Performance factors of subsidiaries abroad: lessons in an analysis of German subsidiaries in France.
Foreign Direct Investment (FDI) has been growing for several decades and this trend now appears to be irreversible. During the 1980s there was marked acceleration worldwide in the flow of FDI. The stocks of FDI increased by approximately 250% between 1980 and 1989, from 524 US billion dollars in 1980 to 1342 US billion dollars in 1989.(1) Over the last few years the FDI has risen at a similar annual rate, a rate approximately three times higher than that of the world trade. International management theorist believe that this is due to the numerous advantages that businesses can gain from internationalisation (for a review, see, for example, Neidengard 1991). However, the withdrawal of businesses, such as Renault and Volkswagen from the USA (Womack et al. 1992), also indicates that an international strategy could potentially create problems.
Thus, a fundamental question arises: which factors contribute to the subsequent success or failure of foreign subsidiary companies?
This is a vital question, because the performance of companies present in international markets is influenced as much by their management practices in their home markets as by their management operations abroad. However, one of the problems is that the analyses of the performance factors of foreign subsidiaries often produces contradictory results.
For example, Hout, Porter, Rudden (1982) conclude that a globalisation (standardisation) strategy leads to improved profitability. This hypothesis has been confirmed by many authors such as Kotabe and Omura (1989), and Fraser and Hite (1990). However, other authors, such as Keegan (1969) or Samiee and Roth (1992) have pointed out that companies which had opted for a global standardisation strategy were not as profitable as those that did not stress standardisation. Kotabe and Okoroafo (1990) obtained more confusing results. They note that, in the United States, Triad marketing does not have any significant impact on market performance (profitability, market share and sales growth rate), but that product adaptation reduces "the firm's ability to gain market share and sales growth rate". In order to resolve this considerable controversy, Douglas and Wind (1987) argued that global standardisation is not the general key to success, merely "one of a number of strategies which may be successful in international markets".
It is therefore necessary to examine the factors contributing to the performance of foreign subsidiaries. As bi-dimensional analyses generally lead to conflicting conclusions, it seems that more sophisticated methods are needed in order to achieve a greater depth of analysis and to obtain more reliable results.
Recourse to multi-criteria analyses at this level is encouraging and international management theorists are also showing interest in these more reliable techniques (cf. Macharzina and Engelhard 1991).
Although it is recognised that multi-criteria analyses are not infallible, a study based on its techniques has been nevertheless carried out and the results at this initial stage are encouraging. This first phase of the research was solely concerned with German subsidiaries set up in France, but in time the aim is to compare the results with those of subsidiaries in other countries.
There are two reasons which explain the decision to analyse German subsidiaries in France. The first is that France is the European country with the highest concentration of German subsidiaries located abroad.(2) Therefore, studying these subsidiaries enables one to put together a sample in the conditions necessary for carrying out irrefutable statistical analyses. The second and most important reason explaining the analysis of German subsidiaries in France is that in typologies which classify countries by their culture, France and Germany appear to be opposed (Hofstede 1991, Hall and Hall 1989, Trompenaars 1993). Therefore, the analysis of subsidiaries based in a different cultural context to that of the parent company may help to resolve two major controversies in international management.
The first controversy is related to the effect of a globalisation strategy versus a differentiation strategy on results (Douglas and Wind 1987). A hypothesis which could help to resolve this dilemma has emerged mainly from studies on cultural differences (Miracle, Chang, Taylor 1992). The hypothesis (H1) is formulated as follows:
H1: Local differentiation is advantageous when it is applied in countries with differing cultures, whereas globalisation is necessary when the national cultures are similar.
The second controversy concerns the effect of centralisation versus decentralisation of decisions (autonomy by decision) on performance groups which have international subsidiaries (cf. Welge 1987, Ackermann 1990).
A hypothesis derived from Ghoshal and Nohria (1989) may help to clarify contradictory results linked to this question. This hypothesis (H2) is as follows:
H2: If the culture of the country where the subsidiary is located is different from the culture of the country of the parent company, the autonomy given to the subsidiary limits conflicts and encourages performance improvement. In the opposite situation (identical culture) centralisation of decisions appears to be the best way.
The analysis of German subsidiaries in France enables the testing of the first part of both hypotheses.
