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How Do the Normativity of Headquarters and the Knowledge Autonomy of Subsidiaries Co-Evolve? Capability-Upgrading Processes of Chinese Subsidiaries in Belgium.

1 Introduction

The current literature on emerging market multinationals' (EMNEs) capability-upgrading adopts knowledge-based assumptions in its depiction of the relation between headquarters and advanced economy subsidiaries. EMNE headquarter managers decide to provide advanced economy subsidiaries managers with a leading role in capability-upgrading projects as the latter have access to "higher knowledge" (Awate et al. 2012, 2015). In this regard, the main barrier to EMNE capability-upgrading is subsidiary managers' opportunism, i.e. their unwillingness and inability to deliver on promised behaviour or performance (Awate et al. 2015; Verbeke and Greidanus 2009).

The emerging headquarters ignorance perspective in international business challenges this boundedly rational headquarters logic (Bouquet et al. 2016; Ciabuschi et al. 2011), casting doubt on knowledge-based motivations to provide subsidiary managers with capability-upgrading autonomy. Headquarters' subsidiary choices are not motivated primarily by actual knowledge but by the normative role expectations of major stakeholders (Ciabuschi et al. 2012). As such, the main barrier to EMNE capability-upgrading resides in headquarters' normativity standing in the way of knowledge-based priorities.

Process research has the ability to clarify contested international business theories (Meyer 2014), such as those explaining the relation between headquarters and subsidiaries in capability catch-up projects (Awate et al. 2012; Ciabuschi et al. 2011). Hence, this paper adopts a process perspective to inquire how EMNE headquarters 'logic of and subsidiaries' mandate for capability-upgrading co-evolve.

Given our interest in the role of stakeholder expectations, most notably those from government and private owners, we apply this question to different EMNE ownership types: private-owned (POEs), jointly private and state-owned (JOEs) and state-owned enterprises (SOEs). Research on the ownership-influenced diversity of capability-upgrading processes is still in its infancy (Klossek et al. 2012). JOEs in particular have received little attention so far in the international business literature (Cuervo-Cazurra et al. 2014).

To develop a process perspective across these three ownership types, this paper focuses on the case of Chinese multinationals (CMNEs) in Belgium. Belgium functions as an extreme case for our research question, activating the relevant variables in a relatively pure form and revealing a lot of information in the process (Flyvbjerg 2006; Siggelkow 2007). Belgium puts great effort in facilitating foreign firms' capability-upgrading because it depends on their capabilities for its own global competitiveness (Van den Bulcke et al. 2009). CMNEs have belatedly discovered Belgium as the quintessential small, and open economy (Konjunktur-forschungsstelle 2013), or "the little big man of Europe" (Banks 2013). This newfound status explains the recent rise in CMNE subsidiary activity of all three ownership types (MOFCOM 2014), providing us with a window of opportunity to study capability-upgrading processes as a pure and live case (Balogun et al. 2011).

Our findings point to the initial prevalence of normative stakeholder expectations in all EMNEs' headquarters logic of subsidiary establishment, confining subsidiaries to a limited output-upgrading mandate. Subsequently, however, headquarters and subsidiaries of the most entrepreneurial POEs and JOEs engage in a co-evolutionary learning process. Subsidiary managers' ability to challenge normative expectations is a condition to headquarters acting in a knowledge-based and autonomy-delegating manner. The most government-dependent JOE and SOE subsidiaries, by contrast, do not engage in a virtuous knowledge-based negotiation process, limiting themselves to normative expectations of output catch-up.

This research contributes to the literature on EMNE capability-upgrading by developing several propositions on how autonomy negotiation processes between headquarters and subsidiary evolve over time; depending on the historical imprinting of home success values, socialisation in how to respond to failure and the emergence of constructive conflict.

In what follows, we review the literature on EMNE capability-upgrading, contrasting the knowledge-based and normative schools of thought on headquarters-subsidiary relations. Given the importance of the type of owner-stakeholders in capability-upgrading decision-making, we summarize the literature on the relation between ownership type and subsidiary autonomy. Drawing on the extreme case of CMNEs in Belgium we analyse how headquarters' logic of and subsidiaries' mandate for capability-upgrading co-evolve. As a result of our coding, we elaborate a co-evolutionary negotiation mechanism between headquarters and subsidiary managers. This mechanism enables some EMNE subsidiaries to shift towards an innovation-upgrading mandate while keeping others in a limited output-upgrading mandate. In conclusion, we emphasize how capability-upgrading behaviour along the lines of the knowledge-based school of thought is triggered by constructive conflict between headquarters and subsidiary managers.

2 Advanced Economy Subsidiaries and EMNE Capability-Upgrading

Multinationals set up subsidiaries, i.e. value-adding activities outside a multinational's home country, with different capability mandates (Birkinshaw and Pedersen 2009; Birkinshaw et al. 1998; Luo and Rui 2009; Makino et al. 2002; Rugman et al. 2011). Subsidiaries can be used as conduits to exploit headquarter advantages abroad; or they can receive a mandate for capability-upgrading in more advanced host country contexts (Verbeke 2013). For EMNEs intent on catching up with incumbent AMNE capabilities the latter is the preferred option. Wielding less advanced home capabilities (Cuervo-Cazurra and Gene 2011), EMNEs attempt to close the gap with incumbents AMNEs by acquiring the knowledge necessary to replicate their output (Kumaraswamy et al. 2012).

EMNE subsidiaries in advanced economies typically do not immediately obtain an explorative catch-up mandate, i.e. a mandate geared at innovation capability-upgrading. Instead the typical pattern is for subsidiaries to start with a more exploitative output catch-up and subsequently move towards innovation catch-up (Awate et al. 2012). Output catch-up involves EMNEs producing output at AMNEs' current standards; while innovation catch-up involves the ability to develop innovative products and services beyond the current output frontier (Brandl and Mudambi 2014; Cantwell and Mudambi 2011).

2.1 Knowledge-Based Intentions Versus Knowledge-Ignorant Normativity

To move from output to innovation catch-up, EMNEs have to acquire knowledge beyond the current output frontier so as to "know more than they make" (Brusoni et al. 2001). Advanced economy subsidiaries play a pivotal role in EMNEs' ability to access such higher knowledge (Awate et al. 2015). To play this role subsidiaries require the sufficient autonomy to enter local knowledge networks and initiate capability-upgrading projects (Cantwell and Mudambi 2005). Subsidiary autonomy is a particularly important lever to EMNE capability-upgrading (Wang et al. 2013). An unresolved process question is how the strategic autonomy required to move EMNEs beyond the current output frontier emerges from the interaction between headquarters' intentions and subsidiary managers' initiative.

There are two competing schools of thought on the relation between headquarter and subsidiary managers in capability-upgrading projects. The first school of thought embraces an intentional, boundedly rational perspective on headquarters' conferral of subsidiary autonomy in advanced economies. In its role of managerial apex (Barner-Rasmussen et al. 2010), EMNE headquarters adhere to the primacy of capability-upgrading knowledge by granting advanced economy subsidiaries considerable catch-up autonomy (Awate et al. 2015).

Faced with the trade-off between rapid output success and long-term innovation investments (Awate et al. 2012), headquarter managers often privilege fast output catch-up over innovation leadership (Cantwell and Mudambi 2011). Yet, from a learning perspective their progression from stages of output to innovation catch-up is perfectly rational (Mathews 2002). Hence, the main culprit of EMNEs' incapacity to move beyond the current output catch-up frontier is to be found at the subsidiary level. Realising that they hold superior knowledge, subsidiary managers often use their stronger bargaining power (Mudambi and Navarra 2004) to engage in opportunistic behaviour beyond headquarters' control (Awate et al. 2015).

