which home and host coun-
tries are embedded (Rangan and Sengul, 2009).
Specifically, they are a function of political, eco-
nomic, and historical home–host ties (HHTs).
Statecraft (including colonial empire of the past
and intercountry preferential economic and security
arrangements of the present), the nonmarket strat-
egies of private enterprise (e.g., the actions of GM
and Ford in the shaping of NAFTA), and events
and developments in international history (e.g.,
voyages of discovery and immigration flows) have
generated, and continue to generate, a heterogenous
pattern of HHTs among the world’s countries.
HHTs are, thus, dyadic links constituted by inter-
Copyright © 2011 Strategic Management Society
country flows and relations; they are not based on
intercountry similarity or isomorphism. Unlike (or
certainly more than) geographical and cultural dis-
tance, HHTs may rise or decline over time.
As an illustration of HHTs, consider the political
and economic ties being forged currently between
China and Africa. These ties no doubt confer some
control benefits to Chinese MNEs (e.g., Huawei)
operating in Africa. Or consider that the United
States has since 1979, channeled more than a billion
dollars annually in foreign support to Egypt. In light
of this long-standing U.S.–Egypt tie, it comes as
less of a surprise that, at least until now, U.S.-
headquartered MNEs (such as GM) lead among
foreign firms in Egypt (which is culturally and geo-
graphically closer to Europe). Likewise, it is note-
worthy that a strategic pipeline delivering Russian
gas to Europe will be channeled into Germany. It is
noteworthy, too, that massive German immigration
into Brazil, like immigration of Indians to the United
Kingdom, has accreted a dyadic intercountry tie
between those culturally distal countries.
As we will explain, such HHTs enable sanction-
ing (of potentially opportunistic host governements)
and monitoring (of potentially errant host employ-
ees, partners, and suppliers) and, hence, predict
greater MNE commitment to certain host countries.
While HHTs are not a panacea, in the international
context of incurably incomplete and dubiously
enforceable contracting, they offer a hedge against
home MNEs exposure to sovereign and delegated
discretion. It follows then that heterogeneity in the
extent of ‘discretion compensating’ HHTs can
predict heterogeneity in the confidence of MNEs’
transfer, input localization, and output adaptation of
firm-level capabilities in a focal host country.
Indeed, this heterogeneity in anticipated value
capture, based on heterogeneous HHTs, we contend,
is what explains the superior commitment and con-
sequent superior performance of European MNEs in
Brazil, American MNEs in Japan, or German MNEs
in Russia.
To summarize, the existing MNE literature has
focused largely on capabilities and value creation
challenges (including cultural and other distance—
see Ghemawat, 2001; Xu and Shenkar, 2002). That
work has highlighted the extra costs of creating
value abroad and emphasized compensating capa-
bilities (see Zaheer, 1995; Eden and Miller, 2004).
Yet, if we wish to better understand and explain
heterogeneity in the foreign country performance of
MNEs beyond the global strategy challenges of
Global Strat. J., 1: 362–376 (2011)
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 Control Role of MNE Home–Host Ties
capabilities and coordination, we need to attend
explicitly to the problem of control. We need to
explore the extra costs of capturing value abroad and
attend to control as a chronic dilemma that is inad-
equately addressed by internalization.
In terms of global strategy research and practice,
this turns the spotlight on macro-level HHTs, non-
market strategy, and, eventually, focused internation-
alization. It also aruges for more microfoundations
research on the limits and actual control benefits of
internalization. Bearing in mind the enlarged set of
salient actors in the global vs. purely domestic
setting, in theorizing about global strategy and
global performance, it is more necessary to integrate
the macro, meso, and micro. Accordingly, in elabo-
rating on the mechanisms through which HHTs
become operative and influence MNEs’ competitive-
ness and relative performance abroad, we draw on
political sociology (in particular, theories of political
and structural embeddedness and power and trust),
economics (in particular, the theory of imperfect
competition), and psychology (especially manage-
rial commitment and decision making under
uncertainty).
VALUE CREATION AND MNE
PERFORMANCE IN A FOREIGN
HOST MARKET
At least since Hymer (1976), explanation of the
emergence and expansion of MNEs has been
founded on the possession of a well-developed
bundle of valuable and nonlocation-bounded firm-
specific capabilities (FSCs) (see Rugman and
Verbeke, 1992; Caves, 1996). FSCs reside in inno-
vative routines and hard and soft technologies that
sustain valuable product differentiation, or superior
processes, including those in manufacturing, assem-
bly, marketing, distribution, or after-sales service.
These routines and repertoires of knowledge and
related intangible assets (brand equity) raise the
MNE’s perceived quality and reduce its unit cost.
This line of reasoning was developed largely in the
primary and manufacturing sectors (i.e., with the
likes of Shell, Nestle, and ITT), but it applies equally
in services and explains newer MNEs (e.g., Google
and Tata).
In the standard case, FSCs emerge in the MNE’s
home market. It is, hence, reasonable to characterize
FSCs as a headquarters (HQ) capability. Over time,
with the aim of optimal exploitation abroad, that HQ
Copyright © 2011 Strategic Management Society
365
capability is projected into foreign markets (via,
for well-established efficiency and transaction
cost reasons, internalization—see Rugman, 1980;
Buckley and Casson, 1976; Kogut and Zander,
1993). There, in the host country, the MNE encoun-
ters local and other foreign competitors, and the rela-
tive market performance it achieves is determined by
the actual cost and quality it achieves there relative
to those other players (Rangan and Drummond,
2004).
Accordingly, HQ-level FSCs notwithstanding, a
key challenge that received explicit research atten-
tion was MNE capability transfer to the host country.
