Japanese Multinational Enterprises In Spain. The Performance

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Japanese Multinational Enterprises in Spain

Determinants of their Performance

Jose Alejandro Patino Astudillo

When your opponent Shows yang in his Right hand, Guide him with The yin of your left hand Morihei Ueshiba

JAPANESE MULTINATIONAL ENTERPRISES IN SPAIN: DETERMINANTS OF THEIR PERFORMANCE ABSTRACT The investments of Japanese Multinational Enterprises (MNE) in Spain have been increasing since the 1980s as a response to the integration of EC markets. At present, approximately 200 Japanese companies are investing in Spain. Another motivation could be that Spain is the least expensive of the EU countries studied by the EIU (Economist Intelligent Unit) for doing business. In particular, Spain has comparatively low cost labor and transport, and the introduction of the single European market has eliminated exchange rate fluctuations and reduced overall transaction costs. It should be noted, however that Spain's comparative cost advantage may be diminished with the accession to the European Union of new members, particularly the lower-cost eastern European countries. However, the structural reforms implemented over the last decade should mean that Spain continues to offer a competitive, yet more secure, stable and reliable environment in which to conduct business. The Kingdom of Spain is the eighth largest economy of the world, over an area that occupies more than 500,000 square kilometers in the southwest of Europe, and being the second largest country in the European Union it gives access within the EU to over 1,200 million potential clients in the EMEA Region (Europe, Middle East and Africa).

30 years ago, in 1978 Spain moved forward from the Autocratic

Government of Gen. Franco who looked to unify the country by narrowing cultural diversity and repressing regional autonomy. The historical background of Spain is relevant for the business studies because of the many implications it has had in the

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society, it’s diversity and the level of autonomy that each region of Spain has from the center. This level of differentiation varies from region to region affecting from taxation to cultural matters. Spain poses challenges for Japanese MNEs. Using evidence to support or negate arguments from theories such as Agency theory and transaction cost theory, the present research explores the reality of those Japanese Multinational Firms doing business in Spain towards performance in the context of three defined dimensions: Managerial, Information Technologies and Financial. The Managerial dimension considers aspects such as the presence of home country expatriate managers in directorship positions as well as in the operative management of the firm, also considers strategic choices like the ownership style from the center or from regional network of subsidiaries and the importance of experience as determinant of firm performance. Information technologies imply the impact that availability of technology such as Internet and software tools at a subsidiary level has on the way companies are controlled. Finally, Financial dimension comprehends the equity level chosen by Japanese firms in Spain, the entry mode and the degree of international sales of the Parent firm out of the sales in the Total market. As final remarks, the relevance of strategy in the form of creating a solid organizational culture as a tool to ease coordination, improve control and to reduce transaction costs is discussed and the challenge of creating more transnational business practices, such as international human resource management is highlighted.

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ACKNOWLEDGEMENTS Researching and engaging in search of light is a challenging task. I would like to thank the Government of Japan for granting me the opportunity to conduct my studies in this wonderful country, further thanks to my professors-advisors Tatsuo Kinbara, Maasaki Komatsu and Shinji Kaneko for their tolerance, sharing their experience and extraordinary advice. It is a blessing to have in life so many people to thank for; people who participated in my formation as a professional: Mi Yaya, who was in the right moment at the right place, my mother Rosmary Astudillo, for everything, my father Jose Patino, who asked me not to come to Japan, my Japanese sensei at Venezuela Miyuki san, professor Eduardo Azuaje, H.E. Ambassador Seiko Ishikawa for his unconditional support and love for Venezuela, Christina Esperon for being my love and companion in any adventure I want to take, my family, friends and colleagues everywhere in the globe, specially those in the Management Information Systems Seminar, here at Hiroshima University. All of them have given me support to fit pieces on what I have become today. Still, any shortcomings and errors in the present manuscript are my entire responsibility.