The article begins by introducing the sample analysed. The results are then presented at two levels. Firstly, the factors determining performance (profitability and growth in turnover) are clearly specified. Secondly, the results are presented hierarchically according to how significantly each factor affects performance.
Finally, the conclusion will resume the main implications of this research for management, before outlining potential areas for future research.
Introducing the Sample
Selecting the Sample
Because the research is based on German controlled subsidiaries, it is exclusively concerned with those with a majority German share holding. It is in fact well known that a decisive influence can be exerted within the field of minority share holding (i.e. less than 50%). It is nonetheless true that the relationship of dependency is often difficult to understand when the share holding is not a majority one.
This preference for a majority share holding means that one cannot be exactly sure how representative the sample is in this study. In fact, in France, the Department of Industrial Statistics (SESSI) of the Ministry of Industry and Foreign Trade lists foreign share holdings over and above 20%, but fails to distinguish between majority and minority share holdings. The Treasury also has data available on businesses established abroad, although its data bank is not as detailed as that of the SESSI. In Germany, the Bundesbank collects information on the flow of direct foreign investment according to the balance of payments. However it does not list the exact number of German businesses that are established abroad.
The decision to undertake a survey was taken on the basis of 1200 addresses listed in the Directory of German Businesses Established in France, published by the French-German Chamber of Commerce and Industry.
After a random selection, 25% of the directory subsidiaries were contacted by telephone, in order to ascertain if they were willing to fill in a mailed questionnaire. About 10% of the companies refused to answer a questionnaire. After eliminating companies employing fewer than 10 people and representation agencies, which were of no interest to this study, about 150 questionnaires were mailed to the CEOs of the subsidiaries. After two telephone reminders, we ended up with 55 completely answered questionnaires. In addition, in order to clarify the results, a dozen subsidiaries from the sample were interviewed, and thus the reliability of the study and the credibility of the conclusions were enhanced.
The Structure of the Sample
Given that 40 of the subsidiaries that returned the questionnaire were industrial, it can be calculated that this sample includes at least 10% of all German industrial companies set up in France with majority share holdings. In fact, taking into [TABULAR DATA FOR TABLE 1 OMITTED] account shareholdings of 20% or more, the SESSI enumerates about 500 German businesses established in France. Thus, it is not over-confident to calculate that the sample studied in this report represents 10% of all German industrial subsidiaries set up in France. However, it is impossible to gauge precisely how representative the 15 commercial subsidiaries are, since there is no reliable data regarding this base population.
Small- and medium-sized businesses (maximum 500 employees) make up 90% of the sample, but the small subsidiaries (maximum 50 employees) only make up a quarter of the sample [see Table 1]. This means that, on the whole, the subsidiaries are these companies which have already been through the start-up process. Furthermore, this data also shows that if size is indicative of the complexity of the style of management, the organisation of most of the subsidiaries analysed has passed beyond the most simple organisational form, thus corroborating the need for the study.
With regard to the structure of the sample, it is worth noting that the 40 industrial subsidiary companies exist mainly in sectors where Germany holds a dominant position in the world market. Hence 24 subsidiaries are in the metal industries (metal work, mechanical engineering, metal components for the automobile industry: pistons, etc.). Of the other industrial subsidiaries, 8 operate in the chemical industry (chemistry, parachemistry, pharmacy), 5 in the clothing-textiles industry and the remaining 3 in various others. It is also worth noting that 80% of the industrial subsidiaries produce mostly finished goods, while the others produce intermediary goods.
The 15 companies described as commercial subsidiaries are those in which at least 80% of turnover comes from the resale of products imported from Germany, the balance being obtained mainly from after-sales service operations. The two best represented sectors in the sample of commercial subsidiaries are mechanical engineering and electrotechnics, with 5 companies in each.
When studying the geographical distribution of the subsidiary companies, one cannot fail to observe the concentration in the east of France. Thirty subsidiaries are situated in the Alsace and Lorraine regions, compared with seven in the north and only three in and around Paris, the others being scattered around the rest of France. This implies that, in the sample, the Paris region and the Rhone-Alpes region were underrepresented, since the existence of German subsidiaries in these two regions is quite high.