In a landmark study, Teece (1976) underlined the
difficulty and high cost of transferring technology
intrafirm but across national borders. Effective trans-
fer is key to avoiding costly duplication (in each new
market) of product and process innovation, the
cumulative results of which deliver standardization
at high and reliable levels of quality. Effective trans-
fer, therefore, has a direct and important bearing on
both host quality and host unit cost and, for this
reason, it can be thought of as a baseline process. For
example, Intel’s competitiveness in China will no
doubt be influenced by the extent to which it trans-
fers its core design and fabrication know-how and
capabilities to China. Although it is not entirely the
same thing, in the multinational management litera-
ture, the analog to transfer would be the concept of
‘integration’ (Prahalad and Doz, 1987), which refers
to such centralized deployment and coordination of
knowledge, semifinished products, and people.
Beyond capability transfer, as mentioned in the
introduction, there are two further critical processes
that also influence an MNE’s relative host market
performance. One is the process of input localization
(i.e., making optimal input mix choices) and the
other is output adaptation (i.e., making suitable
output mix choices) in the host market.
Input localization is important in a first-order
sense because of its unit cost implications. An MNE
begins by transferring not only technology and other
know-how to the host market, but often also semi-
finished intermediate products and materials. Yet, for
reasons related to tariffs, transport costs, exchange
rates, higher inventory costs, potentially unsuitable
quality, logistical delays, and related uncertainties,
the optimal import vs. local content mix is seldom
100:0. Without arguing for the other extreme, it will
suffice to posit that within a reasonable range, the
higher the input localization, the lower realized host
country unit costs will tend to be. While critical
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366 S. Rangan and A. Drummond
intermediates and scarce raw materials might stand
out as exceptions, the localization-lowers-host-
market-unit-cost dictum holds across most manufac-
turing and service sectors. Otherwise there would be
much less economic interest for MNEs to set up
transplants and urge home-based suppliers to estab-
lish complementary operations in the host market.
Surprisingly, even though input localization is an
important predictor of unit cost and, in turn, of price,
profit margin, and market share differences, it has
received little explicit attention in the global strategy
literature. In the integration-responsiveness litera-
ture (Prahalad and Doz, 1987), in fact, integration is
indicated as the way to reduce costs. To be sure,
exhortations to achieve global efficiency—typically
through cross-border rationalization—abound, but
this recommendation has considerable limits in
being implemented across currency and regional
tariff zones. This inattention notwithstanding, input
localization is important—every student of business
strategy now understands that relative unit cost tends
to have a marked influence on a firm’s relative per-
formance even in ‘differentiated’ industries. An
MNE with lower unit costs in a host country is more
likely to be able to offer mass market products there,
whereas an MNE with higher unit costs might be
able to operate profitably only in the premium
segment. This has implications for relative market
share (measured in volumes and revenues as well)
and, usually, though not always, the size of profits.
Beyond effective capability transfer and optimal
input localization (i.e., unit-cost-optimizing input
mix choices), there is a third critical process, namely,
output adaptation. Output adaptation matters in the
first instance due to its revenue-enhancing effects. If
an MNE’s product or service is not suitable in its
current expression to the needs, norms, and, where
relevant, tastes of the host market, then even superi-
ority in costs might be insufficient to stimulate
demand (think of Toyota not offering diesel engines
in Europe; or McDonalds not offering nonbeef-
based menu in India). In terms of existing work in
global strategy, adaptation is akin to local respon-
siveness. Local responsiveness has been recom-
mended in consumer industries (such as food) where
tastes are thought to matter more than scale. In
reality, even in industries such as truck manufactur-
ing, enterprise software, and health care (where
tastes would appear to have a small role), adaptation
to discontinuities in budgets, regulations, and infra-
structure tends to critical (see Cuervo-Cazurra et al.,
2007). Likewise, whereas local responsiveness was
Copyright © 2011 Strategic Management Society
proposed to focus on tastes and benefits in consumer
industries, we would suggest that output adaptation
focuses on meeting local budgets as well.
It is well known, for instance, that Fiat won the
market in Brazil by, among other things, introducing
a famed one-litre engine car, presumably better
suited to that country’s then energy availability and
smaller household budgets. The product and process
technology to offer a one-liter engine was not alien
to Ford or GM, both long present in Brazil. Simi-
larly, apparently one reason why the mobile phone
firm Vodafone did not succeed in Mexico (where
Telefonica of Spain is the main foreign player) is that
it failed to launch prepaid calling cards, instead
requiring that customers sign up for monthly billing.
This illustrates a general point: adapting the output
mix refers not exclusively or even necessarily to the
product and service, but also includes the mode and
location of distribution (Wal-Mart’s rural stores vs.
Carrefour’s rural and urban stores), the mode of
payment (e.g., prepaid cards vs. monthly billing for
cell phone service), etc.
To summarize, while, consistent with the tradi-
tional model, HQ FSCs may indicate an upper bound
on MNE relative host market performance, it is ulti-
mately the extent (i.e., quantity, quality, and speed)
of transfer, input localization, and output adaptation
that determines the actual level of relative host
market performance. In other words, the effective-
ness of all three processes (and not just transfer)
predicts relative host market performance. While the
traditional FSC-emphasizing MNE literature posits
that the better the relative HQ resources and capa-
bilities, the better the expected host market relative
performance, we amplify that by positing that the
worse the transfer, input localization, and output
adaptation, the worse the actual host market relative
performance. To put it more directly, while HQ
resources and capabilities may explain MNE foreign
market entry, they are insufficient to explain MNE
foreign market performance.
