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Cultural distance or cultural positions? Analysing the effect of culture on

the HQsubsidiary relationship

Rian Drogendijk *, Ulf Holm

Department of Business Studies, Uppsala University, PO Box 513, 75120 Uppsala, Sweden

1. Introduction

This paper adopts a relational view of cultural differences: that is, we are interested in how the cultural characteristics of

the national environments of two organisational units, and the differences between them, affect the units relationship. In

the international business literature, the conventional approach to studying cultural differences is to use the concept of

cultural distance and its most popular measure, the Kogut and Singh (1988) index. Recently, this concept and its measure

have faced serious criticism (Drogendijk & Slangen, 2006; Shenkar, 2001), so we need studies that help develop other, richer

conceptualisations and metaphors of cultural differences (Drogendijk & Zander, 2010; Shenkar, Luo, & Yeheskel, 2008) and

their role in relationships between organisations. The cultural distance concept has limitations when applied in the

investigation of relational situations, because it does no justice to actual cultural characteristics, nor does it account

satisfactorily for both sides of the relationship. For example, two pairs of cultures can be at the same cultural distance, yet atcompletely different ends of one or more cultural dimensions. Cultural distance, in other words, ignores the actual cultural

characteristics or positions on cultural dimensions, though these likely affect the behaviour of people from different

countries and the relationships between them. Furthermore, the distance between two cultures is the same from the

perspective of either party to the relationship, whereas perceptions of cultures and cultural differences are not symmetrical

(Chapman, Gajewska-De Mattos, Clegg, & Buckley, 2008; Shenkar, 2001). In the present paper, we consider the cultural

characteristics of both sides of the relationship. We define cultural positions as the actual cultural characteristics of both

parties involved in a relationship and the differences between them. Position refers both to the absolute cultural

International Business Review xxx (2011) xxxxxx

* Corresponding author.

E-mail addresses: [email protected] (R. Drogendijk), [email protected] (U. Holm).

A R T I C L E I N F O

Article history:

Received 16 April 2010

Received in revised form 26 April 2011

Accepted 4 May 2011

Keywords:

Cultural distance

Cultural position

HQ-subsidiary

Power distance

Subsidiary competence development

A B S T R A C T

We develop a model of cultural positions in relationships that should be considered in

addition to the more conventional cultural distance. We empirically analyse relationships

between headquarters and foreign subsidiaries in multinational corporations and how

high or low acceptance of power differences at both sides of the relationship is associated

with headquarters influence on subsidiary competence development. ANCOVA analyses of

1529 subsidiaries in six European countries, headquartered in 28 countries, provide new

insights. We find that relationships with low cultural distance, differ significantly in terms

of headquarters influence depending on whether headquarters and subsidiaries agree on

accepting or rejecting power differences. Similarly, relationships with high cultural

distance differ depending on whether it is headquarters or the subsidiary that is from a

high-power-distance culture: we find that headquarters influence is particularly

dependent on great acceptance of power differences by the subsidiary.

2011 Elsevier Ltd. All rights reserved.

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Please cite this article in press as: Drogendijk, R., & Holm, U. Cultural distance or cultural positions? Analysing the effect of

culture on the HQsubsidiary relationship. International Business Review (2011), doi:10.1016/j.ibusrev.2011.05.002

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characteristics of each party (in terms of qualitative descriptions or quantified as scores on relevant cultural dimensions) and

to their relative content or value.

Our primary aim is to develop the concept of cultural positions, in the context of relationships between headquarters

(HQ) of multinational corporations (MNC) and their subsidiaries. Managing an MNC inevitably involves cross-border and

cross-cultural interaction between managers at different organisational levels and in different countries. The relationship

between HQs and their foreign subsidiaries is thus a relevant context for exploring the effect of cultural positions. We

investigate conceptually how the positions on the cultural dimension of both the HQs and subsidiaries national

environments affect the relationship between them. We focus on one dimension of culture, namely, power distance, or thedegree of acceptance of power inequality in a society, because this dimension is logically related to the idea of hierarchy and

authority (Hofstede, 2001) and has been demonstrated to play an important role in HQsubsidiary relationships (Ferner

et al., 2004).

Our model explores four theoretical situations: two in which the national cultures of HQs and subsidiaries diverge (i.e.,

one national culture scores high in terms of power distance, whereas the other scores low, representing high cultural

distance), and two in which the national cultures of HQs and subsidiaries score similarly in power distance (that is, both are

either high or low, representing low cultural distance). We argue that each of these four relational situations has its own

characteristics, depending on the HQs and subsidiaries respective acceptance of power differences. Our study challenges

the idea that cultural distance is symmetrical, and claims that it matters where on a cultural dimension the parties to a

relationship are (i.e., at the high or the low end), which has been ignored by the literature on cultural distance. Furthermore,

we systematically theorize that four theoretical relationships result from taking into account the cultural positions of both

parties. These are the central contributions of our paper.

We apply our theoretical model in an exploratory empirical study that demonstrates how cultural positions areassociated with a particular aspect of the HQsubsidiary relationship: HQ influence on competence development in

subsidiaries. We further compare our findings with those of a model testing the effect of cultural distance, and demonstrate

what an analysis of positions adds to the insights gained by studying cultural distance alone. Few studies have dealt with

how cultural differences between HQ and subsidiary influence the HQs ability to promote competence development in its

relationship with the subsidiary. Prior research, however, confirms that cultural differences do affect innovation strategies

(Shane, Venkataraman, & MacMillan, 1995; Van der Vegt, Van de Vliert, & Huang, 2005 ) and knowledge transfer across

borders (Bhagat, Kedia, Harveston, & Triandis, 2002) even within MNCs (Lervik, 2008; Lucas, 2006), emphasising the

relevance of this empirical context to our study. We employ unique data collected by a survey of MNC subsidiaries located in

six European countries, and headquartered in 27 countries, and explore how the cultural distance between and cultural

positions of HQ and subsidiaries with respect to one dimension, power distance, are associated with HQ influence on

subsidiary competence development. Our results indicate that, although cultural distance at first sight seems to explain HQ

influence, its negative effect becomes insignificant when we consider cultural positions. The cultural positions analysis

reveals that culture is associated in a much more complex way with HQ influence.