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Table of Contents CHAPTER 1: INTRODUCTION 1.0 Preliminary information........................................................................................1 1.1 Relevance of the research......................................................................................3 1.2 Research Questions...............................................................................................4 1.3 Research Objectives..............................................................................................4 1.4 Justification...........................................................................................................5 CHAPTER 2: BACKGROUND INFORMATION 2.0 Spain Overview....................................................................................................6 2.1 Historical Background: diversity within Spain....................................................9 2.2 Foreign Firms doing business in Spain..............................................................13 2.3 The Japanese Firms in Spain: challenges and opportunities..............................16 2.4 Spanish Culture and differences with Japanese culture.....................................19 CHAPTER 3: LITERATURE REVIEW AND HYPOTHESES STATEMENT 3.0 Literature review................................................................................................22 3.1 Japanese Multinational Enterprises....................................................................22 3.1.2 Parent – Subsidiary relationships and firm influence......................................24 3.2 Agency Theory...................................................................................................25 3.3 Transaction Cost Theory....................................................................................27 3.4 Theory critics......................................................................................................27 3.5 Firm performance...............................................................................................22 3.6 Managerial Dimension of firm performance......................................................29 3.6.1 Expatriate managers........................................................................................30 3.6.2 Board of Directors composition......................................................................33 3.6.3 Ownership structure........................................................................................35 3.6.4 Size (Control Variable)...................................................................................39 3.7 Information Technologies dimension of business performance………………40 3.7.1 Availability of IT resources............................................................................40 3.7.2 Parent firm experience (control variable).......................................................41 3.8 Financial dimension of business performance...................................................41 3.8.1 Equity entry modes and Greenfield investments............................................42 3.8.2 Sales at foreign markets as measurement of internationalization...................43 3.9 Performance.......................................................................................................44 CHAPTER 4: METHODOLOGY 4.0 Research framework and methodology.............................................................46 4.1 Sample of the study: Japanese MNEs in Spain (I should list)...........................46 4.2 Measures (Variables).........................................................................................48 4.3 Analytical Framework.......................................................................................51 4.4 Data analysis......................................................................................................53 CHAPTER 5: RESULTS AND DISCUSSION 5.0 Results and findings..........................................................................................55 5.1 Multiple linear Regression procedures..............................................................56 5.2 Multiple linear Regression results.....................................................................57 5.3 Statistical results analysis..................................................................................58 5.4 Results hypothesis 1: Expatriate Managers.......................................................59 v

5.5 Results hypothesis 2: Subsidiary board composition.........................................60 5.6 Results hypothesis 3: Ownership style...............................................................61 5.7 Results hypothesis 4: IT availability..................................................................63 5.8 Results hypothesis 5: Subsidiary total equity....................................................64 5.9 Results hypothesis 6: Foreign sales of The Parent............................................64 CHAPTER 6: CONCLUDING REMARKS 6.0 Conclusion........................................................................................................,66 6.1 Recommendations for practitioners...................................................................69 6.2 Limitations and further research........................................................................69 REFERENCES…………………………………………………………………….71 ANNEXES

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Chapter 1 Introduction Achieving power and influence over an increasingly international network of operations is a challenge that multinational managers try to cope with. In most cases the strategy makes the difference between success and failure, beyond the availability of resources, the timing and the combination of the human outcomes may help determine the shape of successful strategies. Looking for efficiency in cost and distribution is a reason that justifies this geographical dispersion of most successful firms today; these firms have more dispersed customers around the globe and have readily available information about localization cost savings and advantageous access to resources in distant world regions. Still, the distance creates opportunities but increases the uncertainty over the outcome. Efficiency means in this context the closeness to the customers or the access to valuable resources (natural and human). Managers invest time and effort in designing organizational formulas that allow them to transfer advantages, effectively control and foresee the interests of the shareholders in the world markets. There are two commonly referred approaches to foreign markets, or entry modes: (1) equity entry mode and (2) non-equity entry mode. The non-equity entry involves licensing, exporting, franchising, while the equity style to enter foreign locations considers alternatives such as acquiring an existing firm, alliances and/or doing a Greenfield start up abroad (starting-up a new firm). The equity entry modes are the general topic of this research thesis and involve issues such as the transfer of advantages from a distant location to another; these advantages are also termed as invisible assets by some authors like Itami (1987) who did an extensive