MNE VALUE CAPTURE AND THE
PROBLEM OF CONTROL
Superior transfer, optimal input localization, and
output adaptation (what we shall refer to as ‘TLA’)
are now known keys to MNE foreign value creation
and performance. In earlier global strategy literature,
however, it had been conjectured that, due to ‘heri-
tage,’ some industries were more suited and some
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 Control Role of MNE Home–Host Ties
MNEs were more inclined to a multidomestic
approach, while others were inclined to a global
approach (see Porter, 1986). So long as there was
‘fit’ between the imperative of the industry and the
inclination of the MNE, then high performance was
predicted. With the advent of global competition
during the 1980s, however, Bartlett and Ghoshal
(1989) declared the ‘end of fit.’ Regardless of indus-
try, both host cost and host quality matter. This, in
contrast to the ideal types of multinational and
global approaches, was the essence of their ‘transna-
tional’ strategy.
The issue at hand is not that some MNEs intended
to heed this sensible strategic counsel while others
did not (for the most part, most MNEs have been
obliged to attempt the reconciliation). Nor is the
issue that all MNEs in a given host country exhibit
greater TLA. This latter pattern is adequately
explained by appeal to country-specific characteris-
tics such as market size and property rights (Rugman
and Verbeke, 1992; Delios and Henisz, 2000).
Rather, the issue is why a given MNE appears more
committed to capability transfer, input localization,
and output adaptation in certain host countries and
less so in others. For instance, P&G might exhibit
greater TLA in Mexico than in Brazil; whereas Uni-
lever exhibits the opposite.
As outlined in the introduction, to understand the
heterogeneity across MNEs in level of commitment
and TLA within a given host country, we need to
consider value capture and control issues. In operat-
ing in foreign host countries, MNEs are chronically
exposed to two types of largely uninsurable discre-
tion: sovereign discretion of host governments and
delegated discretion of host country employees,
partners, suppliers, and such. The problem in the first
case relates to power; and in the second it relates to
information. Power and information are the sine qua
non of effective control. Control is a prerequisite for
predictable value capture which, in turn, is a pre-
requisite for value creation.
For instance, the telecommunications giant
Vodafone became embroiled in a dispute with Indian
tax authorities right at entry. At issue is the extent to
which Vodafone is liable to pay taxes to Indian
authorities (to the order of some $2 billion) on its
purchase from another foreign entity (Hutch of Hong
Kong) the latter’s stake in a major telco operator in
India. While MNEs may face more such exposure in
emerging economies, MNEs operating in established
economies hardly get a free pass. In the United
States, the largest beer companies (AB InBev, SAB,
Copyright © 2011 Strategic Management Society
367
and Heineken) are now foreign owned. It did not
escape the notice of these foreign MNEs that soon
after the foreign purchase of Anheuser-Busch, the
United States government moved to raise taxes on
beer (to the order of $2 per case). Russian authorities
too increased taxes on beer and alcohol, but spared
vodka (which is produced mainly by domestic
firms). Similarly, long before the recent banking
crises, Canadian lawmakers and regulators have
been less than keen to allow takeover of Canadian
banks by U.S. institutions.
Sovereign discretion is legitimate authority vested
in host governments to pronounce and pursue, within
domestic territories, what is in the national interest.
By treaty and convention, this discretionary power is
mutually acknowledged and accepted within the
community of nations. National treatment conven-
tions are intended to obtain equal treatment for
foreign firms but, in practice, they fall far short of
being guaranteed. For instance, prodded by a domes-
tic firm (Boeing, in this case) the United States
government reopened for rebid a defense contract
awarded previously to the European Aeronautic
Defence and Space Company EADS. Likewise,
Chinese authorities, dissatisfied with treatment they
perceived in an Australian deal with Rio Tinto, have
dealt sternly with that MNE in their country. Gov-
ernments use discretion to favor firms from one or
another country (as in the case of buying nuclear
power plants or commercial aircraft) and revise laws,
tariffs, taxes, and such. In extremes, foreign firms’
operations in the host country may be nationalized
(as happened to Exxon in Venezuela or Shell in
Russia).
A sizable literature on political risk, including on
the obsolescing bargain, discusses the not entirely
satisfactory menu of options available to MNEs in
the face of sovereign discretion (see Herring, 1983).
This quote from a senior MNE executive (Reid,
1983: 186) is telling. ‘(MNEs) have the option of
trying to make the best utilization of whatever
resources they have . . . It must be recognized,
however, that their abilities to so utilize their
resources in the face of . . . risks are not unlimited.
Basic business fundamentals suggest that inventories
and receivables should always be as low as possible;
(in the face of uncertainty) they will not be adding
extra personnel or approving new spending pro-
grams, and they will always be pursuing cost
improvement programs . . . What magical strategies
then, what actionable events, are truly available that
can be turned on and off at will? Very few!’
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368 S. Rangan and A. Drummond
One traditional option has been to take local part-
ners (‘local hostages’). This is hardly a panacea, as
Shell and BP discovered in Russia or EADS dis-
covered in the United States. Another remedy (espe-
cially in extractive industries) has been to disperse
assets geographically in such a manner as to make
nationalization unattractive for any given host
country (Vernon, 1983). A more decisive option has
been avoidance (that is, to forego investment all
together in the uncertain host country). Much of the
early literature and even recent literature on institu-
tions and rule of law has highlighted this option.
From time to time, MNEs opt for exit (as illustrated
by the much-noted decision of Google to cease
operations in mainland China; or the decision of
Vodafone to quit Mexico; or the recent announce-
ment by capability-rich and globally experienced
HSBC to withdraw out of Russia in retail banking).