2. Cultural distance in a relational context

Recently, Shenkar and colleagues (Shenkar, 2001; Shenkar et al., 2008) made a strong plea for replacing the metaphor of

cultural distance with a better one. One problem with the distance metaphor is that it leads to a one-dimensional

conceptualisation of culture. This has conveniently allowed researchers to position cultures (usually nations) on a single

dimension by calculating the cultural distance between them, but it has also concealed the complexity of culture and the

differences between cultural groups (Shenkar et al., 2008). For example, the general cultural distance between Finland and

Denmark, according to the Kogut and Singh (1988) index, based on scores on the five Hofstede (1980, 2001) dimensions,

equals thedistance between the Philippines andBangladesh (1.34 and 1.35, respectively). Even so,the relationships between

people in these pairs of cultures are likely characterized by different potential frictions (cf. Shenkar et al., 2008) or

enrichment opportunities (cf. Reus & Lamont, 2009). Looking closer, we find that the main difference between Finland and

Denmark relates to the dimension of uncertainty avoidance, whereas the Philippines and Bangladesh differ primarily interms of long-term orientation (according to the scores of these countries on the Hofstede dimensions). The use of cultural

distance between these pairs of countries provides no insight into such differences, although they likely affect the

relationships between people from these countries. Because of a focus on the cultural distance concept, research has

neglected the multidimensionality and non-linearity of cultural differences and how they affect relationships between

people.

Furthermore, expressing cultural differences in the form of a single number does not let researchers express where on a

relevant dimension or continuum two cultures are placed: the focus is on how much they differ, and actual characteristics

are ignored. This becomes particularly clear when we scrutinize the distance aspect between pairs of cultures on a single

cultural dimension. For example, if we compare the cultural distance on a particular dimension between an HQ and a

subsidiary in situations A1 and A2 in Fig. 1A, the distance is the same even though both units score low in situation A1,

whereas they score high in situation A2. In other words, the cultural distance is equal in both situations, despite the fact that

the behavioural relationship between the two units may differ greatly due to the actual cultural characteristics associated

with the different positions on this cultural dimension. Calculating only the cultural distance between HQ and subsidiarywill not lead to these insights.

R. Drogendijk, U. Holm/ International Business Review xxx (2011) xxxxxx2

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Finally, the expression of cultural distance does not take into account whose perspective we take on the cultural

differences between two organisations. The cultural distance between India and the United States is the same (i.e., 6.18)

independent of whether we take an Indian or an American perspective. However, perceptions of cultures and cultural

differences are not symmetrical (Chapman et al., 2008; Shenkar, 2001): the differences between two groups are perceived

differently by the group positioned higher on a cultural dimension than by the group positioned lower. Consider another a

graphic example: in situations B1 and B2 in Fig. 1B, the cultural distances between HQs and subsidiaries are the same.

However, in situation B1, the HQ has a higher score on the culture dimension than does the subsidiary, whereas this situation

is reversed in B2. Whereas the HQ scores high in one situation, it scores low in the other, though the distance is constant. We

suggest that this fact is critical in analysing the impact of cultural differences between corporate actors. Which of the two

units scores high versus low on a particular cultural dimension will probably affect its expectations and behaviour aninsight not gained by calculating merely the cultural distance. Therefore, for a more complete understanding, we should

consider both sides of the relationship and their cultural positions.

3. The role of national culture in HQsubsidiary relationships

Organisations values and behaviour are generally firmly rooted in their national values and practices. House, Hanges,

Javidan, Dorfman, and Gupta (2004, p. 534), for example, argue that in general, organisations tend to mirror the culture of

power distance practices and values in their society so that they can gain legitimacy and also appeal to the people from their

host societies (see also Meyer & Rowan, 1977). This suggests that the values and behaviour of HQ and subsidiaries are likely

to correspond to those prevalent in their national cultural contexts (Harzing & Sorge, 2003; Van Oudenhoven, 2001). Thus,

there can be as much cultural variation, for example, in terms of power distance, among the units of an MNC as among

national cultures, leading to large cultural differences inside the MNC. The role of these cultural differences in the HQ

subsidiary relationship, particularly in the design and delegation of control, has long been discussed in the literature (Baliga& Jaeger, 1985; Egelhoff, 1984).

The relationship between corporate HQs and their subsidiaries can be characterized as hierarchical.1 The basic condition

in this relationship is that HQ has legitimate formal authority, allowing it to exercise control over subordinate organisational

units (cf. Bacharach & Lawler, 1981). However, the fact that HQ occupies a position of formal bureaucratic control in the MNC

does not automatically mean that it actually has influence over its subsidiaries ( Ferner, 2000; Forsgren, Holm, & Johanson,

2005). Theextent to which HQ in fact controls its subsidiaries depends on its willingnessto exert control and its legitimacy to

do so in the eyes of its subsidiaries. It is well documented that HQs can strategically choose to shift control to the subsidiary

level (Bartlett & Ghoshal, 1989; Doz & Prahalad, 1987). Subsidiaries, on the other hand, can defy their HQs formal control

position when they are not greatly dependent on its resources, but not when they are (cf. Pfeffer & Salancik, 1978), or when

[

High

A1 A2

Low

Figure 1A: Equal distance different positions

Figure 1B: Equal distance exchanged positions

B1

HighB2

Low

Headquarters

Subsidiary

Distance on the cultural dimension

Fig. 1. Situationsof equal cultural distance between headquarters and a subsidiary. (A) Equal distance different positions. (B) Equal distance exchanged

positions.

1 Subsidiaries can communicate with and report to several units at different corporate levels, depending on the underlying structures of control and on

the reporting systems in place between MNC units. However, we assume that the corporate HQ has a relationship with its subsidiaries, whether direct orindirect, and represents a potential promoter of competence development for the subsidiary.

R. Drogendijk, U. Holm / International Business Review xxx (2011) xxxxxx 3

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they perceive a lack of procedural justice in its control ( Kim & Mauborgne, 1993). Our knowledge is very limited as to

whether national cultural context, in particular, preferences concerning power distance, helps explain the relationship

between HQs and their subsidiaries, and HQs influence on their subsidiaries.

3.1. Power distance

Power distance refers to the unequal division of power, that is, some people in a society (or organisation) having more

power privileges than others, and the acceptance thereof by the society (organisation). Power distance can be large or small,meaning that societies (organisations) differ in the degree to which they accept the unequal distribution of power. When

large power distances prevail, people expect and accept substantial differences in power among hierarchical levels. The

division of power is equal to the hierarchical position of the people involved; it reflects the existential superiority of

superiors (cf. Hofstede, 2001). In low-power-distance contexts, people are less accepting of power differences among

hierarchical levels: they are egalitarian, and expect power to be more equally distributed (Hofstede, 1980, 2001; House

et al., 2004). This does not mean that organisational hierarchies are meaningless in low-power-distance cultures. Instead, in

these contexts, lower parts of the hierarchy can be expected to question decisions made above and exert influence when

they do not entirely agree with the imposition of power, for example, based on particular expertise residing in the lower

hierarchical unit. In low-power-distance cultures, hierarchy is perceived as a role structure and more of an arrangement of

convenience (Hofstede, 2001, p. 97) than as the factor determining the division of power.