When considering which method of production is used by German subsidiaries in France, one finds that few industrial subsidiaries operate exclusively with one production system; however, more than 2/3 of the subsidiaries specialise in one given system, whereby over 70% of output is produced with one particular system. Given that the mechanical construction industry is well represented in the sample, it is not surprising that 33% of the industrial subsidiaries specialise in "job shop" type production [ILLUSTRATION FOR FIGURE 1 OMITTED], "mass" production being the prevailing method in 27% of cases. However, few subsidiaries specialise in "project" or "continuous flow" production (5% and 4% respectively). These results indicate, therefore, that in almost one in three firms there is a diversification of production methods.
Subsidiary Company Performance(3)
As mentioned earlier, the performance factors taken into account are profitability (return on investment) and relative sales growth. This choice is explained by the fact these two variables are part of the three most common measures of performance used by managers: e.g. Buckley, Pass, Prescott (1988), Kotabe (1990). The third variable is the change in market share. However, while this variable is suitable for weighing up the performance of the strategic business unit, it is unsuitable for measuring the overall performance of a company, especially if the company is diversified. Moreover, the concept of market share remains difficult to define in a homogeneous way. Thus, Buzzell and Wiersema (1981) note that market share borders are rarely clearly defined and, therefore, any market definition is in the final analysis arbitrary and subjective. This implies that the reliability of the measure of the market share by those participating in a survey could be called into question, as is the case for the data base PIMS (Jacobson and Aaker 1987).
On the whole, the performance of German subsidiaries situated in France can be judged satisfactory for the following reasons: 45% claimed that during the last three years their profitability had been higher than that of their French competitors, which only 15% estimating lower profitability. Similarly, less than 10% of the subsidiaries have experienced a stagnation in sales over the last three years, whereas over 60% have recorded a real growth in turnover (after inflation) of more than 5% per year.
This performance is just as impressive when comparisons are made not only at an inter-company level but also within the group that controls the subsidiary. For example, 47% of the German subsidiaries set up in France estimate that their profitability exceeds the average of their group, as does the growth in turnover in 40% of the subsidiaries. Only 18% have a profitability less than the group average, and only 9% record a growth sales lower than the average of their group.
Explanation of the Differences in Performance
Variables Used in Multi-criteria Analyses
The methods used to explain performance disparities are Multiple Correspondence Analysis, generalisation of two way Contingency Tables Analysis (Benzecri 1973), and Segmentation (Nanopoulos 1991). In order to give clear results the analysis is made using four separate sets of variables:
- structure variables,
- human resource management variables,
- marketing policy variables,
- R & D policy variables.
Although the preliminary results need refining, they do hold some interest, allowing the proposition of several explanations for the differences in profitability and growth of turnover observed.
The analysis focuses on firms with a poor track record regarding the determinants of profitability. It is true that some firms can operate with poor profitability in the short term, in order to accommodate an investment policy aimed at innovation and gaining market share. In these cases, poor management is not to blame for lower profitability and it is erroneous to assume that they are in a critical situation. Consequently, the following study concerns only those subsidiaries in which the low profit level is not attributable to a deliberate policy to gain market share.
Effects of Structural Characteristics on Profitability
To determine whether the profitability(4) of a subsidiary is influenced by its structure, the analyses were based on the following set of variables, the modes of which are presented in Appendix:
- size of the subsidiary company,
- size of the parent company,
- region where the subsidiary is located in France,
- nature of output,
- production typology.
At a structural level, four main differences appear between the most and least profitable subsidiary companies. As Rugman (1986) has already observed, size and profitability are not directly related. This is true both for the size of the parent company and for the size of the subsidiary. However, size plays a role in explaining the profitability gaps when it is combined with others variables. Thus, the most profitable subsidiaries tend to be mainly based in the Alsace and Moselle regions, with a "job shop" type of production system, and are rather small in size (less than 150 employees), whereas the parent is either a small- or medium-sized company (with less than 1000 employees).
The least profitable subsidiaries have the following characteristics. Generally, output is of "mass produced" goods. They tend not to be situated in eastern France, but are generally found south of Lyon or in the north. They are of moderate size (between 150 and 300 employees), but the parent company tends to be small in comparison to its larger counterparts (between 1000 and 2000 employees).