Yet, for MNEs to completely avoid the important
markets of JENA (Japan, Europe, North America) or,
today, BRICs (Brazil, Russia, India, China), CEE
(Central and Eastern Europe), and, tomorrow,
MENA (Middle East North Africa), hardly seems
like a satisfactory option. Today MNE response to
the risk of sovereign discretion appears slightly less
focused on entry-exit decisions. Rather, MNE
confidence, or lack of it, is likely reflected in the
demonstrated commitment to transfer, localize, and
adapt. The less anxious an MNE is regarding its
exposure to sovereign discretion in a given host
country, the more committedly it will transfer, local-
ize, and adapt. As outlined in the introduction, un-
related to cultural or other distance, certain HHTs
can play a key role here. We pick up the point in the
next section after considering MNEs’ exposure to
delegated discretion.
A second and separate discretion to which MNEs
are exposed in foreign host countries is delegated
discretion. To operate successfully and responsively
in a foreign host country, MNEs must be able to
confidently delegate decision making to the region or
country. This has been known even since the early
trading companies, precursors to the modern multi-
national, that Mira Wilkins (1970) has written about.
Centralizing decisions in HQ will tend to hurt speed
and effectiveness. It will also overload HQ and test
the bounds of organizational rationality.
Not only must an MNE delegate discretion to its
own employees in the foreign host country, it must
also delegate certain decision rights to its partners,
suppliers, and such. Yet the incentives of host
country employees and other private actors there
Copyright © 2011 Strategic Management Society
may not be aligned with those of the MNE which, in
theory, is aiming to optimize performance at the
enterprise, not just foreign host, unit level. (Control
is, no doubt, an issue in the purely domestic setting
as well; except, access to information, future career
trajectories, social closure, and integration of parties
under the same legal system, all make the isssue less
challenging than in the international setting.)
In the traditional MNE literature, drawing on
transaction cost theory, the central recommended
response to such private actor exposure has been
internalization. Yet, in practice, internalization is
hardly a panacea. First, not all exposure can be inter-
nalized. Exposure to government, for instance,
cannot be internalized. In many countries (e.g.,
China, India) in many sectors, by law, MNEs may
not have whole (or even majority) ownership.
Second, in internalization, gains in transaction costs
are often more than offset by losses in production
costs. In other words, efficiency often suffers.
Finally, and most critically, internalization may be
superior to arm’s-length alternatives, but it can
hardly be equated with control. In an empirical study
specifically looking at this issue, Mjoen and Tallman
(1997: 269) conclude that ‘control seems to be a
direct managerial function related to . . . specific
activities . . . The role of ownership as the key
to . . . control appears to be highly questionable, a
distinct departure from traditional market-hierarchy
models.’
MNE internalization implies that HQ has formal
authority over foreign units, but it does not imply
that HQ automatically has the reliable organizational
information to know that its ends and means are
being attended to in the foreign unit. Imperfect
exchange problems are traded for imperfect agency
problems (see Perrow, 1990): how to know whether
employees are doing things right (so as not to dissi-
pate MNE standards and reputation); whether part-
ners and suppliers are doing the right things (i.e.,
keeping their side of the deal and not shirking). To be
sure, advances in information and communication
technology are helping greatly. Yet, in knowledge-
based economic exchange, process and social
control are more important than output controls
(Chen, Park, and Newburry, 2009). Credible and
continuous information about organizational activi-
ties are key. MNEs thrive in knowledge-based eco-
nomic exchange. How do they achieve better process
and social control in foreign host markets?
If an MNE does not perceive acceptable levels of
control over employees, partners, and suppliers, it
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 Control Role of MNE Home–Host Ties
HQ
resources, Resources &
capabilities, capabilities
experience transfer
Home–host Input
ties localization
Output
adaptation
Host
country-
specific
factors
Figure 1. An augmented model of multinational enterprise relative performance in a foreign host market
will be less committed and less confident to transfer
core technologies. It will be even more hesitant to
localize and adapt. Input localization and output
adaptation, after all, correspond to even greater reli-
ance on local private entities (employees, partners,
suppliers) and greater exposure to delegated
discretion.
To recap, HQ resources and capabilities notwith-
standing, control is a prerequisite for predictable host
country value capture and, in turn, value creation.
Accordingly, heterogeneity in access to credible
power and reliable information in a focal host country
will influence MNEs’ commitment to transfer, local-
ize, and adapt. Extent of TLA will, in turn, influence
extent of competitiveness as well as relative perfor-
mance. Having outlined the problem of control, we
now explore the alleviating role of HHTs.
HHTS CONVEY CONTROL BENEFITS
AND, THUS, EXPLAIN TLA
If capability transfer, input localization, and output
adaptation are key influences on an MNE’s host
market performance, but are impeded by exposure
to sovereign and delegated discretion, then HQ
resources and capabilities controlled for, HHTs that
bring credible power and reliable information can be
predicted to influence TLA because they convey
Copyright © 2011 Strategic Management Society
369
Relative
host
quality
Relative
host market
performance
Relative
host
cost
control benefits. By implication, HHTs also influ-
ence and predict MNE host market performance.
Specifically, HHTs can help predict where relative
host market performance of a given MNE will be
strong and where it will be weak and, likewise, help
predict relative host market performance within a
given host market of MNEs from different home
nations (e.g., predict that Wal-Mart might outper-
form Carrefour in Mexico and Japan, with whom the
United States has greater ties; but that Carrefour may
outperform Wal-Mart in Brazil and Spain, with
whom France has greater ties). We depict this logic
in Figure 1, which we would characterize as an
augmented model of MNE relative host market
performance.
Until now we have mentioned and illustrated, but
not attempted to enumerate, HHTs. To be clear, any
list of HHTs is subject to the criticism that it is
incomplete, redundant, and hard to operationalize.
