1

1. Introduction

Over the past decades, organizations have become more interconnected, cross border linkages have emerged and advanced technologies have become inevitable in order to remain competitive. When the act of globalization has begun, more and more companies tried to operate internationally and opened subsidiaries in other countries than their domestic one. At the same time, those companies have also transferred some sort of power to the management of their subsidiaries. In order to survive in today´s growing and dynamic business world multinational firms are required to maintain trust and control over its management in subsidiaries. Yet, in the recent past there have been many issues of control and trust. A multitude of factors outside and inside the enterprise can damage the application of management control. Especially, social, economic, political, geographical and cultural differences across national borders have shown that they have a serious impact on the efficiency of management control in the past.

The aim of this report is to investigate what are the requirements of MNE´s to maintain control and how do MNE´s may implement their own policies without incurring disadvantages for its subsidiaries. First, the report will explain what multinational firms are about. The report continues by explaining the relationship between control and trust with multinational companies. Next, the report will specifically address management control issues in the Chinese environment. Finally, the report will provide several solutions and outlooks while referring to the problem statement.

2. Multinational Enterprises (MNE´s)

Multinational corporations are a powerful facilitator of transfer of cash flows, technology and managerial know how. Multinational firms do operate with subsidiaries in different countries. They are delegated by their headquarters in their domestic country. Furthermore, these countries bear several distinctions with regard to its culture, economic, social and political situation. The headquarters and subsidiaries of MNE´s have to cope with locals, such as consumers or suppliers.

In general, an MNE is defined by its complex structures. More and more multinational firms are changing its coordination strategy from a pure international player towards a multinational, global and transnational enterprise (Yan, Lecture 2018). Management can visit multinational firms more frequently. Therefore, control and trust is easy to integrate. Yet, MNE´s that follow a globalization or transnational strategy face the problem that it becomes more complex and difficult to visit its subsidiaries and monitor them. Next to these strategies, MNE´s have to be aware of cultural distinctions between the host country and the domestic country. For example, the Asian market is not comparable to the European market. Many European firms made fatal mistakes when entering the Asian market as they did not incorporate the local tastes. Another relevant consideration is the entry strategy. While opening subsidiaries overseas, headquarters have the responsibility of control and trust. MNE´s can set up wholly owned subsidiaries or engage into partnering by, for instance, establishing a joint venture. As MNE´s do operate in different countries with different habits, they also have to adjust their control and trust ability towards the characteristics of the particular host country. Especially partnerships add complexity. Generally speaking, MNE´s have two options when setting up subsidiaries. Either they can adjust their practices to local needs or they stick to their original practices from their home country.

3. Control in Multinational Enterprises

There are numerous definitions of control in multinational enterprises. However, control in multinational companies can be characterized as practices, rules and values that are dictated in order to monitor management/ employee behavior (Malmi & Brown, 2008). Furthermore, control systems are “means of gathering and using information to aid and coordinate the planning and control decisions throughout an organization” (Horngren et al. 2012). In general, one can say that there is a relationship between the coordination strategy and the level of control of subsidiaries. First of all, global multinational firms try to reach global consistency. Therefore, the headquarter has the responsibility to control and coordinate its subsidiaries. In turn, the subsidiaries are very much dependent on the headquarters policies. Hence, control of local subsidiaries in host countries is limited. Secondly, firms that pursue an international and multinational strategy do neither follow global consistency nor local adaptiveness. Within the international MNE the headquarter transfers knowledge and coordinates the subsidiaries, yet, subsidiaries can exhibit some sort of autonomy, meaning full control is not guaranteed. Thirdly, MNE´s that pursue a transnational strategy try to tackle both global efficiency while responding to local tastes. The idea is to build a horizontal organizational structure instead of a coordinated hierarchal structure. Headquarters and local subsidiaries are very interdependent and act on the same level. Even though this strategy is most promising it is difficult to implement (Abdullah & Khalid, 2011)

Control is key to achieve the goals set up by the overall MNE. Furthermore, one can differentiate between different types of control. Chow et al. state that there are three general types of control. First of all, output control describes the adherence to certain objectives by the parent company. Secondly, process control which states that employees must stick to pre-specified processes. Finally, there is some sort of social control, incorporating the formal as well as the informal relations within the MNE.

Control is of utmost importance in order to achieve global competitive advantage. Often subsidiaries do not align with the standardization strategy of the parent company and do not achieve certain goals. However, sometimes parent companies do control too much meaning that local needs are not tackled and local employees are not regarded as important. Apart from the coordination strategy or the different types of control, literally all multinational companies inhibit some issues of control. It is obvious to identify a main factor for these issues: distinction between home and host country due to several differences between society, culture, economy and politics.