These initial results are interesting as they seem to support Porter's (1982) hypothesis, which states that the relationship between the Size of a company and its profitability is not linear, but follows a U-shaped polynomial function (for a synthesis of this subject, see Liouville 1990). However, in this particular sample, larger companies tended to report average profitability, and the question of why the subsidiaries with a workforce of between 150 and 300 employees have especially low profitability remains unanswered.
It is equally interesting to note that the probability of being profitable is greater in German subsidiaries established in the Alsace and Moselle regions. This result contradicts that obtained by Kumar et al. (1985), whose argument is based on the fact that the desire to impose common group policies by parent companies on subsidiaries established in bilingual areas (such as Alsace and Moselle), is very high. According to Kumar et al., this policy demotivates the workers of the subsidiary companies. Given that total policy standardisation is harmful at present (to be clarified shortly), it can be concluded that subsidiaries based in bilingual areas have learnt from previous mistakes. However, this is not sufficient to explain their current success. This can be further explained by the slight cultural differences between subsidiaries and parent companies (due to the history of the bilingual region), which help to reduce sources of dysfunction. More generally speaking, this report implies that cultural differences must be researched on a national scale as well as an international one (this hypothesis is confirmed by the results of Usunier 1991). Thus, German Firms must realise that, by basing their subsidiaries in French regions distant from the German mentality in a cultural sense (such as the south of France), they are increasing the risk of rejection of the German value system.(5) This will generally have a negative influence on performance (Goldberg 1982).
As for the opposition that was observed towards production systems, this can be explained on the one hand by the fact that the main competitive advantage of German companies lies in their ability to produce specialised goods. It thus follows that the most profitable subsidiaries are those which gain from a competitive edge. On the other hand, the subsidiaries producing generic goods (mass production) do not have such an advantage when faced with French competition, but they do bear the costs of coordination resulting from German control. It is therefore understandable, that subsidiaries producing standardised goods while lacking special knowledge of marketing do not tend to profit from their investment.(6)
Human Resources and Profitability
As Welge (1980) has already noted, the less profitable subsidiaries often have an expatriate at the head of the company. This may be due to the fact that when defending the interests of the subsidiaries, an expatriate cannot rely on as wide a network of contacts as his French counterpart. This study, however, largely relativises the Welge hypothesis. While 70% of respondents consider that a French national is better suited than a German to run a German subsidiary in France, then Welge's argument is only the third most important criterion in forming this judgement. A knowledge of the market is the main reason mentioned which justifies giving this position to a French national. The second reason mentioned is that a national is better suited to motivating personnel. The importance of this element is highlighted when one notes that subsidiaries of poor profitability suffer from insufficient productivity, partly due to a lack of team spirit (there is a significant link between these two elements). Nowadays, this factor can largely differentiate profitable from non-profitable subsidiaries.
The conclusion to be drawn from these facts is that electing a director incapable of motivating personnel tends to lead to poor profit. These days, an expatriate director may have more difficulty than his French counterpart in creating a team spirit in a French-based establishment. Consequently, the parent company still wishing to put an expatriate at its head must choose a person capable of motivating people in order to maximise the chances of gaining a substantial profit.
It must be recognised, however, that such qualities are more vital in smaller as opposed to larger firms, as management style has a greater influence in the former: the larger the company, the less effect management style will have on personnel.
To expand on the subject of human resources, it is interesting to note that the subsidiaries located in France producing the best results are those in which local executives have greater responsibility. It can be therefore concluded that workers with more directive responsibility are more motivated, even when their salary is not performance-based, which is often the case in the sample examined here. This phenomenon can be explained with the help of Burmann's (1985) hypothesis, which states that German workers are primarily motivated by independence and autonomy in decision-making. One of the reasons for this is that they feel more valued in the social structure and also on the labour market, since they can be evaluated according to the outcome of their decisions.