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contribution to the studies of management of invisible assets. A for-profit firm will choose an equity entry mode when the need to control and monitor the foreign market is high. An added up reason is if it’s economically justified by the potential outcome (a talented pool of labor, relatively free access to natural resources) or if the firm needs to protect specific knowledge assets such as patents, manufacturing techniques and other intangibles from unauthorized appropriation. In the establishment of equity entry modes new relationships arise such as the one between the original firm, known as the Parent firm and the newly created or acquired firm at the destination country, known as Subsidiary firm. The Strategic Management academics have developed in recent years a robust body of literature concerning Parent-Subsidiary relationships, Internationalization Strategies and Corporate Governance. Japanese firms have gained an important place in the works of those academic writers. Japanese Multinational Enterprises (MNEs) pursue a strategy with a common characteristic to MNEs from other countries, which is the need to coordinate dispersed resources with the appropriate decision-making, while trying to keep efficiency. Japanese firms have been catalogued by management academics as Global firms and as evolutionary firms. The exhibit 1-1 (below) highlights some of the differences between types of MNEs. Exhibit 1-1: Comparison of different types of MNE Multinational Decentralized

Global Centralized

Local strategy

Parent strategies

Retain knowledge by unit

Knowledge retained at the center Source: Bartlett and Ghoshal, 2000

International Core competencies centralized. Others, decentralized Adapt parent competencies Knowledge transferred from the center to overseas

Transnational Dispersed, independent and specialized Different views integrated to worldwide scale Knowledge jointly developed and scaled worldwide

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As explained above, a widely accepted separation by types of Multinational Enterprises is: Transnational, International, Global and Multinational. Although those terms sound similar, like synonyms, one can spot the differences on the management style and knowledge transfer style. However, it may also be valid to term Multinational Enterprises according to the degree of dispersion of their strategies, as follows: Regiocentric, Ethnocentric, Polycentric, and Hybrids which may be equivalent to Multinational, Global, International and Transnational respectively. During the following chapters MNEs will be termed interchangeably but always trying to keep in the line with the preceding definitions. 1.1 Relevance of the research This research finds support in Agency Theory as a method to explain the relationship between Parent firms and Subsidiaries established in a geographically distant and culturally different country and in order to do so, explains evidence from the case of Japanese Multinational enterprises in Spain. The study of Japanese MNEs in Spain aims to provide new light or evidence to support or falsate the arguments that Agency theory and transaction cost theory postulate. It also intends to remark the role of Information technologies as potential mechanisms of control and influence. Control entails the engagement of more resources in overlooking one’s interests and in that regard the firms must face choices of keeping controls loose or tight. The coming pages aim to focus on the role of management and human behavior as controls over an agent. 1.2 Research Questions

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This research presents an extensive literature review on topics about management, corporate finance and strategy, but narrowing down toward the objectives, the following questions will be addressed: In a geographically distant and culturally different market: 1. What factors contribute the most to the desirable performance of a subsidiary firm? 2. What is the pattern regarding high performing parent-subsidiary relationships in Japanese Multinational Enterprises in Spain? 3. What is the blend of talent, experience and financial resources toward high overseas performance? 1.3 Research Objectives The following chapters will give an outline of the literature review, then an empirical analysis of the situation of Japanese MNE will foresee the objectives statement described below:

I. To identify, based on empirical evidence and literature review the best strategies to establish high performing international subsidiaries.

II. To identify the outstanding traits of the behavioral layouts that end up in a high performing subsidiary

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1.4 Justification The cross-cultural differences between Japan and Spain have not constraint at all the development of relationships in the diplomatic and economic areas. Today, there are deep bounds that link both nations. According to the Ministry of Foreign relations of Japan, MOFA, Japan's trade surplus with Spain reaches $1883 million in 1999 based on exports of $3.291 billion and imports of $1.408 billion. Regarding investment, Japan has greatly increased its amount of direct investment in Spain since the 1980s because of the necessity of responding to the integration of EC markets. At present, approximately 200 Japanese companies are investing in Spain. As a consequence of the many differences, still deep bounds, it was considered by the author that the case of Spain would bring new evidence about the management strategies that are determinants of performance in a geographically distant and culturally different host country.