3.1 China as an Example of Too Much Control

China opened its markets in the 90s and served as a lucrative new market for foreign investors. Yet, China has embedded some sort of hurdles regarding its social, political and economical environment. This leads to complex structures. China itself is separated into one tier, two tier and three tier regions. These regions inhibit large discrepancies. However, the growth rates were gigantic which attracted many foreign investors. While opening new subsidiaries in China, a lot of multinational corporations ended up in issues regarding their control, yet, not because there was no control but rather because there was too much control. The reason for that were expatriates which were assigned to transfer technology and knowledge but also to monitor and to coordinate. Especially Japanese companies, such as Fujitso or Mitsubishih put a large number of expatriates in charge to facilitate the exchange of control status between headquarter and subsidiary. However, there are tremendous differences in the culture. Japan and Germany, for instance, are according to Hofstede a very coordinated country. This can also be seen in a multitude of firms. As these firms tried to standardize and establish the same control systems as in their home country, issues arose. Leung et al. describes two major fields of problems. First of all, local employees feel uncomfortable and disappointed under the high level of control as they have no autonomy and are excluded in the decision making process. Secondly, foreign multinational enterprises have become more and more inflexible to respond to the local needs from both, its customers and its employees. The reason for that is that this clear subordinate-superior relationship is controversial and does not provide the needed middle man that yields joint decisions (Leung et al., 1999).

5. Requirements to Maintain Control

As outlined in the sections before, the right mix for control is clearly a huge challenge for multinational firms. Control is key to achieve the goals set up by the overall MNE. Therefore, one can differentiate between different types of control. These mechanisms can and should be implemented by expatriates in order to have the perfect bridge between subsidiary and headquarter.

In general, there are certain requirements a multinational should retain or implement in order to maintain control. In order to remain output control, MNEs can implement three actions, namely incentives/perks, reporting and budget controls. This type of control is not really specifically attributed to a certain host country as output control is depending on the targets of the parent company. You can measure output control with both financial and non financial targets.
First, MNE´s can introduce incentives. Incentives have the goal to motivate employees in subsidiaries to deliver positive results. By that, the headquarter ensures and controls that the management in subsidiaries sticks to financial and non-financial goals of the parent company.
Secondly, through reporting the parent company can get information access and see how well the subsidiary performs. Reporting, however, requires time and expertise. It is likely that this is a task for expatriates. Yet, reporting is still very powerful as it can be tracked back and serves as an information transfer. Thirdly, the parent company can implement budgeting plans. By that, the management of subsidiaries does not have the ability to overspend. Furthermore, it gives a great forecast of what managers should and should not spend. In case of special spending, the management can still communicate with the parent company to enlarge the budgeting policy (Dossi & Patelli, 2010).

In order to remain process control, multinational companies can try to implement rules and procedure manuals, clear rights of decision and finally a transnational strategy.
First of all, MNEs can give their local employees procedure manuals and propose rules. It is important to remember that there might be differences in the culture. Furthermore, it is important to ensure that the manual can be read by everyone, meaning the manuals and rules should be translated into the particular language. The managers of subsidiaries should be responsible to ensure that every local employee is coherent with the rules. Clear rules and a clear outline of procedures can leverage the efficiency of the firm and give some sort of control about the organizational processes.
Secondly, the parent company should be able to define decision rights. Of course, the parent company wants to ensure that goals of the subsidiary are aligned with corporate goals. However, as the example in China has shown, it can be very demotivating to be controlled 24/7. Therefore, companies should give managers of subsidiaries at least control over the working capital and the daily operations. Managers in foreign subsidiaries are way more flexible to respond to local market needs. Furthermore, too many expatriates sent by the parent company can be dysfunctional as well since they are not aware of the specific local needs. It is of highest importance to give away some authority to maintain control as otherwise the firm will not control anything as employees will leave.
Finally, the multinational companies should really try to become a transnational firm. For sure, this is a difficult task and only the real global players can achieve transnational structures. However, the strategy is incredibly effective with regard to implementing both globalization/ centralization and localization. By that the firm can implement its own policies without incurring any disadvantages for itself (Kranias, 2000)

In order to remain social control, multinational companies can hire and train expatriates from the parent company or can offer workshops for local management.
First of all, expatriates come from the parent company and can convey the mission and vision to the subsidiary. Furthermore, expatriates can facilitate the information transfer by monitoring and complying to other control processes. Yet, it becomes more and more important that expatriates should not be seen as a superior person. They should understand the culture of the foreign subsidiary and starting informal talks to local employees.
Secondly, workshop sessions can be the key towards managing control as it provides a keen way to spread corporate values (Hoque & Chia, 2012)