The normative "headquarters ignorance" perspective adopts a socio-political lens that casts doubt on headquarters' role as an apex of managerial rationality (Forsgren and Holm 2010) that delegates catch-up autonomy to subsidiaries based on knowledge-accruing priorities (Ciabuschi et al. 2012). Headquarter managers are motivated by normative stakeholder expectations rather than knowledge rationalities in capability-upgrading projects (Ciabuschi et al. 2011). Rather than as the apex of managerial rationality, headquarters tend to act in a knowledge-ignorant but politically opportunistic way (Morgan and Kristensen 2006) to satisfy powerful stakeholder expectations (Ciabuschi et al. 2012).

Only further empirical research can resolve the question of what perspective--boundedly rational or normative--best explains the evolution of subsidiary mandates in different EMNE catch-up contexts. In this regard, one potentially crucial socio-political factor that has not been explored in empirical research is the influence of different types of owners--arguably the most important stakeholders. How does ownership type impact the ability of an EMNE subsidiary to enjoy strategic autonomy, a prerequisite to develop the learning functions necessary for capability-upgrading (Wang et al. 2013)?

2.2 Relation Between Capability-Upgrading Autonomy and Ownership Type

Several authors have proposed different subsidiary mandate typologies (Birkinshaw 1997; Birkinshaw et al. 1998; Collinson and Wang 2012; Jarillo and Martinez 1990; Lin and Hsieh 2010; Taggart 1997; Giuliani et al. 2014). Generally speaking, however, we can visualize the role of a particular subsidiary on a continuum between strategic implementer and strategic contributor. While implementers enjoy little decision-making autonomy, contributors use their greater autonomy to engage in substantive local learning (Ghoshal and Bartlett 1986; Tian and Slocum 2014).

The parent's ownership structure is an important determinant of the capability-upgrading mandate of a subsidiary in a particular host country (Dunning 1977, 1988, 1998; Dunning and Lundan 2008; Eden and Dai 2010). Distinctive ownership properties induce a multinational to internalize certain international advantages and strategic priorities more than others. The literature on EMNEs rarely distinguishes between the growing variety of institutional ownership structures beyond the state-owned (SOE) and private-owned (POE) enterprise dichotomy (Milhaupt and Zheng 2014). It most notably underemphasises the intermediary category of jointly state-private owned enterprises (JOEs) (Cuervo-Cazurra et al. 2014). JOEs tend to have a rather opaque ownership structure which makes them hard to classify under formally defined shareholder types (Chen et al. 2009). They are owned to varying extents by a mix of private and governmental (State and/or provincial) investors. When JOEs are publically listed, typically less than 50% of their shares are publically tradable.

In this paper, we explicitly distinguish between all three ownership types as a potential influence on subsidiary capability mandates (Deng 2009; Rugman and Verbeke 1992). Focusing on CMNEs and their institutional environment of State capitalism, SOEs have garnered most of the attention in the international business literature (Deng 2009; Huang 2003; Nolan 2001). While in 2002 the State owned 98 of the 100 biggest Chinese companies (Zeng and Williamson 2003), in 2015 State-owned companies still dominated the Fortune China 500 list.

Tightly controlled by the State, SOEs enjoy access to strategic resources such as political support and capital from state-owned banks (Amighini et al. 2013; Zou and Adams 2008). In return for government help SOEs do not only focus on economic objectives but act as policy vehicles of large national interest projects, involving natural resources and risky strategic asset seeking (Kolstad and Wiig 2012). POEs, by contrast, are less ready to engage with risky projects, preferring plain market seeking objectives (Ramasamy et al. 2012). By default of market-oriented incentives and a clear corporate governance system, however, SOEs and their subsidiaries seem to suffer more from agency problems and a consequently lackluster performance (Qi et al. 2000; Wang et al. 2009). Although they do not make explicit the exact mechanism at work, Wang et al. (2013) hypothesize that the relative ease with which SOEs can obtain government help to overcome domestic and institutional constraints tends to work against autonomy delegation.

By contrast, POEs often have no choice but to overcome domestic constraints without key government assistance. Confronted with the preferential treatment of SOEs, some POEs have turned necessity into virtue by developing stronger organizational innovation capacities (Liang et al. 2012). Openness to organizational innovation as well as the desire to escape an unsupportive domestic business environment (Child and Rodrigues 2005; Luo et al. 2010; Wei et al. 2014a) may explain that POE headquarters are more likely to engage in autonomy delegation to subsidiaries (Wang et al. 2013). JOEs are rarely discussed in this regard. Are they intermediary cases, exhibiting greater levels of governmental control than POEs, yet more strategic and operational flexibility than SOEs by virtue of a more market-oriented management (Cuervo-Cazurra et al. 2014)?

Process research can further our understanding of how headquarters' logic of autonomy and subsidiaries' strategic mandate co-evolve across the three ownership types. Does this co-evolution follow rational, knowledge-based priorities or do normative, socio-political priorities win the day? We draw on the case of CMNE capability-upgrading in Belgium to analyse this.

3 Case Selection and Setting

3.1 Belgium as a Gateway to International Capability-Upgrading

In addition to the standard liability of foreignness faced by all foreign multinationals (Hymer 1976; Zaheer 1995; Zaheer and Mosakowski 1997), EMNEs face an additional country-of-origin liability in advanced economies (Elango and Sethi 2007; Madhok and Keyhani 2012). Embedded in less mature institutional standards at home (Khanna and Palepu 2013) EMNEs have to acquire a significant amount of complementary capabilities in advanced economies (Clark et al. 2003) to offset these liabilities and catch-up with incumbent AMNEs (Luo and Rui 2009; Luo and Tung 2007; Kedia et al. 2012).

Offsetting liabilities of foreignness and upgrading capabilities is easier in some advanced economies than in others. Strategic and competitive considerations can have vastly different effects on multinationals' geography of innovation (Mudambi 2008). Nevertheless, in search for the path of least resistance EMNEs often link up small and open economies such as Belgium (Van den Bulcke et al. 2009). Small and open economies source relatively more inputs from abroad and produce relatively more outputs for use in global value chains than large economies (OECD 2013), providing a natural entry point to global networks of suppliers and customers. Thus, international trade represents more than 70% of Belgium's annual GDP (EUROSTAT 2013); a number which most likely will not decline given the country's large investments in consolidating the international role of the port of Antwerp (De Beule and Van Beveren 2009). As the second largest and one of the most innovative European ports (Van Hamme and Strale 2011) the port of Antwerp provides crucial links in global supply chains linking Asia, Africa, Europe and the United States (Ducruet and Notteboom 2012).

Belgium is strategically located at the heart of Europe, its regulatory institutions and its innovation clusters (Barron 2011; De Beule and Van Beveren 2009; Eskelinen 2002). As a result, establishing in Belgium has liability-offsetting and capability-upgrading advantages at the regional level too. While the liability of foreignness increases rapidly when a firm enters a distant region, it decreases substantially once a firm is established in that region (Rugman and Verbeke 2007). As such, Belgium plays the role of gateway to European capability-upgrading, particularly for its most advanced Western core (Bisciari and Piette 2007; Rugman and Verbeke 2004).