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Chapter 2 Background Information Spain overview The Kingdom of Spain is the eighth largest economy of the world, over an area that occupies more than 500,000 square kilometers in the southwest of Europe, and being the second largest country in the European Union it gives access within the EU to over 1,200 million potential clients in the EMEA Region (Europe, Middle East and Africa). The territory of Spain covers most of the Iberian Peninsula, which it shares with Portugal, and also includes the Balearic Islands in the Mediterranean, the Canary Islands in the Atlantic Ocean, the North African cities of Ceuta and Melilla and some surrounding rocky islands. The geo-strategic position is often quoted in business forums and investment reports of the Spanish government as one of the principal advantages of this country. Beside these elements, Spain has a democratic system with liberalized economy and membership to the European Union as well as major International Organizations. The population of Spain at the end of 2006 is 44.7 Million people and has a density of 89 inhabitants per square kilometer, with the highlight of a 33% of total population living in the capital cities of the main provinces; hence it is not surprising that services sector account for 66% of the Spanish economy. The distribution of population over the most important cities can be seen in exhibit 2-1 (below).

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Exhibit 2-1, Main cities of Spain Madrid

3,128,600

Barcelona

1,605,602

Valencia

805,304

Sevilla

704,414

Zaragoza

649,181

Málagas

560,631

Murcia

416,996

Las Palmas de Gran Canaria

377,056

Mallorca

375,048

Bilbao

354,145

* Figures refer only to the municipal district of each city. Source: Report about population in Spanish cities at January 1, 2006. Instituto Nacional de Estadística (National Statistics Institute). www.ine.es.

Source: World Fact book

Spain has a labor force of 20 million people, which represents 58% of the country’s population over 16 years old according to the Labor Force Survey conducted by the Spanish Government (released on the third quarter 2006). In comparison with other OECD countries, Spain’s population is relatively young: approximately 15% is under 16 years old, 68% is between 16 and 64 years old, and only 17% is 65 and over. Additionally, as it can be seen in the exhibit 2-2, presented below, Spain has been receiving a significant inflow of immigrants in recent years. The increasing number of foreign residents has offset the effect of an aging population. Furthermore exhibit 2-3 present the distribution of the workforce

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per economic sector. Additional details about the working force, including cultural aspects of doing business in Spain will be addressed in a fore coming section of this chapter. Exhibit 2-2: Foreign Residents in Spain by continent of Origin 2004 2005 2006 Europe 667,775 906,461 1,028,678 America 666,086 1,003,230 1,083,025 Asia 142,762 177,423 197,965 Africa 498,507 649,251 709,174 Oceania 1,112 1,466 1,819 Unknown 1,049 1,101 1,147 TOTAL 1,977,291 2,738,932 3,021,808 Source: Ministerio de Trabajo y Asuntos Sociales (Ministry of Labor and Social Affairs). www.mtas.es. Data at December 31, 2006.

Exhibit 2-3: Evolution of Labor Force Structure by Economic Sector (Percentage)

Agriculture Industry Construction Services

2004

2005

2006

5.2 18.0 12.0 64.8

5.2 17.2 12.5 65.1

4.6 16.6 13.1 65.7

Source: Instituto Nacional de Estadística (National Statistic Institute of Spain). Labor Force Survey, fourth quarter of 2006.

As it can be seen in exhibit 2-2, more than 15% of the total labor force in Spain is constituted by immigrant workers, out of this figure the majority coming from American continent and other European countries. This reveals an interesting point about the diversity of Human Resources in Spain, although this topic will be discussed later. 2.1 Historical Background, the diversity within Spain The preceding paragraphs tell about the present situation of Spain as a wealthy and progressive nation with an outstanding position within the European Union. However, 30

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years ago, in 1978 Spain moved forward from the Autocratic Government of Gen. Franco who looked to unify the country by narrowing cultural diversity and repressing regional autonomy. The historical background of Spain is relevant for the business studies because of the many implications it has had in the society, it’s diversity and the level of autonomy1 that each region of Spain has from the center. This level of differentiation varies from region to region affecting from taxation to cultural matters; particularly important regions for this analysis are the Basque country (Euskera) and Catalonia. The tension between centralization and various forms of federalism has been a constant problem faced by Spanish rulers of all times, and contemporary nationalism in regions of Spain is merely the latest phase of a deep-rooted tradition of cultural separatism1 (Guibernau1, 1998). This sense of separatism within Spain lead to a constitutional reform in 1978 calling for a national reconciliation through a new political framework that included the system of Autonomous Communities.

