Multinational corporations (MNCs) are companies that do business in different countries around the world.
Although these companies do business in different countries, the primary focus is domestic markets. Its products may, however, be modified to meet the needs of customers in other countries for example by changing the language on the packaging. In this article, I will elucidate on the agency problem between these MNCs and their subsidiaries.
Information processing challenges and use of heuristics
It is prudent to note that information-processing constraints due to physical limitations and scarce attention restrict the volume of information in decision-making .Such limitations also exist at the unit level. Research shows that organisational units vary with regard to their information processing capacities. Secondly; cognitive economising means that individuals use mental shortcuts (heuristics) instead of systematically processing all of the available information and this could be detrimental to certain operational aspects thus affecting the original goal of the MNC.
Based on the above, it stands to reason that when the HQ assigns a specific role or task to a subsidiary, the subsidiary’s response will be shaped by its bounded rationality. According to Hendry (2002), bounded rationality may lead to “incompetence” and failure of agents to perform as expected by the principal. Thus, poor or improper behaviour of agents must not always be caused by self-interest, but might be the result of bounded rationality and associated incompetence of agents (Hendry, 2002).
Different cultures can influence performance
Different cultures have different views on authority, compliance, and relations between individuals and social groups, all of which are at the core of the agency relationship. In individualistic cultures, the self is viewed as autonomous and independent from the group and, thus, the individual goals are not necessarily aligned with group-level goals. Thus it can be expected that, on an average, subsidiaries in collectivistic cultures are less likely to develop a strong logic of self-interest.
If the HQs are perceived as outsiders, “collectivistic” subsidiaries may develop a rather self-interested logic disregarding the interests of the corporation. Culture is also likely to affect subsidiary’s bounded rationality as it shapes the way actors view and use information and evaluate situations. Individualistic cultures tend to emphasise rationality and comprehensive data driven analysis of different options in decision making, thus improving their information processing capabilities, reducing the reliance on simple heuristics and limiting the risks of biases.
In contrast, collectivistic cultures may forego data driven solutions because of heavy use of heuristics considering social factors such as group dynamics, social relations, the needs of others, and group interests. This in turn will have an impact on the degree to which a given subsidiary is able to correctly interpret and understand HQs mandates, and develop efficient and effective plans for implementing them. Therefore, subsidiaries in collectivistic cultures are more likely to experience high levels of bounded rationality than those in individualistic cultures. Subsidiary self-interest and bounded rationality will also be affected by the quality of the institutional environment in the host country.
Market forces can
Making Outside The Confines of HQs Guidelines Emerging and developing markets are characterised by “institutional voids” reflected in underdeveloped and less mature institutional arrangements often plagued by corruption, poor rule of law and substantial informality in coordinating business transactions.
These countries are also undergoing significant institutional change that creates a sense of unpredictability, crisis, and risk. As a result, economic actors may switch to a “survival mode” and focus disproportionately on their own interests at the expense of others. Subsidiaries in emerging markets and developing economies are thus more likely to develop logic of self-interest.
Incompetence to achieve set goals
An agency problem may still occur due to the subsidiary’s limited rationality and its inability to achieve the ultimate goal. As a result, the subsidiary might commit errors; that is, they might still not act in the HQs’ best interest as they lack the competence to make appropriate judgments of the situation and to take all necessary actions. In any case, this scenario leaves the principal in the dark and represents a very difficult agency challenge. This scenario is associated with the lowest levels of goal incongruence and information asymmetry.
While challenges between the multinational organisations and their subsidiaries are prevalent, it remains imperative to align the incentives of the principal and the agent. This is relatively an effective way of curbing this rudimental problem. It is also important to put in a place a solid legal and regulatory framework and ensure all units operate within the confines of these regulations. Monitoring and supervision is also another strategy that can be employed to mitigate the agency problem.
Blessing Nyatanga holds a Bachelor’s degree in Banking and Investment Management from NUST.0784909184/[email protected]