The basic assumptions of this stream of research are related to the questions: 1) What kind of ownership structure gives the most effective influence, and why? 2) What kind of control tools are needed, in order to secure influence through ownership from HQ towards its subsidiaries and JVs? 3) How does the interplay between influence and ownership affect the relationship between HQ and its subsidiaries and JVs?
Influence and ownership structure
In many discussions, the issue of influence via ownership is connected to the different forms of ownership and the forms of organization, such as equity-based enterprises and non-equity-based enterprises. “Within equity-based the choice is between wholly owned operations and equity joint ventures, while within non-equity-based modes, the choice is between contractual agreements and export” (Pan and Tse, 2000, p. 535). Groot and Merchant (2000) argue that, despite the fact that the equity principle is the best for international subsidiaries, there are many non-equity JVs with different contractual agreements in the world because of the processes of internalization and globalization.
Noting the variety of ownership forms connected to investments abroad, this research will focus on the forms of ownership that are most relevant for MNCs: wholly-owned subsidiary (WOS) and joint venture (JV). In order to better understand the discussions in the management control research domain related to the topic of the kind of ownership control the HQ uses to influence its subsidiaries, the above-mentioned definitions will be further elaborated.
A subsidiary or subsidiary company is a company that is owned or controlled by another company, which is called the parent company. A subsidiary company has 50% or more of its voting shares controlled by another company. It is defined as a WOS when all the common shares are owned by the parent company. In contrast, a regular subsidiary is 51 to 99% owned by the parent company. The parent company is typically a larger business enterprise that often has control over several subsidiaries.
The amount of control the parent company chooses to exercise usually depends on the level of managing control the parent company provides in the subsidiary. A JV is formed by an agreement
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between two or more entities or partners for a specific business purpose, in order to develop a business activity, a new entity. Being the partners in the JV, the shareholders can have different degrees of ownership – minority, majority or equal ownership. The various forms of ownership and different degrees of shareholding reflect the level of influence and control in the subsidiary and the joint venture.
The major differences between a JV and a subsidiary are related to the question of how each business is established and how it maintains control over the enterprises. The subsidiaries exist as separate business entities from the parent company, but the parent company maintains partial or full control of its subsidiaries. The level of control that the parent company has over its subsidiaries depends on whether the parent company owns all or just part of the subsidiary companies. In a joint venture, partners have an ownership interest in shares and in management responsibilities. The parent company of a subsidiary controls the decision-making, such as the selection of the board of directors and managers, to the extent of its ownership interest in the subsidiary. Despite the management responsibilities of a JV being shared between the co-owners, the JV may be organized in such a way that gives some of the partners the possibility of having dominant control over the business unit, in relation to other joint venture participants. The main factors explaining the link between ownership and influence in the context of HQ and subsidiaries will be further presented.
The size of the company invested in abroad and previous international experience are important paradigms in choosing the form of ownership, in order to achieve influence over subsidiaries and JVs.
The evidence from the research literature indicates that the WOS is the more common form of ownership than the JV in influencing the subsidiaries (Mutinelli and Piscitello, 1998; Barbosa and Louri, 2002; Álvarez, 2003; Desaia, et al., 2004). These discussions are related to the followings factors that influence choosing WOS: 1) The parent company’s size positively influences the setting up of a WOS rather than a JV (Kogut and Singh, 1988; Agarwal and Ramaswami, 1992; Mutinelli and Piscitello, 1998; Makino and Neupert, 2000; Pan and Tse, 2000; Brouthers and Brouthers, 2001). 2) The parent company’s coordination of integrated production activities across different markets, transfer technology, benefit from worldwide tax planning (Kogut and Singh, 1988; Padmanabhan and Cho, 1999; Asiedu and Esfahani, 2001; Desaia, et al., 2004). 3) The parent company’s substantial experience in a specific geographical area, knowledge of the country’s market and environment (Hennart and Larimo, 1998; Mutinelli, and Piscitello, 1998; Brouthers and Brouthers, 2001).
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Enterprises with large size, large international experience, large industrial experience, and low cultural distance between home and the country being invested in, are interested in large markets and can benefit the high level of economic growth from investments, choosing the WOSs, in order to increase their influence on the operations abroad (Tahir and Larimo, 2004). In addition, the factors of high competence, innovation, high level of research and development process among the enterprises reaching the foreign market and low levels of risks in the target country increase the probability of choosing WOS (ibid.). Thus, large firm size, low cultural distance, large size of the target market, and high level of economic welfare also increase the probability of choosing WOSs and achieving greater influence in subsidiaries.