As part of a theoretically meaningful and empirically
observable list of HHTs, Rangan and Sengul (2009)
propose the following: (1) HHTs of dependence in
economic and security realms (such as between
Russia and Germany; or Japan and the United States;
or Egypt and the United States); (2) multiplex
common membership of home and host nations in
intergovernmental treaties, agreements, and organi-
zations (e.g., EU; NATO; OECD); and (3) significant
home-hostimmigration (such as from Germany and
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370 S. Rangan and A. Drummond
Italy to Brazil; or from India to the United Kingdom
and United States).
One cannot underestimate the role that history,
especially colonial ties, plays in accruing HHTs. The
colonial links between the United Kingdom and the
United States or between the United Kingdom and
India have accreted immigration and long-standing
economic relations. The historical path dependent
nature of HHTs must be acknowledged. Yet, HHTs
are also cultivated ahistorically as part of purposeful
foreign economic and security policy. India and the
United States have few historical links (e.g., an indi-
rect colonial link through the United Kingdom), but
their economic and security links have never been
stronger than they currently are. These were deliber-
ate initiatives, partly supported by private enterprises
and MNEs in the U.S. Policy shaped patterns of
interdependence, and ties are becoming visible in the
case of China and Africa. Since such ties affect MNE
performance (in ways not directly related to capa-
bilities), they are the object of what we may refer to
as ‘nonmarket strategies.’
Rangan and Sengul (2009) discuss the political
sociology of such HHTs. For our purposes, suffice to
note that HHTs of economic and security dependence
can help contain (though not eliminate) MNEs’ expo-
sure to sovereign discretion. If Japan, in its foreign
relations, feels especially reliant on the United States,
say, for its national security (vis-à-vis China, North
Korea, and Russia), and if this is a long-standing tie,
then it is reasonable for U.S. MNEs (such as Boeing)
to leverage (and perhaps actively support) this politi-
cal embeddedness. It stands to reason then that rela-
tive to other foreign MNEs (say, from Europe), U.S.
MNEs in Japan are likely to perceive a lower exposure
to sovereign discretion there. This despite the fact that
Japan is more institutionally isomorphic to Europe
(especially Germany) than to the United States. In
Russia, the opposite is likely the case. As mentioned
earlier, pipelines transporting Russian natural gas
will come into Europe and specifically Germany.
Also, Germany has historically been Russia’s
staunchest trading partner.
Such political-economic ties are significant
because they help MNEs in resolving hazards if and
when they arise. Such HHTs constitute a source of
material sanctions that a home government may
access to constrain the discretion of host govern-
ments. Cuervo-Cazurra et al. (2007: 716) argue that
exposure to sovereign discretion declines ‘when
political relations between the home- and host-
country governments are good since the treatment of
Copyright © 2011 Strategic Management Society
foreign firms in the host country becomes inter-
mingled with the relationships between the home-
and host-country governments.’ The experience of
Motorola in Turkey vs. Motorola in Russia is illustra-
tive. Motorola was able to put up a defense in Turkey
and not get totally mired down; in Russia it had a less
benign experience. Again, the considerable physical
and psychic distance of Turkey from the United
States notwithstanding, the former has security ties
with the United States. As Slangen and Beugelsdijk
(2010: 992) emphasize, ‘it may not so much be the ex
ante observability of a hazard that determines the
magnitude of its negative impact, but rather its ex post
resolvability . . .’It is by this reasoning that we submit
that in understanding why and how HHTs influence
MNE foreign market performance, political and
structural embeddedness are important (and likely
more so than cognitive and cultural embeddedness—
see Zukin and DiMaggio, 1990).
Analogously, delegated discretion becomes more
manageable when there are ties of immigration
between two nations (e.g. Italy and Brazil). To see
why, recall the psychology of decision making under
uncertainty (Cyert and March, 1963). When top
managers allocate resources to uncertain projects
(and investment decisions abroad are invariably top
management decisions and often cloaked in uncer-
tainty), it is well established that they are influenced
considerably by the credibility and capability of the
persons who will oversee and actualize the project.
In our fieldwork in Brazil, we encountered a
telling recent illustration. During the last years,
General Motors of Brazil was tasked with leading
the installation of a paint shop in Egypt. (Under
GM’s then organization structure, oversight for
Egypt fell to Brazil.) The paint shop was critical
because the auto body finish was a key attribute for
customers. Poor body finish would mean lost sales,
rework, and high warranty costs. GM headquarters
in Detroit recommended a seasoned Mexican execu-
tive to take up the responsibility in Egypt. But the
head of the paint shop operations, a Brazilian execu-
tive located in Sao Paulo, did not know the Mexican
executive. He opted instead to send ‘one of my own
colleagues, a fellow Brazilian whom I had trained
and worked with for many years in the paint shop.’
This deputy and his family moved to Egypt and
oversaw the (expensive and intricate) greenfield
installation of the paint shop there. He built the
‘four walls,’ got the supply chain working, hired
and trained employees, eventually identified his
successor and, after more than two years, ‘mission
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 Control Role of MNE Home–Host Ties
accomplished,’ returned home. As the head of the
paint operations told us, he had to delegate consid-
erable discretion to this deputy. If he had to check
and verify every investment and process, speed
would be lost and the project would jeopardize GM
operations in Egypt (and distract from responsibili-
ties in Brazil). With a trusted aide leading this over-
seas project, however, he felt rationally confident in
exposing himself to delegated discretion. ‘He was
my eyes and ears; he was my monitor.’ Prior personal
experience and social network closure reduce
agency risk.
When a project is to be overseen and led by
persons the resource allocators (i.e., the top manag-
ers) view as credible and capable, then resource
commitments to such projects will tend to be more
sizable and come sooner; otherwise they will tend to
be on the slow and stingy side. This is fully consis-
tent with Cyert and March (1963) who point out that
resource allocators look for ways to negotiate uncer-
tainty. They often do so by appointing ‘trusted sub-
ordinates’ to important projects or by favoring
uncertain projects to be managed by trusted subor-
dinates. There would appear to be evidence all
around us indicating top managers allocate resources
this way. Consider for instance the behavior of R&D
committees, venture capitalists, and new CEOs
(who, upon taking office, typically change a signifi-
cant portion of the top team).
