Global Firms Competing Locally: Management Localization and Subsidiary Performance in China

Abstract

Firms face liability of foreignness and other disadvantages when operating in other countries. The pressure to engage in local isomorphism — that is, imitate the practices of domestic firms — can be great, especially in the case of large cultural distance from home (Salomon and Wu, 2012). Management localization, as a form of local isomorphism, has become an important issue in cross-national operations. In China, many foreign invested enterprises (FIEs) have embarked on the path to localize their management in the past two decades (Katrin, 1996; Keeley, 1999). As a formal and planned strategy, firms often set up a specific target and schedule for management localization. Aside from the need for cost containment, management localization is often discussed in the framework of the global integration vs. local responsiveness paradigm in an effort to balance the scale economy of global standardization with the local contingency that is necessary for success in overseas markets (Hannon et al., 1995; Prahalad and Doz, 1987). On the one hand, multinational corporations (MNCs) must efficiently transfer to the overseas subsidiaries their superior knowledge accumulated from successful operations at home and in other countries (Kogut and Zander, 1993). On the other hand, they face the risk that the knowledge may not apply to the local environment. While researchers emphasize the benefits of management localization in improving local responsiveness, its effect on subsidiary performance has been sparsely studied. A number of researchers find that the effect of management localization is not always straightforward and tends to be highly context-dependent (Lam and Yeung, 2010).