In the context of this research, it will be interesting to investigate how the owners achieve influence in the framework of JVs organized during the process of internationalization. The scholars explained the reasons why some companies may prefer to invest through a JV and not a WOS in particular situations:
1) when the entity needs to share risks (Gatignon and Anderson, 1988; Agarwal and Ramaswami, 1992; Kim and Hwang, 1992; Mutinelli and Piscitello, 1998; Pan and Tse, 2000); 2) when the entity needs additional resources to invest abroad and to be provided with knowledge by a partner, and when there is a lack of adequate experience of working abroad (Aghion and Tirole, 1994; Álvarez, 2003);
and 3) when the market to be invested in is far from the socio-cultural paradigm of the parent company and there is a need for close co-operation with local partners (Mutinelli and Piscitello, 1998; Pla, 1999;
Brouthers and Brouthers, 2001; Asiedu and Esfahani, 2001; Barbosa and Louri, 2002).
When discussing the influence and control mechanisms in JVs, attention should be paid to the possible tensions that can appear in these organizations. In this connection, the issue of co-operation with partners is important, based on knowledge that no one party has total control and that accountants, in particular, must have “an array of specialized knowledge and skills to function well” in JV situations (Morris, 1998: p. xiii). Morris (1998) concluded that influence and control of JVs is complex and multidimensional, underlining that one of the most important issues is that behaviors of the JV’s partners and the partners' employees must be agreed in choosing the set of controls to use. Groot and Merchant (2000) underlined a significant factor for JV success: the common multiple control-system which has similarities as a formal JV agreement, all partners monitoring overall JV results and governance through a board of directors, in order to achieve influence. At the same time, the factor of at what stage of its establishment in the market abroad the investor is can be an important additional factor, affecting the matter of form of ownership, influence and control. Thus, being at an earlier stage of the establishment of subsidiaries and JVs abroad, the use of specific control mechanisms can be of
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more relevance to JV partners, in order to achieve influence, than overall equity control (Geringer, 1986; Schaan, 1983).
Influence via ownership in order to achieve control
Ownership structure and the issue of influence link to the question of how to achieve control in an organization (Cubbin and Leech, 1983; Abernethy et al., 1995; Agrawal and Knoeber, 1996; Groot and Merchant, 2000; Chalos and O’Connor, 2004; Dessai et al., 2004; Ben-Amar and André, 2006; Al Farooque et al., 2010; Dekker, 2008; Chenhall, 2008). With the growth in large corporations abroad and the dispersion of their stakeholders (Ben-Amar, 2006), in order to achieve influence, the question of the separation of ownership from operational control and concentration on strategic control became important. The usage of WOSs and JVs links to the possibility of various types of control mechanisms.
These controls include expatriate staffing, socialization practices, delegated decision-making responsibilities, parent company communications and manager performance incentives (Al Farooque et al., 2010) that, in common, will increase the influence from HQ towards subsidiaries and JVs.
Some authors support the assumption that the degree of ownership increases the level of influence and control (Chalos and O’Connor, 2004), especially strategic control, which is connected to the processes in the organization and control of the development and implementation of strategic plans (Reufli and Sarrazin, 1981). Other researchers argue that other forms of ownership can also affect the issue of influence and control. Thus, Groot and Merchant (2000) describe unequal ownership, which may have significant effects on the decision-making process and control mechanisms and, in this way, affect the influence in the subsidiaries and JVs. At the same time, Mjoen and Tallman (1997) found no linkage between equity of ownership and strategic controls, or between equity of ownership and operational controls that can give influence.
Influence via ownership structure in order to increase control and company performance
The relationship between ownership concentration and influence on company performance is another important issue discussed among scholars. Ownership concentration and firm performance simultaneously impact each other (Al Farooque et al., 2010). André and Schiehall (2004) found a similar relationship between the ownership shares of the dominant shareholder and the firm’s performance. Other discussed factors that have a positive impact on value creation and an influence on company performance under internationalization are linked to the right governance mechanisms and the question of separation of ownership and control (Ben-Amar, 2006; Andre et al., 2004).
Separation of ownership and control, according to Ben-Amar (2006) and André et al. (2004), does not
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have a negative impact on performance. In this connection, the discussions about corporate governance (Shleifer and Vishny, 1997) are central. Some publications link influence, ownership and control issues to governance of MNCs (Dekker, 2008). These articles focus on how firms can handle with control and influence challenges that arise in MNCs by selecting a ‘good’ partner, and by designing an appropriate governance structure (Dekker, 2004), in order to increase the HQ’s influence on its subsidiaries and JVs. At the same time, influence and control mechanisms that are linked to company performance and the active or passive role of shareholders (van den Bogaard, Speklé, 2003;
Thornburg, 2012) are connected, further, to shareholders’ high incidences of control contests, and can lead to poor financial performance and high turnover among managers and directors.