The national cultures in which HQ and subsidiaries are immersed affect their perceptions of the appropriate balance of

power between them, and therefore the relationship between HQ and each subsidiary. In terms of the formal hierarchy, HQ

occupies a higher position than do its subsidiaries, but the power distance values of HQ and its subsidiaries affect theacceptance of large power inequalities, and therefore how much influence HQ exerts on its subsidiaries. Thus, HQs based in

cultures with a large power distance can generally be expected to act in accordance with their hierarchical position. They

intendto control their subsidiaries actions, because the formal authority granted by their position at the top of the hierarchy

corresponds to their cultural acceptance of power differences or, as Ferner et al. (2004) demonstrate, high power distance

scores are related to centralized HQ control. In contrast, when HQs are based in cultures with a low power distance, their

hierarchical position is not translated into absolute power or authority. Instead, these HQs are more likely to consult their

subsidiaries or grant them autonomy to make their own decisions (cf. Hofstede, 2001; House et al., 2004).

It is very important, however, not to look at only the top of a hierarchical relationship, since subordinate units at the

bottom are just as important in defining the power relationship something largely neglected in the literature on power

distance (Hofstede, 2001). In the literature on HQsubsidiary relationships, in contrast, the important role of subsidiaries is

well documented (Andersson, Forsgren, & Holm, 2007; Bartlett & Ghoshal, 1986; Birkinshaw & Hood, 1998; Frost,

Birkinshaw, & Ensign, 2002; Kim & Mauborgne, 1993). Arguing from a subsidiary perspective, high power distance makes

subsidiaries more likely to accept power differences and to act as instructed by the superior organisational unit (i.e., HQ).Subsidiaries from high-power-distance cultures expect HQ to act in accordance with its hierarchical position and to exert

authority. Subsidiaries from low-power-distance cultures are less likely to accept power differences based on formal

hierarchical positions and are therefore more likely to question HQs control. Based on Fig. 2, this leads to four possible

situations, each of which can result in HQs having more or less influence on subsidiaries, depending on the actual behaviour

of the parties, their expectations, and their acceptance of each others behaviour. Let us consider the four possible situations

separately and discuss the HQs influence on its subsidiary in each.

In the power distance (PD) hierarchy relationship, both HQ and subsidiary are from national cultures that value large

power differences, and they accept and expect a hierarchical relationship. HQ exerts power over its subsidiary and the

subsidiary deems this legitimate and acts accordingly. When HQ is from a culture accepting power differences and the

subsidiary is from an egalitarian culture, a PD conflict relationship evolves: HQ attempts to exert its power over the

subsidiary, but the subsidiary does not accept this because it does not perceive it as legitimate. A very different relationship

emerges in the opposite case, when HQ is rooted in an egalitarian national culture and the subsidiary in a hierarchical one. An

egalitarian HQ is much less prone to exert power over its subsidiaries than is an HQ in a high-power-distance culture. Yet a[Acceptance of power

HighPD conflict PD hierarchy

differences by HQ

LowPD egalitarian PD confusion

Low High

Acceptance of power differences by subsidiary

Fig. 2. Headquarters and subsidiaries acceptance of power differences.


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subsidiary from a high-power-distance culture will expect its HQ to exert its power to manage the MNC, and may experience

this lack of guidance as confusing; hence, the PD confusion relationship. Finally, in a PD egalitarian relationship, both HQ and

subsidiary are from egalitarian national cultures that do not accept large power differences. As in the PD hierarchy

relationship, both parties agree on the appropriate distribution of power, butin the PD egalitarian relationships this concerns

rejecting power differences, not accepting them. We expect that this is reflected in the managerial relationship between HQs

and subsidiaries.

4. Empirical exploration of cultural positions

Most research into the influence of national cultural values on the HQsubsidiary relationship has focused on

decentralisationcentralisation or the control of subsidiaries. Egelhoff (1984) demonstrated that US firms preferred to exert

output control over their subsidiaries, whereas European companies relied more often on behavioural control methods. Later

research confirmed the effect of HQ country of origin on the use of control mechanisms and subsidiary dependence in MNCs

(Calori, Lubatkin, & Very, 1994; Harzing & Sorge, 2003). Two recent studies (Dossi & Patelli, 2008; Williams & Van Triest,

2009) have attempted to explain what aspects of culture explain the differences in subsidiary control in MNCs. Dossi and

Patelli (2008) found, for example, that a composite measure of HQ national culture was related to the influence of

performance measurement systems on subsidiary decision making. This suggests that the cultural position of HQ affects its

control over and influence on subsidiaries.

Geppert, Williams, and Matten (2003) and Geppert, Matten, and Williams (2003) found that the national business

environments of both the HQ and its subsidiaries affect how much influence subsidiaries could exert given their HQs global

pressures: British and German subsidiaries of the same MNCs displayed different reactions to the standardisation strategies

of their HQs, and these were explained by differences in the national institutional environments of the subsidiaries. Williams

and Van Triest (2009) support these observations, demonstrating that decentralized decision-making relates to the level of

uncertainty avoidance in the national environment of the subsidiary (and not to a composite measure of cultural distance).

These studies point out that the cultural position of the subsidiary also affects the relationship between HQ and subsidiaries.

Our cultural position model suggests that the cultural backgrounds of both HQ and subsidiaries are important in

analysing the relationship between them. To illustrate our conceptual model, we test its implications in a study of HQ

influence on subsidiaries, particularly on competence development in subsidiaries. Though this issue has been studied

extensively (see, e.g., Asmussen, Pedersen, & Dhanaraj, 2009; Frost et al., 2002; Holm & Pedersen, 2000), cultural aspects

have not been taken into consideration. Below, we will develop hypotheses concerning HQ influence on subsidiary

competence development, as an example of the HQsubsidiary relationship, based on both the HQs and subsidiaries

cultural positions in terms of power distance. In contrast to studies using cultural distance that can only compare low-

cultural-distance with high-cultural-distance relationships, we compare four HQsubsidiary relationships based on our

cultural position model, leading to six pairwise comparisons.

4.1. Power distance acceptance and HQ influence

In the PD hierarchy relationship, when HQ and subsidiary are both from national cultures that value large power

differences, both parties will accept and expect a hierarchical relationship to exist between them (Birnbaum & Wong, 1985;

Hofstede, 2001). High-power-distance HQs use their authority to supervise and control the activities of their subsidiaries

(Ferner et al., 2004). High-power-distance subsidiary managers are likely to perceive HQ authority as legitimate because of

its existential authority. There is a mutually accepted status quo in the division of power, i.e., the dominant influence of HQ is

unquestioned. Shane et al. (1995) find, for example, that in high-power-distance contexts, strong HQ support increases the

likelihood of innovations being accepted and used throughout the MNC. We therefore expect HQ to exert great influence on

competence development in subsidiaries in the PD hierarchy relationship. Furthermore, we expect this influence to be

greater than in any of the other three situations in which at least one party fails to accept the power differences.

In the PD egalitarian relationship, both HQ and subsidiary agree that the subsidiary should be heard and that the

hierarchical position of HQ alone does not grant it power or authority in all matters. This is in line with findings on the use of

more decentralized control mechanisms and more subsidiary autonomy in MNCs in which HQs are based in low-power-

distance countries (Ferner et al., 2004). When comparing both relationships in which there is low cultural distance between

HQ and subsidiary, we hypothesize:

Hypothesis 1. HQ will exert more influence on subsidiary competence development (as perceived by subsidiary managers)

in the PD hierarchy relationship than in the PD egalitarian relationship.