Due to its historical dependence on foreign FDI, R&D activity and job-creation Belgium has a reputation for being an early mover in facilitating projects of global innovation (Buysse and Verbeke 2003; Scott-Kennel and Giroud 2015; Rugman and Verbeke 1993). In return for foreign FDI and R&D activity, Belgium provides multinationals with important R&D and tax incentives (Quaghebeur 2005), a highly skilled and internationally adaptive work force, customers used to buying foreign goods and services, and more accommodating subsidiary establishment conditions than larger economies (Van den Bulcke and Verbeke 2001; Van den Bulcke and Zhang 2005). Thus, foreign-controlled firms account for 1.5 times more R&D expenditures in Belgium than domestic-controlled firms (Teirlinck 2009).

3.2 The Extreme Case of CMNEs in Belgium

Nevertheless, the Chinese focus on larger European markets means Chinese OFDI in Belgium has long remained below par. During the financial crisis, Chinese policy-makers finally discovered Belgium as "the little big man of Europe" (Banks 2013): a country that punches above its weight in terms of inward FDI by functioning as a gateway to not only Europe, but also Africa. As a result, the number of announced Chinese greenfield investments in Belgium has accelerated fast since 2008 (see Fig. 1; EUROSTAT 2013; MOFCOM 2013). As these investments have occurred across the spectrum of SOE, JOE and POE ownership types, the case of CMNEs in Belgium provides us a with a unique window of opportunity into the study of how EMNE headquarters and subsidiary relations co-evolve in capability-upgrading projects.

By May 2014, 73 CMNEs had registered a subsidiary in Belgium (MOFCOM 2014; CCPIT 2014). This includes subsidiaries that have been approved by the Chinese government yet have not been set up in Belgium yet (see Fig. 2). Of these 73 subsidiaries 19 are in the manufacturing industry (see Table 1). Trade subsidiaries take the second rank with 11 subsidiaries, followed by transportation, textiles, telecommunications and agriculture which each contribute 4 subsidiaries. Our research focuses on those subsidiaries that are operative in Belgium, as registered by the Belgian office of CCPIT, which is responsible for keeping a tally of Chinese FDI in Belgium. Only 35 subsidiaries had started operating by June 2014. We further refined the list by excluding those subsidiaries that are non-enterprise units such as host offices of local governments. We also eliminated projects that are less relevant from a capability-upgrading perspective such as a book store and a firm providing a simple VISA service. Finally, we also excluded those firms that meanwhile ceased operations in Belgium. Following this three-step screening procedure, we ended up with a sample of 18 relevant subsidiaries of Chinese SOEs, JOEs and POEs that are currently operating in Belgium.

The focus of the paper is on capability-upgrading through the establishment of wholly-owned subsidiaries. Only two firms in our dataset engaged in acquisitions (Haoneng and Huawei) and only used acquisitions as a principal capability-upgrading means (Haoneng).

3.3 Data Collection

We queried managers of the 18 subsidiaries as to their willingness to participate in our study. Executives of 15 subsidiaries eventually agreed to provide data access (see Table 2): five SOE, three JOE, and seven POE subsidiaries. This amounts to more than 83% of the relevant sample of subsidiary ownership types and industries (amongst which banking, telecommunications, trading, chemicals, packaging and heavy machinery). While collecting data on these firms, we focused on both primary and secondary data sources (Yin 1994).

We accessed MOFCOM, Eurostat, NBB, CCPIT and World Bank databases to document the parent firm's financial margins, ownership type, industry focus, internationalization strategy and experience, transnational status, and FDI history in Belgium--including the size of the investments and the degree of localization of personnel. We collected data on parent profit margins (2013) from the CMNEs' financial statements.

We also consulted Chinese and Belgian newspaper and website reports on the fifteen subsidiaries, to gain contextual and historical insight into their parent's strategy, national champion status, and internationalization strategy--including why they established a subsidiary in Belgium. We contacted the subsidiaries directly to confirm the above data or collect missing data, enabling us to measure (i) the percentage of local staff (local recruitment/total staff) employed in the Belgian subsidiary, (ii) the parent firm's transnational index. (1) Finally, we consulted the director of CCPIT Belgium twice to check the accuracy of our collected data.

During the period September 2012 to October 2015, we conducted 50 interviews with managers who either had led the subsidiary since its early establishment in Belgium or were involved at the highest strategic subsidiary level at the moment of the interviews. Interviews lasted between 60 and 120 min and focused on four issues: (i) the headquarters' capability-upgrading logic to establish a subsidiary in Belgium, (ii) the subsidiary's initial mandate how and why it changed or remained the same, (iii) the degree of strategic autonomy the subsidiary enjoyed at the end of the study period (whether it was a strategic contributor or implementer at the beginning of 2015), and (iv) what, if any, capability-upgrading advantages the Belgian subsidiary brings to the parent's international operations. We conducted our interviews with local and expatriate managers in their native language, i.e. Chinese, English, French or Dutch. We transcribed all interviews in English to facilitate data comparison by the Sino-European research team.

3.4 Data Analysis

We conducted a cross-case comparative analysis of the fifteen subsidiaries, focusing on similarities and differences in the headquarter-subsidiary processes leading to a specific capability-upgrading mandate. Through case comparisons researchers can recognize and generalize the processes at work in an emerging phenomenon (Miles and Huberman 1994; Corbin and Strauss 2008). Researchers start by treating each individual case as a discrete experiment (Eisenhardt 1989). Comparison across cases serves to confirm, contrast and extend individual case insights (Eisenhardt and Graebner 2007).

To obtain new process insights on EMNE subsidiary capability-upgrading mandates, we coded our data following the constant comparative method (Gioia et al. 2013; Nag et al. 2007; Glaser and Strauss 1967; Wei et al. 2014b). We compared data and theory in a sequence from first-order themes (based on the raw data) to second-order theoretical constructs to aggregate dimensions (of capability-upgrading mandates).

We first analysed four individual cases: firms representing the different ownership types, operating in an important Belgian industry with consequent greenfield investments commitments. The four cases are the POEs Huawei (telecommunications) and Haoneng (package labelling for brewers and food manufacturers), the JOE ZTE (telecommunications) and the SOE ICBC (banking). We then extended our coding analysis to the other eleven firms, recoding our primary raw data, second order constructs and aggregate dimensions where necessary. Our coding allowed us to uncover a co-evolutionary negotiation mechanism between headquarters and subsidiary managers, which enables some EMNE subsidiaries to shift towards an innovation-upgrading mandate while keeping others in a limited output-upgrading mandate. We present an overview of our coding results in Fig. 3.

4 Findings

In what follows we present our findings on how CMNE headquarters' logic and subsidiaries' mandate for capability-upgrading in Belgium co-evolved over time. Our coding reveals process similarities and differences between SOEs, POEs and JOEs in terms of (i) the initial headquarter logic of capability-upgrading, (ii) the subsidiary's ability to challenge this logic based on host knowledge, (iii) the subsequent evolution of the subsidiary's capability mandate.