Models for ownership in JVs abroad
Karhunen, Löfgren and Kosonen (2008) used their concepts of degree of ownership and degree of foreign control in order to research four types of international business operations in transition economies; they suggest four types of relationship between the above-mentioned parameters. Despite the fact that the authors did not include the topic of influence in their article and in their models, I have chosen to present these models, based on the logic from the section about the definition of the phenomenon of influence, where influence, power and control are linked to each other. The models focus on the issue of control in operations abroad that can be interpreted as influence and will be used further in this research in discussions, in order to analyze and compare the empirical findings of my research and the results presented by Karhunen et al. (2008).
Type 1: the “arm's-length contractor” represents low levels of foreign ownership and low level of control (contractual partnerships, such as licensing, subcontracting or contracted manufacturing).
Using technically simple manufactured products, the investor can give a local partner the opportunity to be an independent subcontractor organizing the process and the control exerted by the foreign partner (limited by control of quality of the end product).
Type 2: the “hands-on contractor” represents a low level of foreign ownership and a high level of control, when operations are often technologically simple (consumer goods manufacture, and the subcontractor follows the product to the final stage). In this connection, quality control is a more important factor than in the previous model. “However, while arm's length companies often supply components and parts for heavy industry, ventures in this category are often ‘footloose’ – easily to be transferred from one geographical location to another as companies constantly seek lower production
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costs. The difference between this and the previous type, however, is that the foreign partner exercises more control over the quality of production and hence the production process” (Karhunen, 2008, p. 83).
Type 3: the “brand protector” represents high levels of foreign ownership and control. Such operations display the expected interaction between ownership and control (Karhunen, 2008, p. 83). The contributions of financial resources at the entry phase (acquiring a 100% share) and of managerial resources, in order to establish control over the operations, are high, and brand image is one of the key assets of the company that prefers the standardization of management procedures across countries.
This type of company is motivated by expansion into the market. The implementation of standardized operations requires a high level of financial and managerial resources from foreign entities. While the ownership share of the foreign partner may be close to 100%, at the same time, the local employees or co-partner are granted freedom over management of the operations.
Type 4: the “market share maximizer” represents a high level of foreign ownership and a low level of control when the ratio of resource commitment to ownership is high, because the foreign partner is willing to maintain operations in the local market for the longer term (ibid.).
It is to be noted that, in practice, some investors do not take on the active managerial role of the JV, preferring the role of a so-called “sleeping partner”: that is, a partner in a company who does not take an active part in its management, especially one who provides the company with capital (Karhunen, 2008; Child and Yan, 2002). Additionally, in this connection, foreign investors can make the choice to delegate the administration to the local management due to its tacit knowledge of the local business environment and contacts with governmental actors (Karhunen, 2008, p. 81).
To conclude, the literature review demonstrated that:
1). There is a link between the influence and ownership structure, in relation to the context of this study, in the relationship between HQ and subsidiaries in multinational settings within the MNC framework. In many discussions, the issue of influence via ownership is connected with the different forms of ownership and of organizing, such as equity-based enterprises and non-equity-based enterprises. The context of this research is limited to the framework of the MNC in the process of internationalization and, consequently, to equity-based enterprises. Many scholars point out the tendency among MNCs to prefer WOSs rather than JV (Mutinelli and Piscitello, 1998; Barbosa and Louri, 2002; Álvarez 2003; Desaia, et al., 2004), explaining this by the fact that JV ownership is generally suboptimal because of the sharing of residual control rights, and that WOSs mean greater
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influence and control but also require a major commitment in terms of resources and imply both greater risk and less flexibility (Desaia, et al., 2004).
2). Scholars suggest that the degree of ownership increases influence and control (Chalos and O’Connor, 2004), especially strategic control. At the same time, usage of WOSs and JVs is linked to the utilization of various types of control mechanisms that include expatriate staffing, socialization practices, delegated decision-making responsibilities, parent company communications and manager performance incentives (Al Farooque et al., 2010), which increase the HQ’s influence over subsidiaries and JVs.
3). The interplay between influence and ownership has an impact on value creation and influences company performance (Ben-Amar, 2006; Andre et al., 2004). In this connection, discussions on corporate governance are central (Shleifer and Vishny, 1997), in order to increase the HQ’s influence over subsidiaries and JVs. It has been discussed that the relationship in JVs can lead to tensions between the partners, and it is important to design an appropriate governance structure.