Still on the subject of team spirit, it must be mentioned that the link with profitability is not automatic. Team spirit is highly-developed in 75% of the most profitable subsidiaries, but also in 20% of low profit-making subsidiaries. This result indicates that the positive impact of team spirit on profitability is conditioned by contingent factors. The statistical results lead to the conclusion that, to be profitable, the search for team spirit must lead to the setting up of an organisational structure, promoting teamwork across functional boundaries. At the same time, it is necessary to develop the motivation of the workforce, by means of a policy of promotion based on objective criteria known to all staff. Lastly, in order for teamwork to produce positive effects in subsidiaries, salary differences must be small. However, respecting this condition does not necessarily mean that a part of the salary cannot be individualised. In fact, the variable "salary individualisation" plays a neutral role in the analyses. These conclusions are similar to those of Doyle et al. (1992). These authors highlight that teamwork and non-hierarchical structures are very well-developed in innovative Japanese subsidiaries, which know how to benefit from new market segments. In contrast, Doyle et al. (1992) noted that the less successful companies are characterised by rigid organisational structures, and their managers and workers tend to clearly define specialised job boundaries. As a result, these companies are less innovative, late entrants and are positioned in the "down market" (price-orientated) sectors.
The Impact of Marketing Options and R & D on Profitability
Multi-criteria analyses conclude that a lack of autonomy in price fixing is another characteristic found in less profitable subsidiaries. When the parent company fixes a price scale for the subsidiary, the "quality/price" relationship is not always favourable for the French client. This leads to insufficient demand which in turn affects profitability since it is dependent on unit cost and sales volume. The results obtained also show that the subsidiaries must have flexibility when defining the product range as there is a risk of having to manage surplus stocks. This effect is thus harmful for profitability. Another profit-developing factor is the autonomy to organise sales and also after-sales services. Furthermore, the subsidiary must have control of advertising insofar as the reaction to advertising of a French consumer may not be the same as that of a German one.(7) In fact, the standardisation of advertising does not help to increase profitability on the French market. On the contrary, as observed by Sandler and Shani (1992) and Meffert and Bolz (1995), there is a negative relation between standardised communication policy and profitability. An explanation of this phenomenon may be that "German style advertising" is not sufficiently persuasive in France and that "global advertising" tends to be too banal to convince the French consumer.
It is interesting to note that 70% of subsidiaries keep the name of their parent company and its logo, where they do not deem it necessary to adapt the image of the product and company to the French market. However, despite the fact that transferring the parent company's image is generally considered to be profitable, in 20% of cases the Germanic character is considered a hindrance to the success of the subsidiary.(8)
Apart from this, one variable plays a key role in explaining the differing rates of profitability. This is the amount of R & D work carried out in France and at this level, one finds three very different scenarii.(9)
Firstly, the profitability of subsidiaries continuously carrying out R & D work in France is dependent on tangible investment. If their total amount is greater than that of the competition, then the company can be confident of attaining a high profit. However, if their total amount is lower than that of the competition, there is a strong probability of having poor profit.
Secondly, the subsidiaries only selectively carrying out R & D work in France are guaranteed to obtain strong profitability, since the perfection of new products is a priority in the R & D budget. When the budget does not give this priority to new products, the profitability rate can be very different. However, the smaller groups (i.e. less than 1000 employees) in this situation systematically obtain a higher profit.
Lastly, it can be seen that those companies which never carry out R & D work in France are unlikely to be profitable.
These results can lead to question the hypothesis of Fraser and Hite (1990). These authors estimate that internationalised businesses standardising their products are in a particularly favourable situation to become profitable in Europe. For Fraser and Hite, standardisation helps build up a good "quality/price" relationship and according to them this relationship is of the utmost importance in being successful in Europe.
In reality, most of the German subsidiaries which become highly profitable in France invest in R & D and use at least a part of their R & D budget to develop innovative products, or to adapt existing products for the French market.(10) Therefore, one can conclude that an adaptation policy is profitable to German companies that invest in France. This hypothesis corroborates the results of Kenter's (1985), who analysed 22 out of the biggest 31 German multinationals and found that the most successful are those which opted for differentiation (national response).
However, the analyses do not lead to the confirmation of the hypothesis of a positive link between a pioneer strategy(11) and performance. This may arise from the fact that certain innovations of German subsidiaries are quickly copied by the followers (Schewe 1992). Moreover, it is well known today, that the pioneer advantage is related to several factors, such as velocity environments (Eisenhardt 1989), the quality of innovation, and its degree of novelty, etc. (Hauschildt 1991).
