Controlling of Foreign Subsidiaries from a Transaction Cost Perspective

Topics: Transaction cost, Subsidiary, Cost Pages: 15 (4918 words) Published: December 8, 2012
With increasing global competition it becomes more complex for multinational corporations (MNCs) to maintain control over their foreign subsidiaries and international operations. The resulting challenges can be influenced by the low predictability of foreign environments, limited experience of a company, as well as problems transferring specific knowledge and methods to their subsidiaries. Therefore, the appropriate selection of control mechanisms becomes vital for the efficient operation of foreign subsidiaries. The mechanisms of control imposed by the parent company to the subsidiary can be explained within the framework of the transaction costs theory (TCT), mainly developed by Oliver Williamson. According to him, a company will prefer to internalize its activities if their processing through external markets incurs transaction costs higher than the costs of internal governance (Coase, 1937; Williamson, 1975). In literature, most of the empirical studies devoted to the implications of the TCT are limited to an analysis of the market entry mode of MNCs (Gatignon & Anderson, 1988; Dahlstorm & Nygaard, 1999; Meyer, 2001; Hansen 2004). However, the same analysis can be used for organizing internal activities (Hennart, 1991). Thus we set an objective to adopt the existing TCT framework to internal control and to find the confirmation of its relevance through cases of MNCs. In the following chapter, we will give an overview of the TCT. After which, we will describe the available modes of organizing transactions (markets and hierarchies) and the control mechanisms utilized for each mode. We will also analyze the dimensions of transactions and the way they affect the choice between internal control mechanisms. Additionally, we will introduce our theoretical framework, which has been adopted from the TCT framework and complemented by internal governance modes and respective control mechanisms. In the fourth chapter, we will present our research method and practical relevance of the framework in a discussion surrounding the case studies of Wal-Mart, Zara and IBM. In chapter five will summarize the results and discuss the limitations of our research. 2Theoretical framework of transaction cost analysis

The theoretical approach of a transaction cost analysis contains different types of transaction costs, which can lead to various organizational modes and control mechanisms (Buckley & Strange, 2011). The subsequent chapter will outline possible types of transaction costs, organizational modes, control mechanisms and their interdependence. To analyze specific cases in this paper, it is important to have a theoretical background for the terms transaction and transaction costs. In the following text, definitions, sources and a classification of transaction costs are given.

2.1Transaction costs in a broad meaning
According to Williamson (1981), who is one of the most important researchers in this field, a transaction is “a good or service transferred across a technologically separable interface.” Additionally, he defines transaction costs as “the comparative costs of planning, adapting and monitoring task completion under alternative governance structures”. Another definition given by Picot (1982) is that “transaction costs are the costs of information and communication, which arise due to the agreement and control of performance exchange between company units or within corporations and markets.” However, the focus of our paper is the exchange within corporations and different markets, as they concentrate on foreign subsidiaries. Furthermore, it can be said that transaction costs are a consequence of human behavior, which is again shaped by various factors within a business environment. These factors can be divided into external factors, which are related to external markets, like tariffs or exchange rates, and relational factors such as the coordination between a headquarters and its subsidiaries (Buckley & Strange,...
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