Organization Theory and the Multinational Corporation

As an organization that operates simultaneously in many diverse environments, the multinational corporation (MNC) would seem to be promising territory for testing and developing organization theories, particularly theories about the relationships between organizations and their environments; and yet organization theory and the study of the MNC have not had a particularly close relationship. Organization theorists have rarely taken the MNC as an arena for study. Theorists who have focused on case studies of individual organizations have found the MNC’s size and complexity forbidding, whereas those favouring large-sample quantitative studies have preferred to look at categories of organizations with much larger populations.

The increasing intensity of global competition (Porter 1986), the development of MNCs (Stopford, Dunning and Haberich 1980; Dunning and Pearce 1985), and the attendant academic and managerial interest in the role of the diversified MNC (Ghoshal 1987; Prahalad and Doz 1987; Bartlett and Ghoshal 1989) is too well documented to merit repetition. Although there has been a lot of debate on the nature of global competition and of the diversified multinational corporation (hereafter referred to as the DMNC), very little attention has been paid to the conceptual and theoretical frameworks used to analyze DMNCs and their management. Many attempts have been make to analyze aspects of the MNC starting from an established theoretical base: for example, Buckley and Casson (1986) and Hennart (1982) have attempted to seek a rationale for the MNC using a transaction cost perspective. Others (e.g., Dunning 1980 a and b, 1981b) have emphasized the need for an ‘eclectic’ theory explaining the DMNCs. We shall argue in this chapter that on the whole, scholarly research on the functioning of the MNC has suffered both from desire among some scholars to persist with existing paradigms and from other scholars’ ignorance of what existing theories could bring them. Since existing paradigms, by the very nature of their underlying simplifying assumptions, are not fully able to capture the complexity and richness of the DMNC, and since discipline-based researchers have seldom taken the DMNC as an object of research, this discrepancy is not surprising.

Over the last decade and a half, analyses of the strategy and organization of MNCs have increasingly widened their scope to incorporate detailed institutional portrayals of business environments. Relatively little of this work, however, has drawn on the simultaneously evolving body of sociological theory concerning the relationships between organizations and environments. Indeed, the two fields seemed to moving in different directions. As researchers into multinational enterprises focused their level of analysis on the study of businesses and product lines within the MNC, organization theory increasingly raised the level of analysis above the level of the individual organization to populations or fields. Scholars working on MNC organization tended either to remain within the ‘strategy-structure’ tradition of contingency theory or to move away from the detailed studies of formal structure that had dominated earlier work in favor of an emphasis on strategy and process, whereas macro-organization theory concentrated increasingly on structure (organizational forms, institutionalized patterns, the structure of networks) and paid less and less attention to strategy.

As pointed out recently by Kogut (forthcoming), the late 1980s have witnessed a significant evolution of academic interest in the MNC. An important element of this shift has been a change in the focus of research away from the dyadic headquarters-subsidiary relationship in MNCs, or the specific decision of a company to invest in a foreign location, to the coordination tasks of managing a network of established foreign subsidiaries and analysis of the competitive advantages that arise from the potential scope economies of such a network.

Portentous and abrupt changes in the world economic order have recently rekindled public interest in the globalization of business. Students of international business thus face with renewed urgency the challenge of explaining the interaction between business organizations and their environment. This challenge is also an opportunity: large-scale environmental transformations constitute so many occasions to observe organizational reactions and proactions.

An unfortunate development in the study of MNCs has been the separation of comparative management from the theory of foreign direct investment (FDI). The narrow effect of this separation has been to neglect the development of an understanding of how the country of origin influences the capabilities of firms and their domestic and international competitiveness. In fact, as argued below, FDI is the expression of the differential organizing capabilities of firms across countries.

How do firms manage to perform their functions efficiently? How do they constrain individual behavior to make it compatible with the overall goals of the firm? These age-old questions take on new significance in the context of the MNC (see, for example, Brooke and Remmers 1970; Doz and Prahalad 1981; Hedlund 1981, 1986; Prahalad and Doz 1981; Baliga and Jaeger 1984; Gates and Egelhoff 1986; Bartlett 1986; Welge 1987; Egelhoff 1988; Bartlett and Ghoshal 1989). In MNCs the problem of control is particularly acute. Geographical and cultural distance increase the cost of establishing control, and make it difficult for MNCs to secure the cooperation of their foreign affiliates. Overcentralization of decisions leads to paralysis, while excessive decentralization results in chaos (Doz and Prahalad 1981).

The MNC is probably the most complex form of organization in widespread existence today. Operating across products and markets, nations and cultures, it faces problems and situations far more diverse than even the largest domestic firms. With the increasing globalization of business, a rapidly growing level of economic activity now depends upon this form of organization. Thus the MNC is an important entity for scholarly study both because its influence is growing and because it presents organizational problems that lie at the forefront of organization theory and challenge the capacities of existing theory.

The virtues of hierarchical organization — of matter, of life, of information, of human institutions — are mostly taken for granted. Analysts invoke the supposed virtues of hierarchy without much specification. An example is Galbraith’s (1973) synthesis of the information-processing theory of organization design: the discussion is very detailed on most aspects of design dimensions, but hierarchy is left curiously anonymous. Hierarchical structuring is introduced as one of the first and most fundamental ways of improving the handling of information, but why it is among the first and fundamental is left unexplained.

Increasingly global strategy has been recognized to be a key determinant of the success and survival of MNCs. This is traceable, in no small measure, to the non-trivial benefits recognized as flowing from global strategy which include global economies of scale and scope, reduced factor costs, worldwide learning and enhanced competitive leverage (e.g., Yip 1989).

How do the members of a multinational organization organize themselves each day to replicate the interconnections, the hierarchies, the problems and the routines with which they are familiar? It would be a mistake to assume that the taken-for-granted structures of everyday life such as interpersonal relationships, chains of command and exchange networks are re-formed effortlessly each day. In any large complex organization, such communicative structures only survive through constant use. Part of the use may be maintenance, as when friends telephone each other merely to ‘touch base’ rather than to exchange information. This skilled task of social reproduction is all the more difficult in the case of the MNC because it must be accomplished across national frontiers and cultural differences. In an MNC operating across many national borders with a variety of loosely coupled subsidiaries, a large amount of resources may have to be devoted simply to keeping routines and other structured behaviors reliable from day to day. Organizational inertia, from this perspective, is achieved only at great effort and cost (see, e.g., Hannan and Freeman 1984, p. 152).

As this collection of essays suggests, organizational theorists are just getting around to the serious study of the MNC. As of yet they have not had much time for culture, but when culture does enter into the emerging representation of the MNC, it does so often as an all-purpose variable used to account for many of the problems faced by MNCs. Such firms by definition do business in different countries under vastly different conditions throughout the world; they must therefore enter into relations with people — as customers, employees, suppliers — from distinct national (and other) cultures who may have quite different ideas as to what the organization and their roles in relation to it are all about. This multinational character creates varying degrees of cultural complexity, confusion and conflict when individuals and groups who do not share the same underlying codes of meaning and conduct come into contact with one another. These troubles may persist over time and even become amplified, thus leading to a good deal of distrust, disorder, hostility and the unravelling of corporate or local agendas. Organization theory applied to the MNC becomes then a search for those organizational forms that might obviate, mediate or otherwise soothe local interests in favour of corporate ones.