The positive link between sales volume and profitability helps to explain that, among the opposing variables of those firms in a state of strong growth (more than 15% per year) and those with a static or declining turnover, one finds the question of product standardisation to be important. Firms with strong growth continuously carry out R & D work in France, whereas in general this is not the case for the static or declining firms. However, in their R & D budget, strong growth companies tend to put a greater emphasis on products as opposed to processes.
It seems therefore that to improve their chances of growth on the French market, German groups should place greater emphasis on a differentiation policy as opposed to standardisation across the group. Furthermore, it follows that the lack of autonomy in fixing a sales price seems to justify an insufficient increase in turnover. Finally, it is not surprising that the subsidiaries which privilege the strategy of mergers and acquisitions tend to obtain a superior growth rate to these units which develop through internal expansion.
Hierarchy of the Factors Affecting Performance
Method of Application
Given the large number of performance factors, it is necessary to grade them. This objective was reached by submitting all the results recorded from the companies which took part in the first phase. These had to be classified according to the importance of performance factors. The criteria were ranked according to the number of times that they were rated in first or second place.
As the rate of response was in the region of 60%, that is 34 replies out of the total of 55 firms contacted, a certain amount of credibility can be given to the following results.
For the success of the German subsidiaries in France, two criteria are deemed necessary. Firstly, some of the decision-making powers of the parent company must be delegated to its subsidiary. In the list of the five factors this is placed first in 45% of cases and second in 41%.
Secondly, the ability to create team spirit is considered to be vital in guaranteeing success: it ranked first in 32% of cases and second in 39%.
It is notable that stress placed upon the development of a French-German culture in both the parent company and its subsidiary is ranked only third.(12) This is probably due to the strong representation of the "bilingual area" in the sample (70% of the subsidiaries which took part in the second phase of the survey were situated in this area), where there is less need for cultural development. However, it seems that this is a prerequisite for a genuine and effective delegation of the decision-making power, as shown in the complementary interviews.
It is noticeable that the need for autonomy is especially desirable in the marketing sphere and principally to coordinate sales. This factor was polled in first or second place by 78% of the firms.(13) This is linked to the fact that German and French "buyer/seller" relations and the methods used in France and Germany for motivating the sales force are traditionally different.(14) Consequently, the growth in sales and the profitability are affected by the simple transposition of the German system in the French subsidiary.
Autonomy in price fixing is ranked second (56% of the firms placed it first or second) and the freedom to determine the product range, third (placed first or second by 48% of the firms).
Autonomy in advertising did not appear as a priority factor, ranking only fourth in the final placing. This secondary role of advertising is confirmed by those answers relating to the changes necessary to obtain satisfactory results in France. Out of the six proposals in the questionnaire(15), the channels of distribution and the products' technical features are the two highest placed factors, whereas advertising ranked only third in this classification: 33% of those questioned placed advertising either first or second as opposed to 67% for the distribution channels and 48% for technical features respectively.
In fact, with reference to advertising, the results derived from the analysis of the second questionnaire confirm that the efficiency of the international adaptation of an advertising campaign is linked to contingency factors, such as the sector of activity, the presence of local resources to adapt the advertising campaign, etc. (Kirpilani, Laroche, Darmon 1992).
Moreover, these authors verified empirically that German companies have a preference for the international adaptation of advertising. It is therefore possible that under certain conditions, systematic adaptation is not the best option for the subsidiary. Thus, it would be difficult in this article to come to a final conclusion about the necessity of adapting advertising. It is obvious that, to answer this question clearly, it would be necessary to undertake a more detailed study, taking into account such factors as the competitive situation of the subsidiary, its degree of advertising expertise, or media availability. For example, whereas communication via videotext is not very well developed in Germany (system BTX), in France, the system "Minitel" is a very effective means of communication with clients.
The conclusion developed in this paper should be confirmed by other studies, especially given the small size of the sample. However, the parts of both hypotheses (H1 & H2) in a position to be tested empirically in this study were confirmed. In consequence, managers should draw at least 6 lessons from this research.
1) At the level of the organization of subsidiaries abroad, a style of management contrary to the culture of the local workforce should be avoided. Otherwise, the workforce is likely to become demotivated, with the resultant risk of negative repercussions on performance. It is notable that this recommendation is reinforced by Lubatkin et al. (1995), who arrived at a similar conclusion.