This behavior has been long observed in the mul-
tinational setting. Prahalad and Doz (1987: 174)
have noted that ‘when the complexity of decisions
. . . increases, top manager can delegate the respon-
sibility to trusted aides who are responsible for
decision arbitration. Those trusted aides act as
integrators—sensitive to the needs and perspectives
of the various groups and at the same time to
the overall strategic vision of the firm and its
business . . . Further, a lot of arbitrator’s power
comes from proximity to the top management . . .’
This is how, within MNEs, integration and respon-
siveness tend to be jointly optimized.
Trusted aides dispatched from HQ help with
process and social control. They can monitor foreign
employees, partners, suppliers, and such. Formal
reporting and periodic meetings provide output con-
trols, but these fall short in dynamic environments.
Monitoring is a key to getting reliable and regular
information. ‘All the tools of global integration are
associated with a heavy reliance on expatriate man-
agers’ note Evans, Pucik, and Barsoux (2002: 102).
Expatriation is the most important form of direct
Copyright © 2011 Strategic Management Society
371
control, those global human resource specialists note,
because MNEs ‘trust their expatriates more than they
trust their locals’ (Evans et al., 2002: 107). This
allows decentralization and local decision making
without HQ experiencing a serious loss of control.
Evans et al. (2002) refer to this as the ‘it is not where,
but who’ reconciliation. Further Evans et al. (2002:
159), they point to the ‘critical role of expatriates in
implementing localization and (in) recruitment,
development, and retention of local staff.’Evans et al.
(2002: 116) enumerate the virtues of expatriation as
follows: ‘first expatriation allows the firm to avoid the
pathologies of excessive centralization. Business
decisions can be made locally but with the global
perspective in mind. Second, the standards, of the
parent firm are transferred abroad via expatriates.
Third, mobility promotes the diffusion of shared
values—a key element in global integration.’
If this ‘trusted aide’ model is accepted, then in the
MNE setting we can note an important coupling.
Although foreign direct investment is usually (and
rightly) thought of in terms of the cross-border move-
ment of financial and intellectual capital, it is likely
human capital to which the magnitude and speed of
the other two are coupled (see Foley and Kerr, 2011).
Corroborating, the CEO of Telefonica explained
recently to the Wall Street Journal (Perez, 2010) his
firm’s solid international performance: ‘The key
factor for Telefonica to do anything is: first, human
resources . . . (If) we can’t send engineers or market-
ing people . . . you have a big problem.’ As alluded
above, it is more likely than not that good people
don’t necessarily follow capital and technology,
rather capital and technology follow good people.
And the more trusted the people, the greater the
magnitude and speed of the other two. The greater the
extent to which this aids transfer, localization, and
adaptation, the better the local value creation and the
higher the relative host market performance.
The HHTs of immigration enter the picture
because they act as an exogenous but powerful influ-
ence on the specific host nations to which ‘credible
and capable’ HQ actors are willing to be assigned.
While the GM anecdote certainly illustrates that
human capital is mobile, the general point we want
to emphasize is that human capital from a given
home country will be more mobile to certain desti-
nation host countries. In particular, it will be more
mobile to destination countries where a large com-
munity of fellow home country persons already
successfully reside. (There is, then, a certain path
dependence here.)
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372 S. Rangan and A. Drummond
The HHT of immigration predicts better transfer
because the ‘right persons’ (the appropriate transmit-
ters of the technologies to be transferred) are less
likely to express reluctance to be assigned for a dura-
tion to a foreign host nation with HHTs to the home.
Consider, for instance, the readiness with which
Indian executives (en famille) may move to the
United Kingdom or the United States and the reluc-
tance with which they would move to Japan or
Germany (both of which countries are culturally and
geographically more proximate to India). Teece
(1976: 46) found that the ‘utilization of home
country managers and engineers’ was ‘critical to the
success of the transfer.’
Presence of immigrant communities and common
language promise, and usually tend, to make the
expatriate experience in the host country less diffi-
cult (especially for accompanying families). Evans
et al. (2002: 124) report that ‘family considerations
have a critical impact on the willingness to relocate
and the outcome of the assignment.’ They summa-
rize, ‘above all, the studies of why expatriates fail
have highlighted the role of the family in expatria-
tion’ (Evans et al., 2002: 121). We can now under-
stand how HHTs such as immigration and access to
compatible schooling for children (which is likely to
be higher with large home immigrant communities
in the host country) come to matter. Evans et al.
(2002: 142) note that in a Shell expatriation study
that ‘children’s educational needs’ came out as
the ‘most important constraint on international
mobility.’ HHTs such as immigration also make
Greater home-host
sanctioning/monitoring ties
Greater control
benefits perceived by
MNE in host market
More confident Greater integration
value capture and responsiveness
in host market in host market
Figure 2. Macro-micro causality: home–host ties and multinational enterprise (MNE) relative host market performance
Copyright © 2011 Strategic Management Society
home-host direct transport connections more
frequent and convenient.
In our fieldwork in Brazil, the Italian-born first
president of Fiat corroborated our reasoning. Also
corroborative, top managers at Spain’s Telefonica
gloat, ‘we are able to send our best people to Sao
Paulo,’ implying, U.S. rivals there could field only
the B team. On the flip side, a CEO at a leading
French MNE explains his firm’s poor showing in
Japan noting that ‘I am simply unable to get my good
people to go be there in Tokyo.’
