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Liabilities of Distance: Governance Cost Dynamics in MNE Headquarters–Subsidiary Relationships

Distance in International Business: Concept, Cost and Value

ISBN: 978-1-78743-719-7, eISBN: 978-1-78743-718-0

Publication date: 23 November 2017

Abstract

Cultural and geographical distances create friction in multinational enterprises (MNEs), friction that indigenous firms do not experience in the same manner. This friction or liabilities of distance is conceptualized as governance costs in this chapter. Unfortunately, governance costs seem to be a rather equivocal concept, although it is one of the building blocks of internalization theory, and the raison d’être of the idea that certain kind of transactions have to be internalized to overcome the most prohibitive consequences of business activities across cultural and geographical distances. By going back to an award-winning paper, published in IBR in 2009, we put forward some nuances and reflections upon theory and findings presented in that paper, as well as upon implications and behavior of governance costs. The reason for this endeavor is grounded in the idea that theories must be challenged, empirical finding, just as well. Building upon survey data from 159 Norwegian MNEs, we explore and test six hypotheses by structural equation modeling (SEM). The results indicate that information fallacies seem to be the main driver of monitoring – and bargaining costs in the relationship between MNE HQs and their foreign subsidiaries, and thereby also the indirect driver of the observed negative effects of monitoring and bargaining on subsidiary performance. On the other hand, trust shaped by bonding activities seems to be an important factor in reducing bargaining costs and improving subsidiary performance.

Keywords

Citation

Tomassen, S. (2017), "Liabilities of Distance: Governance Cost Dynamics in MNE Headquarters–Subsidiary Relationships", Verbeke, A., Puck, J. and Tulder, R.v. (Ed.) Distance in International Business: Concept, Cost and Value (Progress in International Business Research, Vol. 12), Emerald Publishing Limited, Leeds, pp. 445-470. https://doi.org/10.1108/S1745-886220170000012023

Publisher

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Emerald Publishing Limited

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