2) It is clear that the degree of autonomy accorded to subsidiaries managers, a central question in international management research, must be regulated according to individual motivation. On the one hand, if autonomy is not considered as a motivating factor (for example, if managers are unused to taking the initiative), there is no automatic advantage in decentralising decisions. On the other hand, if autonomy is considered motivating, insufficient decentralisation may have a harmful effect and affect results adversely. This hypothesis may explain the contradictory results obtained in the management literature concerning the influence on performance of the degree of autonomy granted to the managers of subsidiaries abroad.
However, this research also indicates that giving managers autonomy is an important success factor when the subsidiary is located in a country with a culture different from that of the country of the parent compagny (H2). In this case, a degree of adaptation to client expectations (on the part of the local autonomous manager rather than that of the parent company) is generally necessary (see point 6).
3) "Transnational structure", presented as a factor essential to survival in the international arena by Bartlett and Ghoshal (1989), seems to be dispensable. In fact, as Kenter (1985) and Kumar (1987) have observed, German firms going abroad generally retain overall control, but decentralise other decisions. The results concerning German subsidiaries in France confirm this hypothesis. In view of this, it is possible to conclude that German firms which succeed abroad correspond more to the "international model" according to the typology of Bartlett and Ghoshal (1994), than to the "transnational model". Henzler (1992) also supports this conclusion.(16)
Thus, we may conclude with Ghoshal and Nohria (1993), that there is not one ideal model of international structure. On the contrary, performance in the international arena is essentially influenced by the fits or misfits between the selected organisational structure and the nature of the international environment. Consequently, firms looking to benefit from the international market should pay heed to this argument.
4) One hypothesis resulting from this research is that the introduction of social innovations in subsidiaries abroad is a success factor. Wile an ethos of "team spirit" is not as yet highly developed in French companies, which remain largely hierarchical, German subsidiaries, which do create a "team spirit" (an important factor in company democracy) have better results than the others.
5) While the slogan of "Globalisation", which is currently in vogue, dispels the feeling of "local identity", what emerges from this study is that local adaptation is an important factor in the success of German subsidiaries in France. This implies that, in keeping with the hypothesis H1, it could be dangerous to standardise when the culture of the country in which the subsidiary is located is widely divorced from that of the parent company. The results of Calori et al. (1992) or Yip (1991) tend to reinforce this hypothesis.
However, the state of the art does not yet allow exact indications on the precise adaptations which contribute to success abroad. Kumar and Steinmann (1990), for example, noticed that the results of German subsidiaries in Japan were dependent on the appropriate adaptation of brand names. According to the present study, such an adaptation is rarely a success factor of German subsidiaries set up in France.
6) As we have seen above, German firms must make adaptations in order to be successful in France. This research indicates that the adaptations must be made in the target country (France) in order to be beneficial, because such proximity allows the expectations of the client to be better understood.
While these initial recommendations are valuable, it is evident that further research is necessary for the improved guidance of managers. Research will thus be extended in the following three areas:
1) In order to test the universality of our results, the same questionnaire will be sent to a "reciprocal" sample (French subsidiaries in Germany). One objective will be to verify whether the adaptations which contribute to the success of German firms in France are by the same token necessary to the success of French firms in Germany. Following this research phase, companies in other countries will also be interviewed.
2) This research has shown that the image of the country of origin may positively or negatively affect results. It will therefore be useful to carry out further research on this question, in order to establish whether performance factors change according to the perceived image of the country of origin in the mind of the potential customer. German cars, for example, benefit from a positive image in France, whereas German wines are perceived somewhat negatively. Thus, it would be interesting to establish whether firms in these two sectors need the same strategy in order to become successful in France. This research area, which has up till now been neglected merits further study.
3) Given that success factors vary according to sector (due to the image of the country of origin, etc.), sectorial research should be carried out. The greater degree of precision obtained in this way would make the results more operational. Potential comparisons between sectors would not damage the research of universal success factors. However, given the vast scope of the research still to be carried out, work will only be able to advance effectively through the establishment of a network of teams.