The above logic laid out, it is relatively straight-
forward to predict that sanctioning and monitoring
(i.e., discretion compensating) HHTs will aid not
only the quality, but also the magnitude and speed of
TLA. If a person who is top management credible
and capable is overseeing a project, then that project
has a better chance of attracting the necessary
resources (see Noda and Bower, 1996). It even
increases the odds of winning customers (and market
share), especially in business-to-business sectors,
because customers are more likely to perceive in that
actor a greater authority to commit, a greater close-
ness to final decision makers, and less uncertainty
that resources necessary to deliver on commitments
will be made available (Prahalad and Doz, 1987).
We outline the above macro-micro logic in
Figure 2. At a macro-level, greater HHTs predict
superior MNE host market performance. At a micro-
level, HHTs convey control benefits and more con-
fident anticipated value capture. Confidence about
value capture drives commitment to post-entry
Superior MNE relative
host market performance
Greater relative
value creation
in host market
Greater capability transfer,
input localization,
output adaptation
in host market
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 Control Role of MNE Home–Host Ties
integration and responsiveness. In practice, this
translates into more committed transfer, input local-
ization, and output adaptation in the host market.
Relative to rival MNEs from home nations that do
not have HHTs, the focal MNE’s host market
quality and unit cost will be more competitive.
Systematic and specific performance implications
thence follow. Based on the above, we submit the
following:
Proposition 1: Ceteris paribus, HHTs that support
sanctioning and monitoring (e.g., dependence and
immigration) convey control benefits and support
MNE value capture. Since value creation is endog-
enous to value capture, those HHTs predict more
committed host country value creation, competitive-
ness, and relative performance.
Proposition 2: Ceteris paribus, the greater the extent
of HHTs that support sanctioning and monitoring
(e.g., dependence and immigration), the better the
capability transfer (i.e., the closer realized capability
transfer will be to intended). Greater HHTs predict
more committed transfer.
Likewise, we would contend, HHTs of sanction-
ing and monitoring will aid input localization. If
sanctioning and monitoring are more feasible, then
control issues are better addressed and it becomes
more rational to work with local actors. With more
local value added and generally lower costs, MNEs
will be more able to compete in the mass and not
only the premium segment. Larger volumes (coming
from mass market) will make it more efficient to
establish fuller local operations, which Tallman
(1991) found is a key factor in MNE relative host
market performance. Further, it is also more prob-
able that home-based suppliers and complementors
(including banking, legal, advertising, and other
support agencies) will also follow more readily if
they are not already there. Accordingly, we advance:
Proposition 3a: Ceteris paribus, the greater the
extent of HHTs that support sanctioning and moni-
toring (e.g., dependence and immigration), the
greater the input localization (i.e., the greater the
host-to-home content ratio). Accordingly, greater
HHTs predicts lower host unit cost.
Proposition 3b: Ceteris paribus, the greater the
extent of HHTs that support sanctioning and
monitoring (e.g., dependence and immigration),
the greater the input localization, the lower host
unit cost, and the more likely product offers and
Copyright © 2011 Strategic Management Society
373
participation in the mass (as opposed to only
premium) market.
Finally, HHTs are likely to aid output adaptation.
If, due to lower costs and greater commitment, host
market volumes, revenues, and profits are sizable,
then surplus cash can generate autonomy and a host
budget for adaptation. If an MNE host unit becomes
self-financing, its chances of justifying and securing
(or withholding) resources for output adaptation
must certainly increase. Secondly, if due to HHTs,
trusted HQ managers are working in the host nation,
then when they recommend output adaptation, the
odds are higher that such recommendations are
accepted and followed up with necessary resources.
After all, credible and capable expatriates dispatched
from HQ know the system at home and are thought
to be aligned with home interests (typically home
nationality is sufficient to sustain this perception),
so their recommendations carry greater weight.
Approvals are likely received sooner as well (since
they are likely made in the acceptable format and to
the appropriate departments). It is for such reasons
that HQ managers feel more in control when a
trusted subordinate is ‘on the job’ in the foreign host
market. Accordingly, we contend:
Proposition 4: Ceteris paribus, the greater the extent
of HHTs that support sanctioning and monitoring
(e.g., dependence and immigration), the more likely
that suitable output adaptation will be made (i.e., the
better the output mix). Accordingly, greater HHTs
predict higher output adaptation.
To summarize, we have argued that when consum-
ers have choices, a firm’s relative performance will
depend on its relative quality and relative cost. We
have further argued that in any specific host market,
given a base level of HQ capability, it is the quality,
quantity, and speed of transfer, input localization, and
output adaptation that will influence a foreign MNE’s
actual relative quality and cost in the host market.
Lastly, we have argued that sanctioning and monitor-
ing HHTs influence and predict MNE relative perfor-
mance because they mediate the extent (quality,
quantity, and speed) of capability transfer, input
localization, and output adaptation. This is how HHTs
influence MNE relative performance. Thus, if P&G
and Unilever have similar levels of HQ FSCs, then in
a given host market such as Mexico (with whom the
United States has greater HHTs), the former will
achieve higher quality, lower unit cost, and superior
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374 S. Rangan and A. Drummond
performance; and in a host market such as Brazil
(where Europe has greater HHTs), the opposite would
be predicted. Importantly, since HHT patterns tend to
be (1) often asymmetric, (2) observable, and (3)
rather durable, they predict specific, systematic,
and sustained patterns in MNE relative host market
performance.