4.1 Initial Headquarter Logic of Capability-Upgrading

All CMNE headquarters initially were intent on output capability-upgrading rather than innovation capability-upgrading when establishing a Belgian subsidiary. Important initial differences emerged, however, between subsidiaries' output mandate. SOEs and JOEs were intent on output extension in Belgium, i.e. extending the competitiveness of domestic (and emerging market) products and services to Western markets. Extending the world-class reputation of headquarters--and its government sponsors--was a primary aim. POEs, by contrast, had a more opportunistic and open-ended output mandate; they were intent on finding new advanced market product and service opportunities rather than extending current emerging market successes. These differences related to each CMNE's historical experience of how to be successful. Flying the Chinese flag and government priorities ensured SOE and JOE home market success; while demonstrating resilience and a zest for opportunity recognition ensured POE success.

4.1.1 Output Extension

The SOEs' and JOEs' initial logic was to establish a new hub in Belgium to upgrade their competitive reputation vis a vis AMNEs. The overriding purpose was to undo the negative country of origin bias (Made in China) by wooing high profile customers and showcasing one's technological capabilities. Normative government expectations--flying the Chinese flag abroad--dominated headquarter intentions. For instance, as testified by an ICBC manager:
"We are a very good bank that has proven to be at least as good our
international competitors in China. But our Chinese headquarters
realized that our international brand is not so strong because we do
not have enough outlets in important international places. So that is
really what we are focusing on here. We are not here to learn to
compete with European banks, we already are very competitive and want
to show it to the world."

Remarkably, this thinking also dominated the logic of JOEs, who were majority government -owned but private operated. A manager of the Belgian HNA Airlines subsidiary summarizes headquarters thinking:
"We first created a Chinese airline of the highest international
standards, a world-class airline if you like. And then we went to
countries such as Belgium to spread our reputation in Europe and become
known as a world-class company."

4.1.2 Output Opportunism

POEs' initial logic was equally normative than that of SOEs and JOEs. Headquarters appeared to act even less from actual advanced market knowledge, but more from historical experience in the home markets. Rather than by government dependence, this experience was pervaded by more open-ended values of entrepreneurial resilience and opportunism, however, as testified by a Westlake Europe manager:
"When our founder and president Zhang Zhilin launched Tieliu [the
original name of the Chinese entity] he struggled to convince
customers, experiencing failure as well as success. Funnily, he
expected our first Europe expatriate Guo Ning [and later general
manager) to do the same. Zhilin provided Ning with 300 thousand euro to
launch a European subsidiary. The brief was simple: go out and look for
clients. So Ning set out with a bag of car parts and accessories.
Eventually he managed to talk with potential clients about the products
in his bag. Now, when we recall this, it is so ridiculous. But at that
time, he would have been very happy if he found a customer." (Interview
with general manager Westlake Europe)

Similarly, Huawei's headquarters instilled historical expectations of "constant struggle":
"Expatriates were sent out without any actual knowledge of Europe,
nobody had this knowledge. Headquarters expected expatriates to never
give up, and expatriates expected a constant struggle in Europe, just
like the founders had in China. So they acted as venture capitalists
scouring Western Europe for customer opportunities, to launch advanced
products and services. It took them quite a few years to find their
first customers. It took till 2006 in Belgium, with the Mobistar

Some POEs were very recently established in China, depriving them of a historical experience of resilience and struggle: Xin-Shi, Winsun, Energetic Lighting and Haoneng. These firms' headquarters operated from a sense of opportunism rather than opportunity recognition, with for instance easier VISA requirements (Xin-Shi) or subsidies (Winsun) drawing them to Belgium. Haoneng also acted out of opportunism: the opportunity to acquire the Western package label leader Illochrama in 2011.

4.2 Subsidiaries' Ability to Challenge Headquarter Ignorance

All CMNE subsidiaries experienced a degree of failure in the first years after establishment. POEs' and JOEs' headquarters' lack of host location knowledge meant their expatriates and subsidiary managers were ill-prepared for Belgian demand conditions. As a result, they struggled to convince customers to buy any products or services. SOE headquarters generally had better knowledge of Belgian opportunities, acquired through prior Sino-Belgian government contacts. Nevertheless, SOEs' normative insistence on established competitive abilities--rather than openness to calling oneself into question, coupled with their lesser attention to market performance measures rendered their output relatively inefficient for Western European customers.

Depending on whether they had been socialized in more entrepreneurial or more government-dependent values, subsidiary managers reacted very differently to the headquarters ignorance at the basis of host location failure.

4.2.1 Conflict Avoidance

Subsidiary expatriates and managers of the SOEs and the two JOEs Hainan and ZTE had been recruited and socialized in headquarter norms of hierarchy and consensus, preferring to avoid conflict. For instance the ICBC subsidiary manager described the possibility and desirability of engaging in autonomous thinking and critique as follows:
"Subsidiary autonomy is very hard to obtain... it is not normally part
of the Chinese style of management. The traditional management style
is concentration of power, with a top leader that is powerful and pays
little attention to individual or subsidiary rights. Whether we
critique or not because we lose money is not that important, anyway.
Even losing money for 10 years would not be a problem. We are here to
make a bridge between China and Europe rather than compete with the
Belgians or Europeans."

A senior Cosco Belgium manager had similar comments:
"Our management has a military style; we do hierarchy not flat
management or autonomy. Our parent exerts tight control over us: they
audit us all the time and directly manage and control each subsidiary
manager from China. We in Belgium have always tried to avoid internal
friction with the other subsidiaries and our parent."

Although private-operated, the management style at the JOEs HNA and ZTE was equally focused on avoiding conflict. For instance, at ZTE:
"Hierarchy prevails; you always pay attention to what you have to say
and to do. It often feels like everyone nods just to avoid punishment."
(Interview with senior manager)

And HNA headquarters ensured a lack of dissent by recruiting subsidiary employees based on their fit with the headquarter policy of "no quarrels" and willingness to prioritize "common beliefs". Employees have to repeatedly recite ten commandments to avoid conflict and strengthen consensus. While subsidiary managers recognized the flaws of headquarter normativity, they did not try to counter it:
"Headquarters won't admit it, because officially we are a world class
company... But we cannot compete directly with 'old Europe' brands such
as Lufthansa, which is a benchmark for us. There's nothing we can do
about this."

4.2.2 Failure-Based Challenge

By contrast, subsidiary managers of the POEs (in particular Sany, Huawei, Westlake and Haoneng) and of the JOE BBCA felt sufficiently confident of their ability to think autonomously to challenge headquarter ignorance. Nevertheless, this clearly was not part of their headquarter brief or mandate: a headquarters knows best mentality pervaded these firms also in the initial stages. Subsidiary managers had, however, been socialized in the value of recognizing opportunities and failures based on customer evidence. For instance, at Sany:
"We told the manufacturing department at headquarters that customers
require upgraded products. The manufacturing department tends to
answer: 'we always produce like this. You must follow our standard'.
But we decided not to give up; internal rivalry is common now."

Similarly, Huawei subsidiary managers pointed out that the failure to obtain customer contracts was due to customer practices that were not fit for purpose in Western Europe:
"We kept repeating this message to headquarters and they finally saw
the error of their ways, although they did not say it out loud".

Compared to the two other JOE subsidiaries (ZTE and HNA), BBCA Belgium managers enjoyed substantial strategic autonomy. The dwindling importance of BBCA's activities for home government stakeholders (BBCA was 70% private owned in 2014), and the increasing pressures to start making a profit provided opportunities for a challenge to the status quo.