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Since 1479 the joint rule of Ferdinand and Isabella (Los Reyes Catolicos) put Castile and Aragon under the same Crown, where Catalonia was it’s main encounter place, it’s capital. However, the existence of parliamentary equality between Castile and Aragon was not true in practice, since Castile did not exercise legislative powers while Aragon (Catalonia) were participants and had a long tradition of political liberty did. This joint crown did not survived Ferdinand death and was replaced by the rule Philip IV who, looking for more Castilian influence appointed Olivares as prime Minister who created a powerful absolutist state, abandoned commitment in recognizing internal diversity within the Spanish State. Tensions between castile and Catalonia ended with the revolt of the Reapers in 1640 making the Catalans keep their identity until 1714 when Franco attacked and refrain any identity of Catalonia, even banning the local dialect Catalan and any Catalonian cultural manifestation. Regarding The Basque Country, situation is similar. The Basques are the only surviving pre-aryan race in Europe, being distinct in dialect and culture from other regions of Spain. During the years of Franco, Basque culture was oppressed and forbidden and reduced to secrecy, and this created within Basque circles a sense of hostility against Spain and gave origin to an exclusive culture, of which the main representation is the hostile group ETA. Regions, Catalonia and Basque country are well industrialized as a consequence of the strong leaderships influencing their societies.

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Exhibit 2-4: Autonomous Communities in Spain

Source: Tony Rotondas

The autonomous communities have wide legislative and executive autonomy, with their own parliaments and regional governments. The distribution of powers may be different for every community, as laid out in their Constitutional Statutes of Autonomy. There used to be a clear de facto distinction between so-called "historic" communities (Basque Country, Catalonia, Galicia, Andalusia) and the rest. The "historic" ones initially received more functions, including the ability of the regional presidents to choose the timing of the regional elections (as long as they happen no more than four years apart). As

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another example, the Basque Country, Navarre and Catalonia have full-range police forces of their own: Ertzaintza in the Basque Country, Foral Police in Navarre and Mossos d'Esquadra in Catalonia. For centuries, the issues about autonomy and diversity repression in different regions of Spain, particularly in Basque and Catalonia favored the development of strong polarization and leaderships in these regions, strengthening their culture and regionalism, sometimes to the extreme, in the form of separatist ideas. An example is when Basque nationalists favored the highest abstention in the 1978 Spanish Constitution referendum and although the post-Franco Spanish Constitution of 1978 acknowledges "historical rights" and attempts reconciliation towards an old conflict between centralism and federalism by the establishment of autonomous communities Basques think it fails to recognize Spain as a Multidiverse and Multicultural country, therefore many Basques believe that they are not bound to a constitution that they never endorsed (Based on Guibernau, 1998). Despite the conflicts, The Basque Autonomous Community is one of the wealthiest regions in Spain, with gross domestic product (GDP) per capita being 20.6% higher than that of the European Union average in 2004, at $30,680 USD. According to Guibernau, it can be argued that Catalonia and The Basque country were equally discriminated by the autocratic regime, however Catalonia’s resistance was much less violent than the one of The Basque country; due to the fact that Catalonia had a long tradition of participation in Spanish politics and this makes Catalonia manifest a more civic character than Basques, whose culture is defined by Guibernau as a more exclusive culture because of some allusions to the uniqueness of the Basque race and blood 2.

