Local Context and Global Strategy: Extending the Integration Responsiveness Framework to Subsidiary Strategy

• DOI: http://doi.org/10.1111/j.2042-5805.2013.01071.x
• Author: Klaus E. Meyer,Saul Estrin
• Date: 01 February 2014
• Published date: 01 February 2014

LOCAL CONTEXT AND GLOBAL STRATEGY:

EXTENDING THE INTEGRATION RESPONSIVENESS

FRAMEWORK TO SUBSIDIARY STRATEGY

KLAUS E. MEYER1* and SAUL ESTRIN2

1China Europe International Business School, Shanghai, China

2London School of Economics, London, U.K.

The integration-responsiveness (IR) framework is a leading analytical tool of global strategy

but it is less valuable in explaining the heterogeneity of strategic choice for subsidiaries within

an MNE. We propose an IRE framework of subsidiary strategy that complements the IR

framework for the subsidiary level with a third dimension—selling to local versus export

markets (E). Resource-based considerations suggest that subsidiary strategies must fit the

resources both the parentMNE and the local context. We examine how our three dimensions of

subsidiary strategy are locally contingent. We suggest that local resource endowments, local

competition, and the distance between the home and host country influence the use of respon-

siveness and exporting strategies, but influence integration strategies only to a small degree.

We find empirical support for hypotheses developed from these arguments using survey data

from MNE subsidiaries in two Central and Eastern European economies. Copyright © 2014

Strategic Management Society.

INTRODUCTION

Subsidiaries of multinational enterprises (MNEs)

are simultaneously an integral part of the MNE

and actors in a specific local context (Andersson,

Forsgren, and Holm, 2002; Garcia-Pont, Canales,

and Noboa, 2009; Meyer, Mudambi, and Narula,

2011). They combine the resources of the MNE

with local resources in the host economy to create

products or services they can supply to local markets

or export, perhaps (but not exclusively) within the

MNEs global supply chain. Each subsidiary contrib-

utes to the MNE’s global strategy by assuming a

specific role that creates and exploits opportunities

in its specific local context (Ambos, Andersson, and

Birkinshaw, 2010; Birkinshaw and Morrison, 1995;

Cantwell and Mudambi, 2005).

At the levels of the MNE, strategies are commonly

conceptualized with the integration-responsiveness

(IR) framework (Prahalad and Doz, 1987; Bartlett

and Ghoshal, 1989; Devinney, Midgley, and Venaik,

2000), which (implicitly) assumes that MNE strate-

gies are adopted uniformly and consistently across

all subsidiaries. In practice, however, subsidiaries

vary considerably in what they do and how they

partake in global strategies. This variation of sub-

sidiary roles within an MNE depends on both the

MNE’s global strategy and resources and the avail-

ability and character of resources accessed locally

(Anand and Delios, 2002; Hennart, 2009); in other

words, it depends on the interaction of firm-specific

and country-specific advantages (Rugman and

Verbeke, 2001). Thus, MNEs create linkages

between their diverse subsidiaries that, in turn,

exploit opportunities in different kinds of local con-

texts (Andersson et al., 2002; Meyer, Mudambi, and

Narula, 2011). Consequently, subsidiaries vary with

respect to the markets into which they sell: domestic

or international (de la Torre, 1971; Egelhoff, 1982;

Keywords: integration; responsiveness; exports; strategy con-

tingencies; subsidiary strategy; local context; distance

*Correspondence to: Klaus E. Meyer, China Europe Inter-

national Business School, 699 HongFeng Road, Pudong,

Shanghai, 201206 China. E-mail: kmeyer@ceibs.edu

Global Strategy Journal

Global Strat. J., 4: 1–19 (2014)

Published online in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1111/j.2042-5805.2013.01071.x

Copyright © 2014 Strategic Management Society

Estrin et al., 2008, Kogut 1985). Hence, we propose

to extend the ideas of the IR framework to under-

stand the determinants of subsidiary strategy by

adding export orientation (E) as a third dimension in

our IRE framework.