4.3 Evolution of Subsidiary Capability-Upgrading Mandate

Over time, all CMNE subsidiaries--bar the failed Winsun venture--substantially localized their personnel in Belgium--with Belgian and European employees. Localization did not necessarily translate in an evolving capability-upgrading mandate. The mandates of all SOE subsidiaries and the two JOE subsidiaries HNA and ZTE did not change substantially over time. Socialized into values of headquarter hierarchy and conflict avoidance, subsidiary managers were not able to challenge normative priorities of output extension. As a result, subsidiary managers ended up self-limiting their capability upgrading ambitions in Belgium.

By contrast, the capability-upgrading mandates of most POEs and the JOE BBCA evolved significantly over time. Evolution meant initiating a catch-up redirection from output to innovation capabilities, i.e. moving beyond the current output frontier by investing in knowing more than presently needed. The Huawei subsidiary went even further, becoming a leading coordinator of European innovation upgrading. Xin-Shi's Belgian subsidiary also initiated a wholesale innovation upgrading, but failed due to its opportunistic, resource-poor nature. For an overview of the local autonomy of all subsidiaries in 2015 we refer to Fig. 4. Table 3 summarizes the evolution of the capability-upgrading mandate of each CMNE subsidiary in Belgium.

4.3.1 Self-Limiting Output Catch-Up

A Hainan manager in Belgium summarized his subsidiary's mandate as follows:
"Being here allows us to advertise that we are the first Chinese 5 star
airline operator in the official SkyTrax list. But as we are not
competitive with the main European airlines, we limit ourselves to a
focus on Chinese customers who know our home reputation."

Similarly, according to a ZTE Belgium manager:
"The difference with Huawei is that we are still very much focused on
low-cost advantages. Huawei has completely customized its product
innovations for each one of the European markets, including Belgium.
They are even doing R&D here now... We only sell products in Belgium
that we customized for other markets. We only do sales here."

4.3.2 Initiating Redirection from Output to Innovation Catch-Up

Localization was accompanied by substantial strategic autonomy in POE subsidiaries, by contrast. The ability to challenge headquarters with a more effective local solution was key to subsidiary mandate evolution, as testified by a Sany Belgium manager:
"We kept insisting on changes... In the end headquarters set up a
special trade department to satisfy our demands. This department now
takes care of internal changes at headquarters when a subsidiary asks
it... it all became a bit disorderly, but we'll become stronger in the

According to the Chief Executive of Westlake Europe:
"We learned that in Europe people want smaller vehicles and do not
like automatic transmissions. Headquarters did not want or expect us to
take this initiative. But since we were not doing very well, in the end
they agreed to invest 300 million RMB to make semi-automatic
transmissions that are more efficient for the frequent stopping and
parking in Europe. We have been more successful since. Now headquarters
offers us pretty much all the freedom we need. It is waiting for us to
launch initiatives to exceed our European clients' requirements through

Not only the POE subsidiaries, but the subsidiary of the JOE BBCA obtained strategic autonomy, initiating an upgrading redirection (interview with BBCA Belgium's chief executive):
"Our chemicals business used to be strategic to our home government
partners, but now they have other priorities. Since 2001 we have had to
become more self-reliant. We now really focus on making profits through
cost innovation. Headquarters allowed us to go through with our idea to
turn Belgium into a logistical hub. Our success since them has
transformed our role in BBCA. No longer are we just a sales-supporting
unit for headquarters. We have now become a driver of the
transformation of our entire firm in an innovative multinational... We
can decide almost anything in Belgium now."

4.3.3 Leading Innovation Capability-Upgrading

One POE subsidiary went further than initiating a catch-up redirection. Huawei's Belgian subsidiary was instrumental in the establishment of a European Research Institute in Belgium, tasked with the coordination of Europe-wide R&D upgrading projects. The European R&D center was the end-result of an evolution that started with a greenfield investment in 2005:
"Compared to for instance ZTE where I also worked we have managed to
build a more open relation with Chinese managers. At ZTE, the Chinese
expatriates still don't say what they think, while Europeans are more
used to saying what they think without fearing punishment. At Huawei it
took a while, but headquarters finally listened to our advice to take
R&D customization one step further in Europe. Headquarters installed a
small country policy that worked to our advantage... Autonomy has
really worked for us. And now headquarters decided to set up a
dedicated R&D center." (Interview with a senior Huawei manager)

5 Discussion

International business scholars have long underscored the importance of finding the right balance between headquarters' control and subsidiaries' autonomy in capability-upgrading processes (Ambos et al. 2010; Andersson et al. 2005; Bouquet and Birkinshaw 2008; Doz and Prahalad 1984). Given their less mature home institutional environment (Narula 2012), finding the right balance is more difficult for infant EMNEs than for AMNEs. In AMNEs headquarters typically provides the main source of innovation knowledge for subsidiaries (Awate et al. 2015)--confirming its central federative position. This is not the case with infant EMNEs, where headquarters intent on catch-up are dependent on advanced economy subsidiaries' higher innovation knowledge (Awate et al. 2012). This presents us with a paradox. Whilst the need for EMNE headquarters to grant capability-upgrading autonomy to subsidiaries is more pressing than for AMNEs (Wang et al. 2013), managers from emerging markets such as China typically are more socialized in values of hierarchical control than autonomy delegation (Chen 2004; Wang et al. 2009).

It is not clear how EMNE subsidiaries obtain the strategic autonomy necessary to initiate high-level capability-upgrading initiatives in coordination with their headquarters. For some scholars obtaining such autonomy is a matter of rational headquarters behaviour; headquarters grant autonomy because they prioritize larger knowledge-upgrading aims (Awate et al. 2012, 2015). Other scholars challenge this boundedly rational perspective on headquarters-subsidiary relations: headquarters' behaviour is motivated by normative stakeholder expectations rather than knowledge priorities. Indeed, subsidiaries often suffer from the "headquarters knows best syndrome" (Bouquet et al. 2016) or, worse, from headquarter ignorance (Ciabuschi et al. 2011, 2012).

This paper adopts a process perspective to shed light on how EMNE subsidiaries negotiate strategic autonomy with headquarters. More specifically, we inquire how EMNE headquarters' logic of and subsidiaries' mandate for capability-upgrading co-evolve. We do so across a sample of EMNEs with different dominant owner-stakeholders.

Our findings point to the initial prevalence of normative stakeholder expectations in all EMNEs' headquarters logic of subsidiary establishment, confining subsidiaries to a limited output-upgrading mandate. The most entrepreneurial POE and JOE headquarters subsequently engage in a co-evolutionary learning process with their subsidiaries. Subsidiary managers' ability to challenge normative expectations with evidence of home ignorance and actual host opportunities induces headquarters to act in an increasingly knowledge-based, autonomy-delegating manner--fueling the progression from output to innovation capability-upgrading predicted by the knowledge-based school of thought. The most government-dependent JOE and SOE subsidiaries, by contrast, do not engage in a virtuous knowledge-based negotiation process, limiting themselves to normative expectations of output extension.

In what follows, we discuss our findings in greater theoretical detail. We contribute to the literature on capability-upgrading through headquarters-subsidiary negotiation processes, with a focus on the challenges faced by infant EMNEs.