We continue by considering differences in HQ influence when comparing the PD hierarchy relationship with the other

two PD relationships (i.e., the PD conflict and PD confusion relationships), that is, we compare a low-cultural-distance

relationship with the two high-cultural-distance relationships. As argued above, in the PD conflict relationship, the

subsidiary is more likely to dispute the hierarchical power of HQ and is therefore less willing to accept HQs influence (cf.

Kostova & Roth, 2002). The subsidiary may even consider HQs attempts to control its innovation activities as illegitimate orunjust interference (Kim & Mauborgne, 1993). HQ may therefore attempt to influence its subsidiary as much as in the PD


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hierarchy relationship, but in effect be less successful doing so given the subsidiarys position in the relationship. We

hypothesize that HQs influence on the subsidiary will be greater in the PD hierarchy relationship than in the PD conflict

relationship.


in the PD hierarchy relationship than in the PD conflict relationship.

In contrast, when comparing the PD hierarchy relationship with the PD confusion relationship, HQ is less inclined to exert

the power it legitimately could in the eyes of its power-accepting subsidiary. The more egalitarian HQ is less likely to controlthe subsidiarys actions in detail and may even expect the subsidiary to take initiative in developing knowledge and to

display and champion its innovations to other units in the MNC without seeking approval from HQ (cf. Shane et al., 1995;

Hofstede, 2001). HQ will likely exert less influence on the subsidiary in the PD confusion relationship than in the PD

hierarchy relationship, because of its own position in the relationship with its subsidiary; we hypothesize:


in the PD hierarchy relationship than in the PD confusion relationship.

4.2. Power distance rejection and HQ influence

Wenowstartfrom the lower left box in Fig. 2, andcompare thePD egalitarian relationship in whichbothHQ and subsidiary

reject power distance with the relationships in which one of the parties accepts it. In the PD egalitarian relationship, HQ and

subsidiary agree that the hierarchical relationship between them is merely an organisational fact (cf. Hofstede, 2001). Ascentralisation is related to high power distance (Ferner et al., 2004; Wong & Birnbaum-More, 1994), HQs from an egalitarian

culture are less likely to control and influence subsidiary activities and decisions in detail. Decentralisation, in contrast, has a

positive impact on subsidiaries as drivers of their competence development and evolution ( Birkinshaw & Hood, 1998; Foss &

Pedersen,2002), andsubsidiaries defined as equal partners of HQ gain autonomy andinfluence(Bartlett& Ghoshal, 1989).Inthe

PD egalitarian relationship, then, both HQ and subsidiaries expect the latter to influence important decisions regarding

innovation and competence development (Shane et al.,1995). In the PD conflict relationship, however, thecultural values of HQ

supportthe existential power based on HQs hierarchical position, which means thatit is much lesspreparedto allow subsidiary

influence. Even though, as arguedabove, conflictsabout HQs hierarchicalinfluence mayarise, HQsactionswill likely cause the

subsidiary to have relativelylessinfluenceon itscompetencedevelopment,and theHQ relativelymore influence, thanin the PD

egalitarian relationship (cf. Bartlett & Ghoshal, 1989). As a result, in the PD egalitarian relationship, subsidiaries will have

relatively greater autonomy and,hence,a greaterability to influencetheir owncompetence development processes, thanin the

PD conflict relationship. We therefore hypothesize:


in the PD conflict relationship than in the PD egalitarian relationship.

Next, we compare the PD egalitarian relationship with the PD confusion relationship both relationships in which HQ

rejects power distance. Unlike in the PD egalitarian relationship, the cultural values of subsidiaries in the PD confusion

relationship strengthen HQs formal hierarchical position: the subsidiaries expect HQ influence in important matters, such as

competence development, and are less likely to take a leading role based on their cultural values. This situation resembles

the atrophy through subsidiary neglect process, i.e., the degeneration of subsidiary competence through neglect of the

subsidiarys side, defined by Birkinshaw and Hood (1998), a process they argue can result from decentralized decision-

making. In the PD egalitarian relationship, subsidiaries respond to HQ influence with challenges and initiatives, but in the PD

confusion relationship, HQ influence is more likely to be adopted by power-accepting subsidiaries. Comparatively,

subsidiaries thus gain influence in the egalitarian relationship, whereas the formal hierarchical position of HQ and the

acceptance thereof by subsidiaries in the PD confusion relationship will lead to relatively more HQ influence on subsidiary

competence development in the latter. It is a case of HQ actingon subsidiaries signals (Birkinshaw, Bouquet, & Ambos, 2007)

and normative role expectations, which means that HQ managers should be able to govern the subsidiary and contribute

expertise and other resources (Tsoukas, 1996). We therefore expect HQ influence to be greater in the PD confusion

relationship because, from the subsidiarys perspective, HQs position in the organisational hierarchy provides it with the

appropriate authority for both formal and cultural reasons. We propose the following hypothesis:


in the PD confusion relationship than in the PD egalitarian relationship.

4.3. Power conflict and power confusion

Finally, we compare the two relationships characterized by high cultural distance: the PD conflict and PD confusion

relationship, or situations B1 and B2 in Fig. 1. Here, HQ and subsidiary have opposite attitudes regarding power distance: inthe PD conflict relationship, HQ accepts power distance and the subsidiary rejects it, but in the PD confusion relationship,


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these positions are exchanged. The question is thus whether HQ has more influence on competence development in the

subsidiary when it uses its hierarchical power to influence a challenging subsidiary, or whether a subsidiary that expects

guidance from HQ succeeds better in obtaining that input when HQ is egalitarian. Situations resembling the PD conflict

relationship have previously been described in the literature: the authoritarian or centralized HQ that is challenged by

unwilling subsidiaries features in a number of articles on HQsubsidiary relationships (e.g., Geppert, Matten, et al., 2003;

Geppert, Williams, et al., 2003; Kim & Mauborgne, 1993; Kostova & Roth, 2002 ). Much less is written about PD confusion

situations. Decentralisation in MNCs has been related to inertia on the part of subsidiaries ( Birkinshaw & Hood, 1998), but

the cultural background of the subsidiary was not considered in that study. Decentralisation has also been argued to lead to

uncertainty and therefore to feedback-seeking behaviour on the part of subsidiaries (Gupta, Govindarajan, & Malhotra,

1999), but this was not supported empirically. In that same study, Gupta et al. (1999) demonstrated that feedback-seeking

by subsidiaries was unrelated to the cultural distance between HQ and subsidiary, though the country of origin of HQ did

affect such behaviour; unfortunately, the effect of country of location of the subsidiary was not tested. The literature

therefore leaves too many unanswered questions: it has focused either on the cultural values of HQ/subsidiary or on culturaldistance as the explanatory variable, and the two distinct PD situations have not previously been compared. We therefore

formulate two competing hypotheses for comparing the PD conflict and the PD confusion relationships (Fig. 3):

Hypothesis 6a. HQ will exert more influence on subsidiary competence development (as perceived by subsidiary managers)

in the PD confusion relationship than in the PD conflict relationship.