In this study, we examine how the three dimen-

sions vary with respect to how and how much they

are shaped by the local environment of the subsid-

iary. Of the three dimensions of the IRE framework,

the integration dimension is, as we will argue, to a

large extent determined by the MNE’s global strat-

egy: effective implementation of an integration

strategy requires the participation of all subsidiaries.

In contrast, local responsiveness will be sensitive

to changing local conditions in the host economy,

including the quality and availability of local

resources of value in an export program and the

intensity of local market competition. Likewise, our

added dimension, export orientation, depends on

these local conditions.1Thus, the R and E dimen-

sions of subsidiary strategy are contingent on the

specific locational advantages in any host economy

(Dunning, 1998; Meyer, et al., 2009a) and the ability

of the MNE to exploit such locational advantages

(Zaheer and Nachum, 2011). In consequence, these

two dimensions may be adjusted to the local context

at each location, while integration is primarily driven

by parent-level factors and is largely independent of

local considerations.

Subsidiary strategies along the IRE dimensions

also depend upon the positioning of the MNE rela-

tive to the host context and, hence, the cultural and

resource distance between home and host country

(Estrin, Baghdasaryan, and Meyer, 2009; Kogut and

Singh, 1988; Tihanyi, Griffith, and Russell, 2005).

Different constellations of local and parent resources

can be exploited by different strategies. However,

large differences can inhibit, for example, knowl-

edge transfers and, in consequence, the effectiveness

of complex organizational structures with multidi-

rectional knowledge flows (Kostova and Roth,

2002). Hence, distance creates opportunities for

subsidiaries to develop export-oriented strategies,

while potentially reducing the effectiveness of local

responsiveness strategies.

We test these ideas on a proprietary dataset of 306

MNE subsidiaries in two East European economies,

Hungary and Poland. As a special feature, we are

able to measure local resources at levels below that

of the nation, specifically at the level of industry (for

local competitors) and province (for local human

resources). The dataset is, thus, appropriate to test

the effects of local resources and distance on subsid-

iary strategies because it displays heterogeneity of

local contexts and high variability in the distances

to source countries. The results support the impact of

distance, local competition, and local resources for

the responsiveness and export-orientation dimen-

sions of subsidiary strategies while, as expected,

parent-level variables dominate the choice of an

integration strategy.

We offer several contributions to global strategy

research. First, we demonstrate how subsidiary

strategies can be characterized by an IRE framework

that integrates export orientation of the subsidiary as

a third dimension with the traditional dimensions of

integration and responsiveness. Second, we develop

a contingency approach that explains how the three

strategic dimensions in each subsidiary are contin-

gent on its local contexts. Third, we offer more fine-

grained theorizing as well as empirical evidence on

the impact of local context by exploring the resource

aspects of local environments in the analysis of

subsidiary strategies. Fourth, we contribute to the

long-running debate in international strategy

research on the role of distance (Shenkar, 2001;

Zaheer, Schomaker, and Nachum, 2012) by showing

that opportunities arising from resource distance

encourage export strategies, while the costs of

resource distance inhibit local responsiveness.

SUBSIDIARY STRATEGY AND THE

IRE FRAMEWORK

Like independent firms, subsidiaries pursue strate-

gies to achieve economic objectives in their chosen

marketplace, but they do so interdependently with

their parent MNE (Garcia-Pont et al., 2009; Taggart,

1997). The parent provides them with access to

resources, but also insists on sharing their resources

and places constraints on the strategic initiatives they

may pursue (Birkinshaw and Morrison, 1995;

Ciabuschi, Dellestrand, and Martin, 2011).

In recent years, these subsidiary strategies have

become more diverse with the advance of globaliza-

tion and the associated geographic ‘fine-slicing’ of

activities within value chains as well as the increas-

ing sophistication of host economies in emerging

1This extension was inspired by Ghemawat’s (2007) sugges-

tion to add ‘arbitrage’ strategies, but distinguishes arbitrage of

parent resources (the traditional model) from arbitrage of

resources obtained locally (export orientation).

2K. E. Meyer and S. Estrin

Copyright © 2014 Strategic Management Society Global Strat. J., 4: 1–19 (2014)

DOI: 10.1111/j.2042-5805.2013.01071.x