5.1 Initial Headquarters Logic of Capability-Upgrading

In a first stage, POE, JOE and SOE headquarters alike work from the normative expectations built in the home market and adjacent emerging markets. A weak institutional environment restricts world-leading innovation ambitions (Narula 2014; Nasra and Dacin 2010), limiting EMNE's immediate expectations to output rather than innovation catch-up. Normative expectations differ, however, depending on the EMNE's historical experience of a benign versus a failure-prone home environment. EMNEs that are heavily sponsored by government are shielded from the worst effects of weak and capricious home institutions, greatly increasing their odds of survival and decreasing the need for more flexible entrepreneurial values (Khanna and Palepu 1997; Wang et al. 2013). Such EMNEs tend to adopt a relatively focused and planned capability outlook. Government-sponsoring also means returning the favor by flying the flag abroad (Nolan 2001), advertising and building on home successes rather than opening oneself up to failure.

By contrast, EMNEs that are largely self-reliant have to develop a more opportunistic, entrepreneurial outlook that makes the most out of adverse circumstances (Hensmans 2017; Madhok and Keyhani 2012). Rather than a knowledge-based outlook, opportunism is likely to prevail amongst the first expatriates setting up advanced economy subsidiaries. As newcomers to the global scene, EMNEs neither have the experience to train their expatriates in setting up advanced economy subsidiaries (Wood and El Mansour 2010), nor the knowledge of what capabilities can be acquired or are strategic per host destination (Leung 2014). By default of capability-upgrading knowledge in advanced economies, the first subsidiary managers obtain a limited, opportunism-oriented output mandate.

This leads to the following propositions:
Proposition 1a: The more an EMNE's headquarters has been dependent on
government sponsoring, the more its advanced economy subsidiary will be
expected to focus on output extension.

Proposition 1b: The more an EMNE's headquarters has depended on
entrepreneurial flexibility to succeed in its home market, the more its
advanced economy subsidiary will be expected to engage in output

5.2 Subsidiaries' Ability to Challenge Normative Expectations

Subsidiaries need to be given enough freedom to enter local knowledge networks and create new capabilities for the parent MNE (Cantwell and Mudambi 2005). Nevertheless, normative expectations, in particular the normative logic of "headquarters knows best" can frustrate subsidiary initiatives of capability-upgrading (Bouquet et al. 2016; Ciabuschi et al. 2012). This study finds this can even be the case when subsidiary managers have understood that host failure is largely caused by overly normative headquarters expectations.

Failure can be a powerful force, triggering sensemaking of alternative opportunities and significantly altering logics and expectations that govern strategic initiative-taking (Sakuma-Keck and Hensmans 2013; Louis and Sutton 1991; Patriotta and Gruber 2015). Extant research has revealed the importance of prior socialisation in explaining why certain entrepreneurs recognize particular opportunities that others are simply unable to see (e.g., Corbett 2005; Dimov 2007; Hensmans 2015; Tsoukas 1996). Socialisation in the relative normality of failure in entrepreneurial ventures and the need to autonomously engage in alternative opportunity-seeking fosters the development of an opportunity recognition culture (Cope 2011; Mueller and Shepherd 2012). In particular, it is conducive to entrepreneurial values of autonomy and initiative-taking that are highly useful in subsequent entrepreneurial ventures (Minniti and Bygrave 2001) such as the establishment of a foreign subsidiary.

Applied to our study on capability-upgrading, EMNE subsidiary managers that have been socialized in the experience of failure as a trigger for autonomous opportunity-seeking, are more likely to use host economy failure to challenge headquarters ignorance--the headquarters knows best logic--and initiate new strategic initiatives. By contrast, EMNEs that have been shielded from failure through government sponsoring, are less likely to make the mental switch of seeing advanced economy failure as an opportunity to challenge headquarter ignorance. This is all the more so for EMNE managers that have been socialized in values of hierarchy, consensus and conflict avoidance. For instance, managers and other employees from Chinese multinationals tend to hold highly values of consensus and hierarchy (Chen 2004; Lockett 1988; Schwartz 2006). Government dependence can further increase normative expectations of central control and planning, rather than entrepreneurial initiative-taking (Liang et al. 2012; Qi et al. 2000; Wang et al. 2009).

The above argument leads to the following propositions:
Proposition 2a: The more EMNE subsidiary managers have been socialized
in values of hierarchy and consensus, the less they will use host
failure to challenge headquarter ignorance and autonomously pursue new

Proposition 2b: The more EMNE subsidiary managers have been socialized
in the value of entrepreneurial opportunity seeking, the more they will
use host failure to challenge headquarter ignorance and autonomously
pursue new opportunities.

5.3 Evolution of Subsidiaries' Capability-Upgrading Mandate

EMNE subsidiary autonomy in advanced economies fosters advanced capability-building (Collinson and Wang 2012; Wang et al. 2013) which subsequently can be accessed by headquarters to shift the firm from output to innovation capability-upgrading (Awate et al. 2015; Hensmans 2017). The boundedly rational or knowledge-based perspective on EMNE capability-upgrading underestimates the extent to which normative stakeholder expectations of headquarters' control stand in the way of granting subsidiaries' with a knowledge-based autonomy mandate. Subsidiary autonomy is the result of a socio-political negotiation process in which the ability to bargain for power in face of normative expectations is key to getting things done (Andersson et al. 2007; Bouquet and Birkinshaw 2008; Dorrenbacher and Gammelgaard 2006; Morgan and Kristensen 2006).

Bargaining for power often involves a measure of conflict between headquarters and subsidiary managers. The emerging consensus in international business research is that such conflict is a normal consequence of organizing and managing across national borders (Schotter and Beamish 2011). From a vantage of capability-upgrading conflict can be entirely functional, resulting in a heightened ability and willingness to make necessary strategic changes before performance deteriorates (Johnson et al. 2012; Pondy 1992; Hensmans et al. 2012).

Nevertheless, organizational conflict more often than not is associated with dysfunctional behaviour and negative performance (Dorrenbacher and Gammelgaard 2006; Eisenhardt and Zbaracki 1992; Pahl and Roth 1993; Menon et al. 1996). This is particularly the case for managers of infant EMNEs that grew up in a home culture that privileges harmony over dissent and conflict avoidance over constructive questioning (Chen 2004; Schwartz 2006; Wall and Stark 1998). Particularly government-dependent firms tend to adopt a hierarchical culture of control, uniformity and centralization (Deshpande and Farley 2002; Ralston et al. 2006). Whilst this observation clearly applies to SOEs, our findings on JOEs provide a mixed picture. Recent research suggests JOEs are now allowed to exercise greater flexibility in their FDI strategies from their governmental stakeholders than before (Li et al. 2014). By default of a willingness to engage in constructive conflict with headquarters, however, this stakeholder freedom is not likely to translate in the questioning and opportunity-seeking behavior necessary for subsidiary managers to shift towards an innovation-upgrading mandate.

To encourage dissent and a shared division of capability-upgrading initiative, the dominant headquarters coalition of an organization should ensure a "fear-free" context (Burgelman and Grove 1996) for subsidiary initiative-taking. Such a context involves "letting go of control" (Burgelman and Grove 2007; Johnson et al. 2012) over subsidiary managers. In this regard, we define constructive conflict between headquarters and subsidiary managers as a relatively fear-free process of negotiating headquarters' control and subsidiary autonomy. Letting go of control and allowing a measure of disorderly, yet constructive conflict to enter the headquarters-subsidiary relationship is a daunting challenge for EMNE managers and stakeholders versed in a normative culture of hierarchy and consensus. By default of constructive conflict, however, EMNEs' subsidiary mandate is not likely to evolve from output to innovation capability upgrading in a timely manner.

The above argument leads to the following propositions:
Proposition 3a: The less headquarter and subsidiary managers engage in
constructive conflict, the less an EMNE subsidiary mandate will evolve
from output to innovation upgrading.