Hypothesis 6b. HQ will exert more influence on subsidiary competence development (as perceived by subsidiary managers)

in the PD conflict relationship than in the PD confusion relationship.

5. Methods

In the following sections, we discuss the data collection and the operationalisation of the variables involved. We present

some descriptive statistics and use an ANCOVA test to analyse HQ influence on subsidiary competence development in thefour relationships resulting from HQs and subsidiaries positions on the power distance dimension. This procedure tests

whether HQ influence differs in the four PD relationships, while controlling for a number of common control variables (for

which we do not specify any hypotheses, but that we anticipate will affect the dependent variable). The ANCOVA analysis

allows the distinguished groups, i.e., the four relationships, to differ in size. F-statistics are provided for testing the

hypotheses and the usual regression results are presented for the control variables. We compare our results with those of

analyses based on the conventional cultural distance concept.

5.1. Data collection

For all data, except the culture variables for which we used data from the GLOBE study (see below), we employ data

collected for a large international project initiated in 1997 (see Foss & Pedersen, 2002; Frost et al., 2002; Holm & Pedersen,

2000) to investigate the impact of subsidiary role development in MNCs. Data were collected in seven countries, i.e., Austria,

Denmark, Finland, Germany, Norway, Sweden, and the United Kingdom, but we had to exclude observations for Norway dueto missing values on our main explanatory variable (i.e., GLOBE culture data). In designing the data collection instruments,

[

Acceptance of

power

High PD conflict PD hierarchy

differences by HQ

Low PD egalitarian PD confusion

Low High

Acceptance of power differences by subsidiary

H2

H1H4

H5

H3

H6a

H6b

Fig. 3. Summary of hypotheses, dependent variable: HQ influence on subsidiary competence development.


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great care was taken to ensure that the data would be comparable, and the questionnaire was constructed so that it could be

applied in all countries involved. Questionnaire items aimed to identify subsidiaries competences in various activities, how

these competences emerged, and how subsidiaries with strong competences affect the competitive advantage of the MNC.

Questionnaires sent to the top managers of each subsidiary were completed by the CEO in 80% of cases and by the sales

director, chief controller, or administrative director in the rest of them. The response rate was 2055% depending on the

country of investigation. Responding and non-responding firms did not differ significantly in terms of sales volume or

number of employees, so we conclude that our data were unaffected by non-response bias.

From the total sample of 1714 subsidiaries in the six listed countries, 185 observations had to be excluded because ofmissing values, leaving a working sample of 1529 subsidiaries in both service and manufacturing industries. The

subsidiaries HQs were located in 28 countries: 19% in Nordic countries (Denmark, Finland, and Sweden), 51% in the rest of

Europe, and 24% in North America (the USA and Canada), and 6% in the rest of the world. In total, 60% of the subsidiaries had

been obtained through acquisitions or mergers, while the remaining 40% were greenfield establishments. The subsidiary size

ranged from one to 25,460 employees, the average being 537. The subsidiaries had been part of the MNCs for between one

and 117 years, with an average of 17 years. The subsidiaries business volumes ranged from under USD 1 million to USD

11,529 million, with an average of USD 162 million.

5.2. Measures

Below, we describe measures of the dependent, independent, and control variables.

5.2.1. Dependent variable: HQ influence on subsidiary competence developmentThis measure captures the extent to which HQ influences the development of the subsidiarys distinctive competence as

perceived by the subsidiary. In the questionnaire, respondents first evaluated, using a seven-point Likert-type scale, the

strength of the subsidiarys competences in a number of activities, i.e., process and product development, production,

marketing and sales, logistics, and purchasing. In a subsequent item, the respondent again used a seven-point Likert-type

scale to evaluate HQ influence on the development of strong competences, defined as those assigned a score of four or above

in the prior item. On the scale, 1 represented no influence at all, and 7 very decisive influence (this measure has also been

used by, e.g., Holm & Pedersen, 2000; Frost et al., 2002). In our analyses, we therefore compare HQ influence on strong

subsidiary competence in the distinguished PD relationships.

Observe that the measure of HQ influence on subsidiary competence development gauged respondent perceptions and

that the respondents in the subsidiaries made this evaluation.It is preferable to measure HQ influence at the subsidiary level,

because respondents in subsidiaries can better judge the magnitude of the influence on their competence development than

can respondents in HQ.

5.2.2. Independent variable: power distance

We employa measure based on the GLOBE study of leadership andnational cultures (House et al., 2004). TheGLOBEstudy

is largely based on Hofstedes (1980) seminal investigation of national cultures, but in contrast to Hofstedes research, the

GLOBE study was designed to measure cultural dimensions and its data were collected much more recently. The

measurement of culture dimensions has been the subject of debate in recent years (see, e.g., the exchange between Hofstede

andGLOBEin the November 2006 issue of the Journal of International Business Studies, JIBS). Although the GLOBE study does

not solve all the problems related to Hofstedes research (see, e.g., the contributions of Smith (2006) and of Earley in the

exchange inJIBS, 2006), it does provide us with the most recent set of cross-cultural data encompassing the largest variety of

cultures available.

An important aspect of the GLOBE study is that it measures both practice (As is scales) and values (Should be scales)

(House et al., 2004). We used the societal-level means of power distance practices (As is), because we are interested in the

actual power distance-related behaviour of the two parties involved: HQs and subsidiaries. GLOBE measured societal

practices in terms of power distance by asking its respondents about the basis of influence, concentration of power, powerprivileges, and interpersonal behaviours relating to power. Items had the following format: In this society, followers are

expected to . . . (1) obey their leader without question . . . (7) question their leaders when in disagreement; respondents

answered using a seven-point Likert-type scale (the example item is reverse scored). We use power distance scores to define

cultural positions and distinguish among the four PD relationships in our analyses, as explained in the results section. We

further calculate absolute culture distance as the absolute difference between the power distance scores of the HQs and

subsidiarys countries.

