The Role of Headquarters
- New Horizons in International Business series
Edited by Ulf Andersson and Ulf Holm
Chapter 7: Governance Costs in Headquarters–Subsidiary Relationships
7. Governance costs in headquarters– subsidiary relationships Gabriel R.G. Benito and Sverre Tomassen INTRODUCTION A multinational company (MNC) is per definition a company that owns and operates units that perform value-adding activities in locations outside its home-country: put differently, it is a company that has made foreign direct investments (FDI). While FDI is often motivated by access to immobile resources, securing cheaper inputs, searching for lower manufacturing costs, easier and/or more economical transportation and market access, using foreign direct investments as a governance mechanism has a cost side that goes beyond mere production and input costs. According to established theory of MNCs, FDI is the preferred choice of internationalization when the combined costs of operations (for example inputs, manufacturing, and transportation) and governance are lower than the equivalent costs of other options, such as exports, licensing or alliances (Buckley and Casson, 1976; Hennart, 2000; Welch et al., 2007). Yet, the performance of different operation methods cannot, ceteris paribus, vary systematically, even though there could well be differences with regard to governance costs (Masten, 1993). Otherwise, rational managers would always select the one that outperformed all other foreign operation methods. The decision hence entails economizing on ex ante governance costs as well as anticipated ex post governance costs, but while the costs of operations are generally well understood – even though they sometimes are difficult to estimate accurately – the opposite is the case with the costs of governance.1 Managers evidently have an idea about such costs, but the conceptions of the costs...
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