Occasional Papers

No. 2: Business Development Initiatives of Multinational Subsidiaries in Canada

by Julian Birkinshaw, University of Western Ontario, under contract to Industry Canada, May 1995

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Summary

The context for this study is the changing role of the multinational subsidiary in Canada. In the increasingly global business environment of the 1990s, the multinational subsidiary's role is shifting from addressing the needs of the Canadian market to identifying ways of adding value to the corporation worldwide. This typically means undertaking a limited range of activities for the North American region or the world, rather than a full scope of activities for Canada only. International responsibilities of this type are commonly referred to as world product mandates.

A key feature of the world product mandate is that it is 'earned' by the subsidiary. Fundamentally, the multinational subsidiary has no rights to any business activities other than those that are focused on selling in the local market. Thus, if the subsidiary is to undertake manufacturing on a world scale, for example, it has to demonstrate that it can do so in an efficient and effective manner. This process of identifying an opportunity, putting together a proposal and convincing parent company management to award the mandate is referred to here as a subsidiary initiative. An initiative is defined here as a business development activity that is actively pursued by subsidiary managers, with the intention of developing international responsibilities for the subsidiary.

This research was concerned primarily with understanding the nature of subsidiary initiatives. Two questions drove the work: What forms do subsidiary initiatives take? and What factors are associated with initiative success? The secondary thrust of this research was to understand initiatives in their broader context, that is, how initiatives develop and link over time in a single subsidiary. Implicit in these questions is the notion that subsidiaries mature over time in terms of the activities they can take responsibility for. An understanding of the initiative process should, therefore, provide some insights into the broader issue of subsidiary development. In addition, general questions were asked about the role of the Canadian government in initiative development.

Research was conducted at five organizations, each one a Canadian subsidiary of a large U.S. multinational corporation. Each subsidiary had undertaken between 6 and 10 initiatives over its history. The intention in the study was to consider all 39 of these initiatives, of which 11 were failures to some degree. The lead individuals associated with each initiative were interviewed. A total of 100 interviews were conducted, lasting one hour each.

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Four distinct initiative types exist

From this research, four distinct initiative types were identified. For each type it was possible to identify the major driving forces of the initiative, and the major factors associated with the success of the initiative. The four types of initiatives are summarized below:

1. Reconfiguration Initiative: one that promotes the redistribution of existing corporate assets or resources so that they are more efficiently deployed. The most common scenario was the conversion of a branch plant to a world-scale production facility, resulting in a manufacturing mandate. Key success factors were:

1. timing;
2. championing efforts by key individuals;
3. credibility and good relationships with parent management; and
4. a compelling proposal.

2. Local Market Initiative: one that seeks to develop a new product or new market through business opportunities that are first identified in the subsidiary's home market. The opportunities for these initiatives came from local customers or business contacts. Key success factors were:

1. a high level of autonomy and local presence;
2. fit with the parent company and the subsidiary's strategic objectives; and
3. a creative or entrepreneurial spirit in the subsidiary.

3. Competitive Bid Initiative: one that seeks to attract a value-added activity that is not country-specific and that has already received support in principle from the parent company. This initiative typically involves head-to-head competition with sister subsidiaries. Key success factors were:

1. a competitive proposal;
2. high credibility with the parent; and
3. championing and selling efforts.

4. Mandate Extension Initiative: one that seeks to build on existing capabilities to capitalize on a perceived international product or market opportunity. This initiative is driven by the traditional processes of business development, and typically builds on an existing world mandate. Key success factors were:

1. a solid business proposal;
2. a high level of autonomy;
3. strategic fit with the parent company; and
4. a successful track record of the subsidiary.

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A Developmental Process over Time

This research also found that there is a discernable development process at work in the five subsidiaries studied. Managers reported an increase in international responsibilities over time and an increase in parent company openness to initiatives. There was also qualitative evidence that later initiatives built on the capabilities and the experiences gained through earlier initiatives. In two subsidiaries, however, the development process was brought to a halt by actions taken by parent management that were beyond the control of the subsidiary.

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Public Policy Implications

This study provided some solid empirical evidence of the world product mandate phenomenon. Policy makers have argued the merits of world product mandates for years. This study showed clearly:

• that the majority of world product mandates are gained through the entrepreneurial efforts of subsidiary managers, not through the generosity of the parent company;
• that the mechanisms by which world product mandates are won (that is, the initiatives) vary significantly according to the type of market opportunity and the contestability of the mandate in question; and
• that 'full' mandates involving research and development, manufacturing and marketing, in most cases, are neither a realistic goal nor noticeably superior to more constrained mandates. Mandates developed on the subsidiary's unique capabilities appear to offer the greatest potential for sustainability and long-term job creation.

This study also analysed the perceived impact of government on the initiative process. The results suggested that government impact was perceived to be harmful for reconfiguration initiatives, beneficial for competitive bid initiatives, and neutral for the local market and mandate extension initiatives. It would appear that government has typically supported investment of the competitive bid type, through legitimate means of encouragement, but has shown little interest in lower-profile initiatives. The perceived harmful impact for reconfiguration initiatives is probably a reflection of the remaining barriers to free trade that are widely seen (for good reasons) to be counter-productive to operational efficiency in North America.

Finally, this report provides the foundation for a subsequent research study to examine the factors associated with the presence or absence of initiatives in Canadian subsidiaries. This study identified the types of initiatives that are typically observed in Canadian subsidiaries; the next stage is to understand the circumstances in which they occur. Such a study could also offer some insight into the sustainability of the different types of initiatives and, hence, into issues of long-term job creation and inward investment.

Occasional Papers