5.2.3. Control variables

The study included a number of control variables. First, the number of employees in a subsidiary was taken as the

measure of its size (we used the natural logarithm in our models). This measure was included, as it can be assumed that large

subsidiaries control more resources. The assumed influence of HQ on subsidiary competence is unclear in relation to

subsidiary size since, although large subsidiaries can be assumed to control much of their own competence development, HQ

may have played an important role in the expansion of the subsidiary and, thus, in its competence development.Respondents also indicated whether the subsidiary had been established as part of the MNC by acquisition or as a greenfield


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operation. The dummy variable is coded 1 for acquisitions. Furthermore, since the sample included subsidiaries active in

both manufacturing and service industries, we included a dummy variable, coded 1 for services. Next, as subsidiaries

conduct a variety of value-added activities, we controlled for the scope of their value-added activities. It is unclear how the

scope of activities relates to HQ influence. Arguably, the more value chain activities performed by the subsidiary, the less

dependent the subsidiary will be on HQ for support. On the other hand, a large scope of activities may be associated with the

subsidiarys having greater corporate importance and thus with stronger recognition by HQ managers who want to influence

its development (Andersson et al., 2007). Scope of activities was calculated as the number of activities conducted by the

subsidiary in the following seven areas: research, development, production, marketing and sales, logistics, purchasing, andHRM(cf. Benito, Grgaard, & Narula, 2003). We also controlled for subsidiary age, as this may be related to the HQs influence

on its competence development. Recently established subsidiaries arguably need stronger HQ support than do older

subsidiaries that have gradually developed their own resources, knowledge, and market position. Subsidiary age was

measured as the number of years the subsidiary had been part of the MNC (we employed its natural logarithm in our

models).

Since subsidiary competence development is driven not only by the parent company, but also by the subsidiary itself and

its environment (Birkinshaw & Hood, 1998; Foss & Pedersen, 2002; Holm, Holmstrom, & Sharma, 2005; Holm, Malmberg, &

Solvell, 2003), we included control variables for the latter two. When subsidiary competence development has its origins in

horizontal relationships within the MNC, the relative impact of HQ arguably decreases. We therefore controlled for the

impact that MNC units other than HQ may have had on competence development in our sample subsidiaries. The

questionnaire asked respondents about the influence of specific customers, suppliers, or R&D units within the MNC

organisation on the development of their units distinct competences. A seven-point Likert-type scale was used to indicate

the influence of each aspect (the same measure as was used for indicating HQ influence). Factor analysis of these three itemsindicated that they formed a single factor explaining 83.5% of the variance, all three items loading above .9; we used the

resulting regressed factor in our analyses. For the same reason, we also controlled for the influence that the subsidiary itself

had on its competence development (cf. Birkinshaw & Hood, 1998) and measured this using a single item, on a seven-point

Likert-type scale, dealing with the influence of internal circumstances on the development of distinct competences. Finally,

we also measured whether external factors (e.g., the host country factors distinguished by Birkinshaw & Hood, 1998; Holm

et al., 2005) affected competence development in the sample subsidiaries. Respondents assessed, using a seven-point Likert-

type scale, the impact of their product and supplier markets on competence development. We summed the responses to

these two items and included the resulting variable in our analyses to control for the impact of factors external to the MNC.

6. Analysis of the effect of power distance

We divided our observations into four groups, each representing a PD relationship, using the national power distance

scores for the countries in which the subsidiary and its HQ are located (see the Appendix A for the scores of all countriesinvolved). We determined whether our observations scored high or low relative to the median value for the sample

countries for both HQ country and subsidiary country, resulting in four sub-samples, one for each relationship. In 450 of the

1529 observations, both HQ and subsidiary scored high on power distance, i.e., they accepted power differences; these

observations correspond to the PD hierarchy relationship (the upper right box in Fig. 2). The mean value of HQ influence on

subsidiary competence development was 4.442 (on the seven-point Likert-type scale) in this group. The PD conflict

relationship (upper left, Fig. 2) counts 367 observations; in these observations, the HQs national culture has a high, but the

subsidiarys a low power distance, and the mean value of HQ influence is 3.708. The 426 observations in which HQs are from

low-power-distance, but subsidiaries from high-power-distance cultures, correspond to the PD confusion relationship

(lower right, Fig. 2); HQ influence has a mean value of 4.317 for these observations. Finally, 286 observations correspond to a

PD egalitarian relationship in which both HQ and subsidiaries are from low-power-distance cultures (lower left, Fig. 2); the

mean value of HQ influence is 3.801.

6.1. Analysis of covariates

We start our analyses by investigating the effects of the control variables, or covariates in the ANCOVA analyses, on HQ

influence on subsidiary competence development. The first two columns ofTable 1 show the results: column 1 presents the

results of the control variables only, while column 2 includes a measure of absolute differences in power distance (our

measure of cultural distance2). On the whole, both models are significant, with F-values of 10.449 and 10.147, respectively

(p< .001). The results indicate that the scope of activities and the industry do not affect the extentof HQ influence, nor do the

impacts of other units within the MNC, the subsidiary, or external market factors. The control variables subsidiary size,

acquisition, and subsidiary age are significantly related to the dependent variable. The results indicate that size positively

and significantly affects the dependent variable, suggesting that HQ has more influence on competence development in

larger subsidiaries. The effect of acquisition indicates that HQ has a stronger influence on competence development in

2

We have performed the same analyses using a cultural distance measure calculated from the nine dimensions of culture as defined and measured byGLOBE, and obtained similar results for all models, including the tests of our hypotheses.


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greenfield than in acquired subsidiaries. Furthermore, the length of time that the subsidiary has been part of the MNC

matters:the longer a subsidiary hasbeen part of the MNC, themore influence HQ has on itscompetencedevelopment. This

is opposite to our expectations, but can be explained by the fact that many younger subsidiaries in our dataset are

acquisitions (see also Holm & Pedersen, 2000): it takes time before HQ can influence competence development in newly

acquired units. Most interestingly, however, are the absolute power distance results: in line with expectations, we find a

negative and significant relationship between absolute power distance and HQ influence. The larger the cultural distance

with regard to power distancebetween the HQ andthe subsidiary, the lessinfluence HQ hason competence development in

the subsidiary.

We now enter cultural positions into the equation, that is, the power distance relationship factor consisting of the four

categories defined above. Column 3 in Table 1 presents the results of the basic model, i.e., the covariates plus the PDrelationships, while column 4 presents the model including absolute power distance. Observe, first, that by including the PD

relationships, the absolute power distance variable becomes insignificant, suggesting that cultural positions is associated

more significantly with HQ-influence than is absolute cultural distance. In both models 3 and 4, we compare three of the four

PD relationships with the fourth, the PD hierarchy relationship. The results indicate that HQ influence differs between the

four groups and, most notably, that two groups, i.e., PD conflict and PD egalitarian relationships, display significantly lower

HQ influence than does the PD hierarchy relationship.

These results add nuance to the negative effect of cultural distance on HQ influence found in model 2, since both PD

relationships characterized by low cultural distance display a significant difference in terms of HQ influence. Furthermore,

the low cultural distance in the PD hierarchy relationship is associated with significantly more HQ influence than is the high

cultural distance in the PD conflict relationship (in line with the general finding that cultural distance has a negative effect).

However, there seems to be no significant difference between the PD hierarchy relationship and the PD confusion

relationship in this regard, which disagrees with the negative cultural distance effect suggested in model 2. Let us look in

more detail at the pairwise comparisons and present the tests of our hypotheses.

