Controlling of Foreign Subsidiaries from a Transaction Cost Perspective
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