Proposition 3b: The more headquarter and subsidiary managers engage in
constructive conflict, the more an EMNE subsidiary will evolve from
output to innovation upgrading.

6 Conclusions

This research contributes to the literature on EMNE capability-upgrading by opening the black box of autonomy negotiation processes between headquarters and subsidiaries. As predicted by the headquarters ignorance school of thought, normative stakeholder expectations stand in the way of EMNEs' rapid shift from limited output catch-up aims to innovation leadership ambitions. Subsidiary managers' willingness and ability to challenge headquarters' normativity is key to the development of a knowledge-based relation between headquarters and subsidiary managers. The emergence of constructive conflict between headquarters and subsidiary managers induces behaviour in line with the knowledge-based school of thought on EMNE capability-upgrading. By default of constructive conflict, subsidiary mandates remain limited to output catch-up rather than progressing rapidly towards innovation upgrading.

Acknowledgements This research was supported by the China Scholarship Council, CSC#: 201307650004, China.


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Manuel Hensmans (1) [iD] Guangyan Liu (1)

Received: 22 June 2015/Revised: 25 May 2016/Accepted: 19 August 2017/Published online: 9 January 2018

[??] Manuel Hensmans

(1) Solvay Brussels School of Economics and Management, Universite Libre de Bruxelles, Brussels, Belgium

(1) Transnational index = (overseas assets/total assets + overseas sales/total sales + overseas staff/total staff)/3 x 100%.
Table 1 Industrial distribution of officially registered CMNE
subsidiaries in Belgium

Industry           Number  % total

Bank                  2      2.74
Telecom               4      5.48
Transportation        4      5.48
Airlines              2      2.74
Agriculture           4      5.48
Energy                3      4.11
Chemicals             2      2.74
Trading              11     15.07
Fashion               1      1.37
Manufacture          19     26.03
Decoration            3      4.11
Foods                 2      2.74
Hotel                 3      4.11
Houseware             1      1.37
Investment            1      1.37
Medical equipment     2      2.74
Pharmaceutical        2      2.74
Metal recycling       1      1.37
Service               1      1.37
Tourism               1      1.37
Textile               4      5.48
Total                73    100.00

Table 2 Overview of the 15 operating CMNE subsidiaries that agreed to
interview and data access

Home capability advantages
MNE        Home status             Ownership  Parent profit
parent                                        margin 2013

ICBC       The largest Bank        SOE         29%

BOC        Pioneer of              SOE         24%
COSCO      The largest shipping    SOE          0.36%
CSCL       The most shipping       SOE        - 8.57%
ETIC       State owned key         SOE          6%
HNA        Only 5star airlines     JOE          7.49%

ZTE        The largest listing     JOE        - 1.98%
           telecom company

BBCA       The largest             JOE          3.24%
Sany       The largest             POE          7.36%
Huawei     The largest telecom     POE         12.2%

Westlake   The largest auto parts  POE          9%
Xin-Shi    Small producer          POE            NON

Haoneng    The largest label       POE            NON

Winsun     Small producer          POE            NON

Energetic  The biggest producer    POE          3.43%
Lighting   of energetic

           Capatility-upgrading through internationalization
MNE        Start  Transnational  Estabishment  International   Total
parent            index          in Begium     staff ratio in  asset in
                                               Belgium         Belgium

ICBC       1992     6.7%         2011          50%             200

BOC        1929   23.52%         2010          87%             110

COSCO      1967   35.43%         1998          94%              10

CSCL       1997    25.81         1999          93%               1.2

ETIC       1985      70%         1989          50%               2

HNA        2004      21%         2006          60%               0.9

ZTE        1998    52.6%         2010          75%              13

BBCA       1998      20%         2001          58%              21

Sany       2002   29.92%         2008          40%              10

Huawei     1996      65%         2005          78%              50

Westlake   2002      45%         2005          80%              12

Xin-Shi    2008      10%         2010          75%               0.5

Haoneng    2009      50%         2011          97%              20

Winsun     2010      40%         2010           0                0.1

Energetic  2007     <20%         2008          91%              10

           Sector        Interviewees

ICBC       Banking       Senior customer
                         manager, Project
                         manager, Senior
                         headquarter manager
BOC        Banking       Branch manager

COSCO      Shipping      CEO

CSCL       Shipping      CEO

ETIC       Trading       General manager

HNA        Airlines      Financial manager,
                          General Manager
ZTE        Telecom       Former CEO
                         Financial manager,
                          Client manager,
                          Outsourcing manager
                         VP Europe Region,
                          Country manager
                         6 Project managers
                         2 Expatriate project managers
                         R&D process manager
BBCA       Biochemicals  CEO

Sany       Heavy         International marketing
           machinery     manager

Huawei     Telecom       Procurement manager, 6
                          Project managers
                         Country manager
                         VP European public affairs, Assistant VP
                         EU Public Affairs,
                         European account manager
                         VP delivery management
                         Delivery and Service director
                         Technical support manager
Westlake   Auto parts    General manager (two interviews)
Xin-Shi    Aquatic       CEO/Founder
Haoneng    Packaging     CEO/shareholder,
                         General manager,
                         Finance director
Winsun     Photovoltaic  CEO
                         Former CEO
Energetic  Lighting      General manager

Table 3 Evolution of the capability-upgrading mandates of CMNE
subsidiaries in Belgium