6.2. Hypothesis testing through pairwise comparisons

The results of the ANCOVA analysis and post-hoc tests of pairwise comparisons of the four PD relationships defined above

are presented in Table 2. The results of the basic model, excluding absolute differences in power distance, indicate that the

acceptance of power differences is a significant factor distinguishing the four relationships and HQ influence on subsidiary

competence development with an F-value of 9.631 (p< .001). As shown in Table 2, the results remain stable when including

absolute differences in power distance (with a minor change in the significance level of the difference between two groups:

PD confusion versus PD egalitarian). We further find that HQ influence is significantly higher in the PD hierarchy relationship

than in the PD egalitarian relationship, in line with Hypothesis 1. Thus, when both HQ and subsidiary are embedded in

cultures acceptingof power differences, HQ can exert a stronger influence on the subsidiarys competence development than

when both parties are embedded in cultures less accepting of power differences. The same conclusion holds when the PD

hierarchy relationship is compared with the high-cultural-distance situation in which the HQ has a high power-differenceacceptance and the subsidiary does not (the PD conflict relationship), in line with Hypothesis 2. However, Hypothesis 3 is not

Table 1

Covariate analysis, dependent variable: HQ influence on subsidiary competence development.

1 2 3 4

Size 3.247*** 2.985** 2.160* 2.087*

Acquisition 4.860*** 4.595*** 3.662*** 3.601***

Age of subsidiary 3.912*** 4.040*** 4.515*** 4.533***

Scope of activities .196 .369 .087 .176

Service industry 1.076 1.137 1.701y 1.681y

Influence of other MNC units

1.034

.908

.798

.759Influence of subsidiary .369 .369 .094 .106

Influence of external factors .832 .788 .888 .895

Absolute power distance 2.717** 1.462

PD hierarchy relationship a a

PD confusion .908 .895

PD conflict 4.618*** 4.477***

PD egalitarian 3.979*** 3.212***

R-square (adjusted) .048 .052 .064 .065

F-statistic 10.449*** 10.147*** 10.460*** 9.774***

Cells contain t-values.a Parameter set to zero.y p< .10.* p< .05.**

p< .01.*** p< .001.


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supported, as the PD hierarchy relationship is not associated with stronger HQ influence than is the PD confusion

relationship.

The importance of investigating the roles and cultural positions (and not only cultural distance) of both HQ and

subsidiaries is further confirmed by the tests ofHypotheses 4 and 5. In these, we compare the low cultural distance of the PD

egalitarian relationship with both high-cultural-distance relationships, i.e., PD conflict and PD confusion. Hypothesis 4 is notsupported, since the PD conflict relationship is not associated with a stronger HQ influence than is the PD egalitarian

relationship. Hypothesis 5, however, is supported: HQ influence is higher in the PD confusion relationship than in the PD

egalitarian relationship. Finally, our results indicate that, of our competing hypotheses, Hypotheses 6a and 6b, the first

receives support, which means that HQ influence on subsidiary competence development is stronger in the PD confusion

than in the PD conflict relationship.

Our tests find empirical evidence for our two-by-two conceptualisation of relationships in cross-cultural settings: both

low- and high-cultural-distance situations are dissimilar, and dependent on the cultural positions of both parties to the

relationship. However, our results also indicate an interesting pattern in our empirical context: the support for Hypotheses 1,

2, 5 and 6a suggests that the subsidiarys cultural position relates more strongly to HQ influence than does the HQs own

position.

We repeated our tests as a sensitivity analysis, grouping the observations about the median power distance of all 60

societies included in the GLOBE study (instead of using the sample mean). Due to the large representation of Scandinavian

countries, all of which have power distance scores below the grand mean for the GLOBE study (a value of 5.17), the meanpower distance value of the countries in our sample is lower, affecting the grouping of our observations in the four PD

relationships. When repeating our tests using groups based on GLOBEs grand mean, we obtain results very similar to those

presented above, although with somewhat lower significance levels (though still at a 5% level), for Hypotheses 1, 2 and 6a.

This provides convincing support for our results.

We further analysed whether any cultural biases, i.e., national differences in power distance, affect our results. We first

entered a dummy variable for each of the six nations where the respondent subsidiaries are located. We found that

respondents in Austrian subsidiaries assess HQ influence on subsidiary competence development relatively higher than do

respondents in other countries (significant at a 10% level), and that respondents in Finnish subsidiaries, in contrast, display a

more negative response pattern than do respondents in other countries (significant at a 5% level). Therefore, in a second step,

we ran the model excludingrespondents from Austria and Finland. In this model, we find the same pattern of results as in the

models including all 1529 observations (support for Hypotheses 1, 2, 5 and 6a), with some minor differences in significance

levels for Hypotheses 1 and 6a (to a 1% level, still a strong result).

7. Discussion and conclusion

Cultural differences are a fundamental factor influencing relationships within MNCs, including those between HQs and

subsidiaries (Baliga & Jaeger, 1985). Few studies have explicitly dealt with the mutuality of the cultural context in the HQ

subsidiary relationship. We argue that, although we have learned from prior research that the environments of both HQ and

subsidiary are important for the relationship between them (e.g., Geppert, Matten, et al., 2003; Geppert, Williams, et al.,

2003; Kostova & Roth, 2002; Westney, 1993), we need more research that takes the environment of both parties into

account. Previous studies of the impact of culture on HQsubsidiary relationships, for example, have not dealt properly with

both sides actual position on various cultural dimensions, but have focused on cultural distance instead. This paper has

systematically examined one specific cultural dimension, power distance (PD), and analysed four situations or relationships

based on the cultural positions of HQs and their subsidiaries: one in which there is mutual acceptance of power differences

by HQ and subsidiary (the PD hierarchy relationship), one in which there is agreement on the equal distribution of power(the PD egalitarian relationship), and two in which HQ and subsidiaries have different power distance practices (the PD

Table 2

Results of the ANCOVA test; pairwise comparison of four PD relationships.

Results, basic model Results including cultural distance

(absolute power distance differences)

Hypotheses PD hierarchy> PD egalitarian (H1)*** PD hierarchy> PD egalitarian (H1)***

PD hierarchy> PD conflict (H2)*** PD hierarchy> PD conflict (H2)***

PD hierarchy> PD confusion (H3)n.s. PD hierarchy> PD confusion (H3)n.s.

PD conflict> PD egalitarian (H4)n.s. PD conflict> PD egalitarian (H4)n.s.

PD confusion> PD egalitarian (H5)** PD confusion> PD egalitarian (H5)*

PD confusion> PD conflict (H6a)*** PD confusion> PD conflict (H6a)***

PD conflict> PD confusion (H6b)n.s. PD conflict> PD confusion (H6b)n.s.

F-statistic 9.631*** 7.975***

* p< .05.** p< .01.*** p< .001.