The asymmetric outcome patterns we theorize
about are reinforced and sustained because (1) HHTs
tend to be durable (and their host productivity-
enhancing advantages are operative in every period
without exception); (2) most sectors and markets are
dynamic (making transfer, input localization, and
output adaptation not one time but continual chal-
lenges); and, last but not least, (3) frequently, success
tends to beget success (i.e., early wins lead to greater
resource allocation). To the extent such positive
feedback cycles hold, we can see how host markets
become ‘strongholds’ for an MNE from one home
nation vs. another (e.g., Unilever has a stronghold in
Brazil and P&G in Mexico). Since such strongholds
come to generate valuable free cash flow, they
become jealously guarded from competitive incur-
sions. In this vein, it is relayed that when P&G
moved to establish operations in Brazil, all units of
Unilever South America contributed to a pot so that
the Brazilian unit could prepare a stinging ‘welcome
package’ for the archrival. The modest market share
achieved by P&G (after more than a dozen years) in
Brazil is not at odds with this story.
CONCLUSION
To compensate for the extra costs of doing business
abroad, MNEs need superior FSCs. Global strategy
scholars have researched and established unequivo-
cally that innovation and value creation capabilities
are essential in expanding abroad successfully and
taking on local firms in their own backyards. Much
has also been written about physical, cultural, and
other institutional distance. The emphasis has been on
superior value creation premised on coordination
costs and isomorphism-centered legitimacy (Kostova
and Zaheer, 1999).
More and more research, however, corroborates
that MNE value creation abroad is endogenous to
value capture abroad (see Hornstein, 2010; Chang,
Chung, and Moon, 2010). MNE control and value
capture dilemmas abroad have no doubt been
addressed (e.g., Delios and Henisz, 2000), but
mainly via discussions of optimal mode of entry and
Copyright © 2011 Strategic Management Society
extent of internalization. In particular, the role of
HHTs appears to have received less attention in the
literature on MNE foreign country operations and
performance. The asymmetric host country outcome
patterns alluded to here and the explanatory role of
HHTs have been little theorized or unpacked.
In this article, building on Rangan and Sengul
(2009), we elaborated on the problem of MNE
control and value capture in host countries. We theo-
rized about the role of HHTs in alleviating this MNE
control problem and elaborated on the operative
mechanisms of capability transfer, input localiza-
tion, and output adaptation through which macro-
level heterogenous HHTs effect heterogeneity in
MNE host value creation and performance. We pro-
posed that sanctioning and monitoring HHTs that
support MNE value capture will, endogenously,
elicit higher levels of MNE integration and respon-
siveness. In turn, HHTs predict higher host country
competitiveness and performance.
Our explanation can resolve the reported ‘cultural
paradox’ (whereby MNEs from a given home
country do well in what is a ‘culturally distant’ host
country—e.g., U.S.-Japan), and it can help us appre-
ciate actor-initiated patterns of HHTs (such as we see
between China and Africa). While some MNEs
(such as Gillette, Ikea, and Intel) may possess vastly
superior capabilities than all others in their sector,
empirically most MNEs must be content with
sharing technological leadership with one or more
rivals from other home nations (think of GE,
Siemens, and Toshiba in medical instruments). As a
result, and this is more and more the case, this vast
majority of MNEs have to compete in third host
markets against other equally good rivals from other
home markets. In such competition where rival
MNEs’ home capability levels stand nearly shoulder
to shoulder, it appears that HHTs can play a decisive
and durable role in influencing MNE foreign opera-
tions and performance outcomes.
Our exploration suggests clearly that the relation-
ship between sanctioning and monitoring HHTs and
performance is primarily a supply side phenomenon.
There need be no special role for consumer tastes in
the operation of such HHTs. This would predict, as
casual observations confirms, that HHTs are influen-
tial across a variety of sectors (including energy and
telecommunications; and not just in food, apparel, or
other taste sensitive industries).
In terms of contributions and implications, we
highlight a few. First, whereas the conventional
literature in global strategy has focused on
Global Strat. J., 1: 362–376 (2011)
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 Control Role of MNE Home–Host Ties
capabilities (or Dunning’s ownership advantage in
his OLI model) and value creation, we have shown
the importance of control and value capture. If we
wish to better understand MNE performance abroad,
it is important that we acknowledge the endogeneity
of value creation to value capture and attend more to
the chronic control and value capture challenges of
MNEs. The literature on strategic control merits
much greater development, and there is an opportu-
nity for global strategy scholars to make a general
contribution.
Second, continuing to conflate internalization with
effective control holds back theory and hurts practice.
The ‘I’ in Dunning’s OLI model is clearly overesti-
mated in the global strategy literature. It behooves
global strategy scholars to stop disregarding reality
and to scrutinize our fundamental assumptions,
circumscribe their validity, and explore practice for
real-world work-arounds and alternatives.
Third, we have argued that more than similarity
(cultural, legal, etc.), it is separateness of home and
host countries that is the issue. Global strategy
research stands to benefit from better exploring the
sociology of home-host political and structural (and
not only cognitive and cultural) embeddedness. In
terms of practice, MNEs, beyond attending to capa-
bilities and cross-cultural training, must explore and
attend a lot more to nonmarket strategies. Global
strategy scholars must help by better conceptualizing
and theorizing (beyond lobbying) about nonmarket
strategies. The preceding will help advance global
strategy theory and practice, and may even improve
welfare.
ACKNOWLEDGEMENTS
We thank the business executives in Brazil who, during
the course of this research, so generously granted us
valuable access and time. We acknowledge helpful feed-
back from Ron Adner, Wilbur Cheung, Alvaro Cuervo-
Cazurra, Tom D’Aunno, Antonio Fatas, Javier Gimeno,
Dominique Heau, Randal Heeb, Peter Ring, Metin
Sengul, Steve Tallman, Eleanor Westney, and participants
at the July 2010 Global Strategy Journal launch con-
ference. Phani Vemuri provided excellent research
assistance.
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