CMNE       Ownership  Evolution of subsidiary mandate

ICBC       SOE        Self-limiting output catch-up through
                      service extension:
                      (i) Extending Chinese reputation as
                      an efficient loan service to Belgian
                      enterprises wanting to invest in
                      China, (ii) Access to Belgium,
                      where EU headquarter is located,
                      has strengthened its popularity,
                      which is important for attracting
                      high end clients, (iii) A new IT
                      platform to test its transaction
                      processing system (i.e. FOVA) to
                      integrate into its global transaction system
BOC        SOE        Self-limiting output catch-up through
                      service extension:
                      Longer international experience than
                      other Chinese banks makes it pay
                      much attention to its global
                      arrangement. Under strict top-down
                      authorization, BOC managed to
                      transform its business from only
                      targeting Chinese enterprises to
                      local high-end clients through more
                      efficient and considerate service
COSCO      SOE        Self-limiting output catch-up through
                      both transportation service
                      extension and reputation upgrading:
                      (i) Increasing worldwide reputation
                      for efficient and modern shipping.
                      (ii) Launching new, large Chinese
                      flagships carriers from Antwerp
                      (e.g. "COSCO Belgium"). (iii)
                      Strict internal authorization
                      procedures and supervision require
                      the local team engage in cost
                      reduction where possible
CSCL       SOE        Transportation service extension:
                      Ascribe to strong fleet for
                      transportation, CSCL targets
                      following dominant trade current of
                      west-east direction. Its access to
                      Belgium offers the company not
                      only stable financial performance,
                      but also strict requirement for
                      service due to heavy competition
ETIC       SOE        Management mode:
                      Its local subsidiary previously played a
                      role as a sale intermediator.
                      Inadequate autonomy limited the
                      activity of management, enlarged its
                      talent shortage and weakened client
                      loyalty due to slow feedback response.
                      After internal top-down
                      reorganization, performance becomes
                      better with more autonomous
                      decision-making procedure
HNA        JOE        Self-limiting output catch-up through
                      customized flight service:
                      (i) Facing fierce competition, service
                      improvement like more considerate
                      care and punctual flight make it
                      become the first Chinese 5 star
                      airline operator in the list of
                      SkyTrax. (ii) But still limiting to
                      focus on Chinese passengers
ZTE        JOE        Self-limiting output catch-up through
                      quality improvement, cost saving:
                      Sustaining commitment to EU market
                      increases ZTE's motivation to
                      improve better and customized
                      product. However, its business
                      mode keep "traditional" by low-cost
                      advantages of earlier subsidiary
                      style compared to Huawei's
                      business unit. Quality improvement
                      and cost saving activities (e.g.
                      talents and expertise sharing among
                      European subsidiaries) have
                      rewarded ZTE with good profit
                      rather than initial losses
BBCA       JOE        Redirecting from output to innovation
                      catch-up because logistical
                      innovation beyond headquarter focus:
                      Finding chances to increase profit
                      through enriching new kinds of
                      products. Even those products
                      beyond the mother company's
                      product list. A 5000 m2 warehouse
                      and additional space for storage
                      extension makes it become a
                      logistic hub and more self-reliant.
                      This initial success has broken their
                      former mode as only a sale-supporting
                      unit and then become a
                      profit source with higher degree of
Sany       POE        Initiating redirection from output to
                      innovation catch-up:
                      (i) Improving product quality (e.g.
                      customized products with bigger
                      and more comfortable driving
                      space). (ii) Developing core
                      products with the longest
                      mechanical arm to strengthen
                      unique advantages. (iii) invest more
                      in R&D customization
Westlake   POE        Initiating redirection from output to
                      innovation catch-up:
                      (i) Initially as the unit of after-sale
                      supporting of an OEM supplier, (ii)
                      Now, the subsidiary plays a role
                      beyond marketing and after-sale
                      supporting. It is also an information
                      center for continuous quality
                      improvement and resource
                      distribution. Customers'
                      requirement and feedback are
                      quickly collected and reported to
                      HQ. Then experts and engineers
                      deal with problem in time. (iii) It
                      has started its brand building
                      through European market access in
                      order to increase its bargaining
                      power against stronger intermediary
Xin-Shi    POE        Output opportunism, Research
                      The experience here motivates them
                      try to explore the technique to
                      enhance the activity of its product--a
                      kind of worm for bait in cold
                      water, which is not a problem for its
                      present domestic customers because
                      of warmer home climate
Haoneng    POE        Reputation, distribution channels,
                      management upgrading, lead
                      through technological innovation:
                      (i) Long term of competition and
                      cooperation with Illochroma, a
                      well-known Belgium based package
                      label supplier gave Haoneng the
                      opportunity to purchase this
                      company successfully. (ii) Haoneng
                      has obtained strategic asset: high
                      level of equipment, talents,
                      knowhow and brand. (iii) Continual
                      mix with domestic management and
                      intelligence offers Haoneng an
                      innovation mode of cross culture
                      and nation

Winsun     POE        VISA opportunism, Gateway to
                      Easier business VISA application
                      make the boss set its European sub
                      in Belgium. As a capital channel to
                      invest in Europe. For example, it
                      then invested a solar power station
                      in Italy
Energetic  POE        Quality improvement, management
Lighting              and technology upgrading:
                      Its subsidiary experienced a business
                      startup from scratch. Now, it has
                      already had its own team and
                      exhibition room. More importantly,
                      it has its own customers and
                      stable financial performance.
                      During the process, the company
                      has continuously improved its
                      lighting product quality to save
                      more energy and be more

Huawei     POE        Leading innovation capability-upgrading
                      after a process of
                      (i) Initially collaborating with local
                      agent to look for contracts. (ii)
                      Cooperating closely with customers
                      through 'Joint Innovation Center' to
                      response to their specific demand
                      accurately and immediately: For
                      example, its product--SingleRAN
                      based on 'Multicarrier Modulation
                      Technique' for Vodafone. (iii)
                      Becoming an autonomous hub to
                      share resources (e.g. R&D, HR etc.)
                      with other subsidiaries under "small
                      country policy"

CMNE       Challenge to headquarter

ICBC       Not applicable

BOC        NA


CSCL       NA

ETIC       NA

HNA        NA

ZTE        NA

BBCA       Yes. The subsidiary has become:
           (i) more "self-reliant"
           (ii) "a driver of the transformation of
           the entire firm in an innovative
           (iii) more autonomous in decisionmaking

Sany       Yes. Lessons from local market due
           to climate difference make HQ rely
           on the feedback of the subsidiary.
           "In the end, headquarters set up a
           special trade department to satisfy
           our demands". "This department
           now takes care of internal changes
           at headquarter level when the
           subsidiary asks it"

Westlake   Yes. The subsidiary signaled to
           headquarters the need for an
           upgrade of its innovation
           Due to local experience and
           performance pressure, HQ
           eventually accepted the advice and
           "invested 300 million RMB
           (around 37 million euro) to produce
           parts for semi-automatic cars. There
           would not be such an investment if
           there is no the experience of
           Westlake Europe BVBA"
           "Now headquarters offers us pretty
           much all the freedom we need"

Xin-Shi    Xin-Shi experienced failure with its
           initial Chinese products in Belgium.
           This prompted the subsidiary to
           initiate a product research

Haoneng    Integration of host advantage of R&D
           with home advantage in
           manufacture to produce synthesis.
           "If we just stay in China, we would
           be separated with something the
           latest. We acquired Illochroma to
           catch up with the latest
           technological innovations. Now we
           realize that many innovative ideas
           are beyond knowledge of the
           current technology architecture"
           "The Illochroma staff provide us with
           the experience and knowledge to go
           beyond this. Except our own team,
           we also have a look at those in
           markets, and even our competitors'.
           Then we can know something
           innovated before it comes into the
Winsun     Failure led to shutting down of

Energetic  Effective local solution of the
Lighting   subsidiary is valued by HQ:
           "We previously concentrate on
           manufacture. Now we pay much
           attention to our own brand and
           "There are a lot of new information
           about new products or ideas from
           market, which could help us
           improve and optimize the
           manufacture resource of parent
           "I start thinking about more reliable
           sales pattern. After all, the market is
           not in your hands if you just do
           "We have nothing to reference. It is
           trial error. What we only could do is
           to try it"
Huawei     Yes. HQ realizes that needs to grant
           new Europe-wide strategy mandate:
           coordinate Europe-wide to know
           more than you make. For example,
           in May 2015. Huawei announced
           the opening of a brand-new
           European Research Institute (ERI)
           in Leuven (Flanders). The ERI will
           manage Huawei's growing array of

           European R&D facilities - 18 in 8
           different countries so far - and
           support Huawei's various 5G
           projects underway in Europe.
           According to the company, the new
           center is "an important milestone in
           Huawei's global innovation
           "Huawei's R&D facilities are
           centered around the development of
           next-generation network
           technologies", says CEO of Huawei
           Belgium "Today, a total of 1200
           researchers in Europe alone are
           already working on a variety of
           innovative projects"
           "HQ finally listened to our advice to
           take R&D customization one step
           further in Europe. Headquarters
           installed a small country policy that
           worked to our
           ad vantage... Autonomy has really
           worked for us"
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Author:Hensmans, Manuel; Liu, Guangyan
Publication:Management International Review
Article Type:Report
Geographic Code:4EUBL
Date:Jan 1, 2018
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