The Role of Headquarters
Edited by Ulf Andersson and Ulf Holm
Chapter 7: Governance Costs in Headquarters–Subsidiary Relationships
139 explain why governance costs tend to be overlooked by companies venturing abroad. However, crucial decisions such as that of ‘make or buy’ will frequently be based on unclear, or – even worse – on wrong assumptions if key elements of such decisions – namely, their governance costs – are kept hidden in the shadows. In this chapter, we focus on the relationship between MNC headquarters and their foreign subsidiaries – established either as a greenfield or as an acquisition – and examine the costs of governance in such relationships. Drawing on organizational economics perspectives, especially transaction cost economics (TCE), we presume that using a hierarchical solution – that is, having chosen the ‘make’ alternative – for dealing with cross-border interdependencies reflects a perceived need to take on a high level of control over the activity performed abroad. Typically, MNCs would want to control foreign units in business contexts characterized by uncertainty, information asymmetries and potential for opportunistic behaviour (Buckley and Casson, 1976; Hennart, 1991, 2000), particularly if these factors occur concurrently with high levels of asset specificity (Williamson, 1981). Attaining high performance – if not necessarily profit maximization in a strict sense (Simon, 1997) – is a common and important assumption in economic perspectives on companies’ behaviour. This assumption of profit-seeking companies is especially important when we discuss governance costs within companies (that is, the ‘make or buy’ decision has already been made), since bringing cross-border interdependencies into common governance attenuates the immediate impact of competitive forces on performance. As Benito and Tomassen (2003) point out, performance is a...
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