After more than a century of globalization, the key question by management scholars and corporate executives has broadened from how multinational enterprises (MNEs) enter new markets to a focus on how established subsidiaries remain competitive and influential over time. Many of the Western European MNEs that internationalized during the first wave of globalization that started in the late 19th century now have a wealth of experience in managing foreign markets such as India and Indonesia. Longstanding subsidiaries, owned by companies such as Unilever or Philips entered foreign markets (often former colonies) because they offered favourable entry conditions. However, Independence from their colonial masters as well as the institutional reforms undertaken fundamentally changed the business landscape of these countries. Consequently, these mature subsidiaries had to develop novel strategies to manage the host markets’ transition from colonies, to developing countries and finally to emerging markets. Developing and maintaining close government relations is often a pivotal aspect of managing emerging markets operations.
Corporate managers need to be aware that managing market entry is ‘a different ballgame’ compared to running longstanding subsidiaries as the role of local employees, the nature of government relations, and resource flow between the headquarters and subsidiaries are all strikingly different. Past studies, however, have primarily focused on addressing the government relations of MNEs aiming to explain the early stages of the internationalisation. Yet, there is little known about the post-entry political strategies and tactics in the later phase of mature subsidiaries in emerging markets.
Insights from four centuries old Dutch MNE subsidiaries in Indonesia
To begin to shed light on this question, in a study recently published in the Journal of Management Studies (published in the Special Issue on The Management of Socio-Political Issues and Environments: Organizational and Strategic Perspectives) we conducted a case study of four centuries old Dutch MNE subsidiaries with a colonial legacy in Indonesia. The four MNEs first entered the country in the late 19th or early 20th century when Indonesia was a Dutch colony. These firms have significant experience in managing government interventions such as discriminatory policies, nationalistic rhetoric, policies requiring more involvement of local managers, restrictions on the transfer of profits, and nationalization. After Indonesian independence, Dutch firms were nationalized for several years in the 1960s before they were allowed to re-establish themselves in the newly formed country. Indonesia’s independence gave rise to new challenges for doing business in Indonesia, where an ‘Indonesianization’ movement aimed to wrest control from Dutch firms and develop indigenous firms. Despite these challenges, the firms have prospered and are market leaders in at least one product category.
We chose a case study approach, involving observations, interviews, and archival research to gain a more nuanced understanding of the subsidiaries’ government relations. Between 2017 and 2021, we conducted semi-structured interviews with executives, managers of peer firms, government officials, lawyers, consultants, and embassy representatives as well as various experts in diplomacy and political economics. We then used secondary data, such as annual reports, corporate documents shared by participants, press releases, media accounts, and parliamentary proceedings, as well as searching in databases, such as Euromonitor and Frost and Sullivan, and popular newspapers in the region (e.g., The Jakarta Post).
The sample offered an opportunity to examine contextual conditions and managerial choices that could illuminate MNE-government interactions not just during the initial foreign entry but also at the dynamic processes that have unfolded over time.
What is different about managing government relations by longstanding subsidiaries compared to new entrants? Our findings
Our study reveals that longstanding subsidiaries face challenges that are distinct from the challenges of firms newly entering a market.
- First, ownership structure often changes as subsidiaries mature.
While it is common (and sometimes required) to enter new markets with the help of a local partner, often in the form of an international joint venture, longstanding subsidiaries tend to seek more independence of the local partner after having learned about the local market and nonmarket conditions, thus reducing the influence of the venture partner for example when expanding its operations. Regime change in emerging markets can also influence ownership structure. For instance, when one of our sample firm’s joint venture partners lost its political influence after the downfall of President Suharto in Indonesia, it started managing government relations directly while steadily reducing its partners’ ownership share.
- Second, the longstanding subsidiaries had developed a strong reputation for conducting its operation with integrity and with respect for people, organisations, and the environment.
Developing a reputation as a socially responsible corporate citizen with respect for local values had allowed the longstanding firms to influence political actors. For instance, by assisting the government in managing important social problems and taking part in collaborative projects with social and political actors, the firms were invited to co-create government policies. Continued investments in the country, also during the Asian financial crisis, when many MNEs had left the country, had built commitment and trust in the eyes of the government. Their social initiative and continued investments helped build legitimacy, which is key in emerging markets and something that newcomers often lack.
- Third, knowledge and resource transfer from the headquarter to the subsidiary becomes less important.
Instead of receiving support from headquarters, longstanding subsidiaries frequently become ‘centres of excellence’ and substantially contribute financial, technological, and human resources to global headquarters. As our sample firms matured, ethnocentric staffing policies and attitudes had been replaced by more progressive, polycentric attitudes (partly due to government requirements). As a result, mature subsidiaries employ mostly local employees including at the senior management level, and the question was more about the contribution of expatriates rather than vice versa. Locally well-connected individuals (such as ex politicians) are often employed to manage government relations, and they may also have an advisory role to headquarters’ corporate affairs team about managing government relations in emerging markets more generally. Large longstanding subsidiaries also play a role in the recruitment of the top management. It is now common (or even expected) for some of the largest MNEs’ CEOs to have proven their leadership in their biggest or fastest growing subsidiaries in emerging markets.
- Fourth, longstanding subsidiaries respond differently to institutional friction.
Subsidiary leaders must strike a balance between conflicting demands, requiring paradoxical thinking to integrate the complex tasks involved in managing fundamental differences in MNEs’ home and host countries. When confronted with friction, new MNE entrants often follow clear mandates set by corporate headquarters executed primarily by expatriates as an extension of the headquarters. As new entrants face pressure to conform to local institutional demands, they generally resort to conformity and isomorphic behaviours to blend in, by using practices like those of their local counterparts, consistent with local cultural norms. In contrast, dominant mature MNEs that are part of the local community (and often listed on the local stock exchange) more fully embrace institutional frictions. We found that longstanding subsidiaries frequently engage in more proactive and manipulative institutional strategies. For instance, in contrast to merely following existing regulations, the firms hired high-profile ex politicians to their boards to enhance social capital and connections to government decision-makers or made CSR investments in line with the country’s strategic goals, ultimately seeking to influence or even co-write government regulations.
To conclude, managers need to be cognizant of the inherent differences between longstanding subsidiaries and newly established operations in emerging markets, and carefully draw on learnings from management of one type to the other.
Photo: Image: Jakarta skyline (source unsplash.com)
0 Comments