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conflict and PD confusion relationships); we have compared the results of our analyses with results based on cultural

distance measurements.

The results support our general conception that HQ influence on subsidiary competence development is associated

with the cultural characteristics of the national environments of the two organisational units. At least three conclusions

can be drawn. First, we can state that nationally based cultural characteristics of both HQs and subsidiaries matter to the

HQsubsidiary relationship, and not only the cultural distance. This supports Shenkars (2001) and Shenkar et al.s (2008)

call to complement the distance metaphor with one doing greater justice to the actual frictions (or agreements)

occurring in the interaction process. Our finding that mutual power acceptance in the PD hierarchy relationship isassociated with a stronger HQ influence than when the relationship is managed within the context of a mutually low

acceptance of power differences (the PD egalitarian relationship), indicates that the positions on the cultural dimension

of interest of both parties to the relationship are essential, and not just the distance between them (compare the

situations in Fig. 1A). Had we investigated only the effect of cultural distance on HQ influence on subsidiary competence

development, we would not have obtained this result, but would have found that cultural distance had only a negative

effect. It is also noteworthy that we obtained different results for both relationships that can be categorized as culturally

distant: the PD conflict and PD confusion relationships. In these two relationships, the cultural distance is large, but the

positions of the parties to the relationship are exchanged (compare Fig. 1B). In summary, our results strongly indicate

that cultural positions, i.e., the actual cultural characteristics of both parties to a relationship, here HQs and subsidiaries

acceptance or rejection of power differences, matter and can provide insights additional to those based on the analysis of

cultural distance.

Second, the combined support for Hypotheses 1, 2, 5 and 6a suggests that, in our empirical context subsidiary managers

acceptance of the power distribution is vital for the HQ-subsidiary relationship. Thus, we cannot merely say that HQ poweracceptance affects HQ influence on the subsidiary when the corresponding acceptance is absent on the subsidiary side. On

the contrary, the cultural position of the subsidiary seems to relate more strongly to HQ influence than does the HQs own

position. HQ influence is consistently stronger when the subsidiary accepts power differences than when it does not,

independent of whether HQ accepts or rejects power differences, and independent of the cultural distance between the

organisations. In other words, HQ influence on subsidiary competence development depends more on the subsidiarys

acceptance of the power distribution and on its expectations regarding the HQs controlling behaviour, than on power

acceptance at the HQ. We may therefore need to revisit the role of subsidiaries in HQsubsidiary relationships, and examine,

for example, feedback-seeking behaviour in relation to cultural positions instead of cultural distance (as in Gupta et al.,

1999). Our results further suggest that the proposed friction metaphor (Shenkar et al., 2008) does not do full justice to the

impact of culture, because this metaphor suggests that cultural differences between groups negatively affect their

relationships. However, our study demonstrates not only that we should distinguish among relationships characterized by

differences (or friction) and by agreements, but also that friction (or agreement) relationships differ depending on the

cultural positions of the groups involved. We would not have achieved these insights had we investigated only the effect ofcultural distance.

Third, HQ influence on subsidiary competence development can be considered a form of control. This refers to the extent

to which HQ managers intervene in the operations of the subsidiary, irrespective of formal decisions (Forsgren et al., 2005, p.

133). Much literature in the field of HQ control has dealt with problems associated with implementing efficient and effective

control and has discussed various control mechanisms (Cray, 1984; Ferner, 2000; Martinez & Jarillo, 1989; Nohria & Ghoshal,

1994). Research adopting the subsidiarys point of view has dealt mainly with the subsidiarys ability to evade control and

gain autonomy, or even with how it can influence corporate decisions (Andersson et al., 2007; Doz & Prahalad, 1981; Ferner,

2000). However, our findings point in another direction, suggesting that the subsidiary may require or expect HQ to exercise

control over its operations, an idea that seems to go beyond feedback-seeking as defined in Gupta et al. (1999): we find that

HQ influence is strengthened by subsidiaries acceptance of power differences. Under what conditions this situation emerges

is, to the best of our knowledge, scarcely investigated in the literature. Our results reveal that one factor, i.e., the culturally

induced acceptance of the right to exercise power, is one aspect of such a situation. Our findings are consistent with the

eagerness of subsidiaries to attract HQ attention (Birkinshaw et al., 2007), not necessarily to influence HQ decisions, butinstead to motivate HQs to increase their involvement in their subsidiarys activities. We suggest that this should be further

explored and related to other control mechanisms in the HQsubsidiary relationship.

This paper adopted a relational view of the effect of cultural differences, claiming that not only the cultural distance, but

also the actual cultural characteristics of the two parties to a relationship and the differences between them (i.e., their

cultural positions), affect their relationship. Of course, our framework distinguished four ideal-type relationships, and we

split our sample on the median to identify these relationships in our sample, which means that, in practice, relationships will

display more variety than we were able to test for in our empirical study. We also based our arguments and tests on just one

cultural dimension for clarity and simplicity; however, cultures comprise many values and behaviours, increasing the

complexity of our conceptualisation and the challenges of dealing with relationships in inter-cultural contexts. In the future,

researchers may wish to include more cultural dimensions that are relevant to HQsubsidiary relationships in studies of

cultural positions. The cultural positions concept should be further validated and tested in multidimensional settings and

using scales more complex than dichotomous ones. Such validation studies should also test the cultural positions concept

and its implications in broader empirical settings than that of HQ influence on subsidiary competence development. Inparticular, researchers could collect data about HQsubsidiary relationships based on a broader set of factors than only HQ


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influence or control, to test the validity of the conceptual labels attached to the PD relationships and to identify other ways of

characterising HQsubsidiary relationships.

Researchers might also wish to include subsidiaries and HQs in a wider range of host countries to increase the variety of

cultural dimensions. Such studies should consider what countries to include to achieve as much variation as possible. In the

current study, we were unable to control for how long HQs had been located in their home countries or for organisational

culture, or to measure power acceptance at the level of the units involved.Studies including these and other control variables

would make valuable contributions to the field and could foster a more complete understanding of the impact of cultural

positions on HQsubsidiary relationships.

Appendix A

Power distance scores of the countries in which the HQs of sample subsidiaries are located (scores taken from House et al.,

2004, pp. 742744).

Country Power distance Country Power distance

Australia 4.81 Netherlands 4.32

Austria 5.00 Portugal 5.50

Canada 4.85 Russian Federation 5.61

China 5.02 Singapore 4.92Denmark 4.14 Slovenia 5.32

Finland 5.08 Spain 5.53

France 5.68 South Africa 5.10

Germany 5.48 Sweden 4.94

Hungary 5.57 Switzerland 5.05

Ireland 5.13 Thailand 5.62

Israel 4.71 Turkey 5.43

Italy 5.45 UK 5.26

Japan 5.23 USA 4.92

Malaysia 5.09

Median HQ 5.05

Median subsidiary 5.00

Bold text and scores indicate the six countries in which subsidiaries are located.

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