Subsidiaries reaction to institutional duality

1. The article 'Subsidiary responses to institutional duality: Collective representation practices of US
multinationals in Britain and Germany' describes a case study led by Tempel, Edwards, Ferner,
Muller-Camen and Wächter which considers pressures for internal and external legitimacy. This
research was intended to show how subsidiary management responds to parent company demand
and host country pressures and was based on case studies conducted looking at US subsidiaries in
Britain and Germany, namely the manufacturing companies Itco and CPGco; and the service
companies Business Services and Logistico. It is important to mention that the employment
relations in the US firms are considered to be anti-unionism which can be explained by the fact that
America is said to be an individualistic country. Additionally, American MNCs most of the times
use a more ethnocentric approach to HRM which is why they especially try to exert pressure on
subsidiary managers to introduce home country practices. Comparing the US MNC's anti-unionism
mindset to the ones in the countries where the U.S. MNC has placed its subsidiaries, unionism is far
more present in Britain and Germany. In the former, subsidiary management is largely independent
on the collective representation institutions, whereas in the latter the interference of labor unions
and works councils often presents an obstacle for companies who try to operate a business in the
German market.
Since parent companies are dependent on their subsidiaries in some way, for example due to their
knowledge of the local institutional environment or their development of strategic resources, they
try to exert control over those subsidiaries and keep the local influence on them in check. On the
other hand, subsidiaries also feel the pressure from the local environment, especially from local
stakeholders like trade unions and works councils.
The study starts by looking at the two manufacturing companies: The founding fathers of ITco have
decided that their anti-union philosophy should be applied on a global scale, which is an approach
that has been adopted in its British subsidiary. CPGco subsidiary management, on the other hand,
has recognized unions since the 1970s, diverging from its parent company's intentions. Subsidiary
management has come to recognize the benefits of collective representation and thus tries to
cooperate with trade unions.
In Germany, collective representation structures have long been important in the subsidiaries of
both of the companies but are still not very welcomed by corporate management. As a result of
strong resentment of the ITco's parent company towards Germany, works councillors tried to
interfere which lead to management preferring to make a deal with another service sector union.
CPGco decided to go in a similar direction and changed the legal status of the subsidiary from a
public to a private limited company. This action led to the election of a new works council which
freed the company from some old restrictions imposed on them.

2. Because the service sector is a less heavily unionized sector, the two subsidiaries chosen for this
section have not seen major problems regarding union recognition. Although the British subsidiary
of Business Service adopts a welfare capitalist style like its parent company, it also introduced
channels of communication common throughout the company to prevent its employees from
seeking other means of representation. Logistico, on the other hand, recognizes trade unions and is
the only company that has a written policy regarding collective representation in their foreign
subsidiaries. Their British subsidiary management has used its relationship with trade unions to free
itself from corporate pressure.
In Germany, Logistico and Business Services have good collective bargaining arrangements, and
have therefore neither been faced with union pressure for that matter and have used similar
incentives and approaches like their British counter-parts to free themselves from local restrictions.
This study showed no significant defiance of corporate expectations by subsidiary management.
Compared to Germany, there has been less total compliance with corporate expectations and less
defiance of local expectations in 3 out of 4 subsidiaries in Britain. Additionally, one could see more
of a cherry-picking approach in British subsidiaries, successfully using their local knowledge to
find favorable conditions in terms of dealing with parent company control and local restrictions.
German subsidiary managers on the other hand seemed to be more dependent on corporate
management, always trying to respond to local pressures as well as to corporate demands, but
following corporate pressure in most of the times. These findings stand in contrast to previous ones.
Still, this study has showed that there are differences in the behavior of subsidiary managers in
manufacturing and services sectors and that the dependencies at a country-, sectoral- and micro-
level created by host country institutions cannot be explained by the concept of institutional
distance only. As a result, the authors suggest that there has yet more research to be done in this
particular field.
Regarding Scott's (1995) definition of institutions as cognitive, normative, and regulative structures
and activities that provide stability and meaning to social behavior, one could imply that
organizations share a common philosophy and that those within the same environment have similar
structures and implement similar policies. Therefore, when thinking about MNCs, placing
subsidiaries in different countries implies institutional distance. This concept describes the degree of
similarity or difference between home country and host country institutions occurring due to
different environmental settings.
Apparently, when institutional distance is greater, practicing a global integration strategy becomes
more problematic because transferring strategic routines between the parent firm and its subsidiaries
becomes more difficult as for example, employees also adapt to local contexts. Additionally, there

3. might be restricting laws in a country prohibiting specific compensation schemes. Certainly, MNCs
would want to pursue a globally standardized compensation program. This practice would result in
economies of scale, encouragement of workforce alignment and the development of unique firm
capacity. On the other side, MNCs that want to implement a global corporate identity shown
through common compensational incentives, might face problems in countries where people feel
offended by these kinds of incentives or where they actually do not feel the need for workers
benefits in order to achieve a company's objectives, whereas in another country more cash
incentives would be needed. Governments themselves in many countries also provide or guarantee
certain benefits, such as retirement pensions and basic health care, and thus remove from MNCs the
option and need to consider whether to provide these benefits. This argument also applies to the
strong mindset about providing special social benefits in Europe compared to other countries. By
neglecting such constraints in the host country, MNCs could face lawsuits and therefore a loss of
their reputation in this country.
Concerning recruitment, institutional distance could also pose some challenges for MNCs when
trying to find suitable persons for positions in the host country. First, the company has to decide
upon internal or external candidates. Internal recruitment surely provides the parent company to
exert control over a subsidiary within the host country, bringing company knowledge and
expectations right to the table. However, they would not dispose of the local knowledge and useful
networks within the host country which would rather be the case for an external (host country)
candidate. Still, the potential workforce in every country needs to be approached differently,
especially due to cultural differences, e.g. when directly advertising to reach the external public in a
host country, a MNC must be careful with the choice of his words in their job descriptions: direct
advertising for an employee that 'must not be a female' would infringe anti-discrimination law in
some countries. That being said, MNCs have to inform themselves properly about the environment
they are working with when recruiting either in the host or the home country to avoid assignment
failure and comply with expectations, for example about the recruiting process itself, HCNs might
have. The greater the institutional distance, the greater the difference in people's perceptions of how
recruitment should be conducted.
The leadership competencies of MNCs are particularly important in order to transfer knowledge or
critical capabilities across borders effectively. To achieve that goal, managers need to be cross-
functionally educated and be able to communicate effectively with people with different cultural
backgrounds. These beliefs and values are deeply rooted in people and determine whether or not
particular behaviors are appropriate or not followed by positive or negative sanctions. Most of the
times these thoughts are not directly communicated from one culture to the other, they represent

4. tacit knowledge, sometimes seen in non-verbal communications. Because of that fact, a global
perspective on business or cross-cultural knowledge cannot be attained within the headquarters but
by working in the actual host country environment. However, culture-specific leadership often tends
to overemphasize the role of culture limiting expatriates in their actions. Also there is no proof that
the host country workforce always prefers a culturally-adapted leadership-style rather than the
original one, which could probably help them to identify better with the company.
Contrary to that, sometimes institutional distance is underestimated like in the case of Austria and
Germany. Although the language is the same, and the people tend to be similar in some ways, legal
restrictions and mind-sets of people still differ and not considering that could lead to the conduction
of unsuccessful business. In conclusion, it can be said that institutional distance presents an crucial
factor for MNCs to look at without neglecting the special importance of the cognitive and
normative component of it, since they are the less apparent or visible than the regulations.