1 Source: United Nations Centre on Transnational Corporations.
2 This situation can be accounted for by at least two factors. On the one hand, production costs are higher in Germany than in France. The cost of labour in France is on average 30% lower than in Germany. Similarly, the cost of land, energy, water, etc., is lower in France. This has a favourable effect on German FDI in border zones, which represent about 40% of German FDI in France. On the other hand, with the exception of Germany, the French market is the biggest in the European Union. This makes it an attractive market for foreign investors. Thus, many German investors locate in France in order to obtain a competitive advantage on this market, because the proximity of the supplier (investor) can positively affect consumer choice.
3 For a more detailed presentation of the subsidiaries characteristics in this sample, see Liouville and Nanopoulos 1992.
4 The profitability criteria used here is that obtained by asking the following question: Was in the last three years the R.O.I. of your subsidiary, higher, equal or lower, than that of your French competitors?
5 Conversely, this means that firms wanting to set up a subsidiary in Germany would be wise not to base it in a region where there is a very strong German sentiment (Bavaria for example).
6 On this level it can be noted that less than 10% of subsidiaries consider that German marketing methods are superior to those of the French.
7 On this subject see Schroeder 1991.
8 This argument is above all cited by less successful subsidiaries. The more successful ones complain essentially of French centralisation and insufficient training of French manpower.
9 These results are based on the analyses of the following variables:
- size of parent company,
- size of subsidiary,
- strategy of entry into France,
- R & D work carried out,
- level of investments, material and immaterial compared to that of the competition.
10 It is interesting to note that French standards require certain product adaptation since they are more stringent than their German equivalents.
11 In this study, the pionnier strategy is measured by the variable "successful launching of new products", the possible answers are as follows: number inferior, equal, or superior to that of the competition.
12 The other answers suggested were the following:
- the existence of an R & D department in the subsidiary,
- location of the plant in France.
13 The percentage quoted represents the cumulative total of those ranked first or second.
14 see Campbell et al. (1988), Untereiner (1990).
15 Publicity, promotion, channels of distribution, marque, product positionnement and products technical features.
16 Of course, this does not mean that some of the German firms based in France do not profit from the "transnational" model. However, the application of such a logic requires competence in certain practices, in which businesses with limited experience in the international arena may be lacking.
Appendix. Structures' variables
Size of the Subsidiary
MODE 1 = S [less than] 50 employees
MODE 2 = 50 [less than] S [less than] 150 employees
MODE 3 = 150 [less than] S [less than] 300 employees
MODE 4 = S [greater than] 300 employees
Size of the Parent Company
MODE 1 = S [less than] 500 employees
MODE 2 = 500 [less than] S [less than] 1000 employees
MODE 3 = 1000 [less than] S [less than] 2000 employees
MODE 4 = S [greater than] 2000 employees
MODE 1 = Alsace + Moselle
MODE 2 = Northern France
MODE 3 = Paris
MODE 4 = rest of France
Nature of the Main Output
MODE 1 = finished goods
MODE 2 = intermediary goods
MODE 3 = assembly
MODE 4 = maintenance / after-sales services
MODE 5 = distribution
"Project" Production System
MODE 1 = [less than] 10%
MODE 2 = 10 % [less than] PS [less than] 50%
MODE 3 = [greater than] 50%
"Job shop" Production System
MODE 1 = [less than] 10%
MODE 2 = 10% [less than] PS [less than] 50%
MODE 3 = [greater than] 50%
"Mass" Production System
MODE 1 = [less than] 10%
MODE 2 = 10 % [less than] PS [less than] 50%
MODE 3 = [greater than] 50%
"Continuous Flow" Production System
MODE 1 = [less than] 10%
MODE 2 = 10% [less than] PS [less than] 50%
MODE 3 = [greater than] 50%
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Jacques Liouville, Professor of Management, Metz University, Metz, member of the Research Center CESAG (University Robert Schuman), Strasbourg, France.
Constantin Nanopoulos, Senior Lecturer in Statistics and Management, IECS (Ecole de Management Europeen), University Robert Schuman, and member of the CESAG, Strasbourg, France.
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|Title Annotation:||includes appendix|
|Author:||Liouville, Jacques; Nanopoulos, Constantin|
|Publication:||Management International Review|
|Date:||Feb 1, 1996|
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