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The differences between Catalan and Basque nationalism can be explained by the social and cultural structures of both societies, the local dialects of both regions were suppressed and discriminated during the dictatorship, and this created a sense of defense to own culture and rejection to be part of Spain and to Castilian language, which is most known as Spanish language. Still in the present time, Catalan is a preferred dialect in Catalonia. Exhibit 2-5 shows the perceptions of Catalonia naturals, regarding the language they most identify with. Exhibit 2-5: Catalans identify themselves (2003) Maternal language Own language Catalan 40.4 % 48.8 % Spanish (Castilian) 53.5 % 44.3 % Both 2.8 % 5.2 % Aranese 0.1 % 0.0 % Other languages 3.2 % 1.7 %

Usual language 50.1 % 44.1 % 4.7 % 0.0 % 1.1 %

Source: Estadística d’usos lingüístics a Catalunya 2003

Additionally, it could be added that Catalonia and The Basque country developed zones of Heavy industry in the XX century, and a demographic explosion occurred in the 1960s, which, together with migrations from other regions of Spain led to growth and Urbanization. Today, Catalonia has the highest number of foreign companies in Spain and the most consolidated: Nearly 34% of foreign companies have their headquarters or main activity in

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Sabino Arana, a Spanish writer and politician, promoted the idea of Euskadi (The Basque country) as a country occupied by a foreign power. The Francoist regime, with its obsession to root out all symbols of Basque culture, merely gave plausibility to Arana’s theory of Alien occupation.

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Catalonia. Catalonia accounts for more than half of the total of Japanese, French, German, North American, Italian and Dutch companies, amongst others, in Spain. 80% of these companies have been there for more than 10 years. The Area of Barcelona brings together 90% of all foreign companies in Catalonia. 2.2 Foreign firms doing business in Spain According to the 2006 UNCTAD Report, Spanish outflows in 2005 reached $38,772 million, making the country one of the largest EU investors, this rapid growth in imports and exports has made Spain one of the most internationally-oriented countries in the world. During 2006, Spain’s main trading partners were the countries of the UE-25. Exports to the European Union amount to 70.3% of total exports represent an increase of 8% from the previous year while sales to the Euro Zone accounted for 56.2% of the total - a 7,8% increase from 2005. Imports to Spain from these countries also rose in 2006: 7.8% from the UE and 7.5% from the Euro Zone. More specifically France and Germany are Spain’s main trading partners, followed by Latin America and then North America. Trading relationships beyond the EU have been very dynamic, with a rise of 17.5% in exports and 19% in imports. Foreign Direct Investment is also dynamic in the Spanish context; lately Spain has been one of the main recipients of foreign direct investment. In 2005, Spain ranked ninth in FDI income and third in the EU in terms of foreign company subsidiaries. The positive trend of productive FDI inflows (13,738 million Euros, gross inward investment; and 7,472 million Euros, net inward investment) is especially notable. About the conditions that stimulate the development of foreign firms within the Spanish Market one may refer to the Royal Decree 664/1999 that deregulated practically all the beyond borders related

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transactions, eliminating the requirement for “prior verification” and adapting Spanish domestic law to the rules on the freedom of movement of capital contained in Articles 56 et seq. of the Treaty of the European Union. Exhibit 2-6 highlights applicable rules to foreign investment in Spain. Exhibit 2-6: Overview of rules on Foreign Investment in Spain ! Foreign investments are, as a general rule, subject only to notification after the investment has been made. The only exceptions are: (i) investments from tax havens, which in general must be notified beforehand, and (ii) foreign investments in activities directly related to national security, and real estate investments for diplomatic missions by States that are not members of the European Union and require “prior verification” from the Spanish Council of Ministers. ! There is no obligation for foreign investments to be formalized in the presence of a Spanish notary public (unless specific legislation provides otherwise). ! Investments in the air transportation and radio industries, in industries relating to minerals and raw mineral materials of strategic interest and mining rights, in the television, gaming, telecommunications and private security industries, in industries concerned with the manufacturing, marketing or distributing of arms and explosives for civilian use, and in national security-related activities (these latter activities are subject to the clearance rules contained in the Royal Decree), will be subject to the requirements imposed by the relevant body established by industry-specific legislation. Who can be an investor in Spain: ! non-resident individuals (that is, Spanish nationals or foreigners domiciled abroad, or who have their principal place of residence there); ! legal entities whose registered offices are located abroad; and ! public agencies of foreign States. A Spanish company in which foreign shareholders have a majority holding is not deemed to be an investor. A change of registered office of legal entities or a change of residence of individuals is enough to change the classification of an investment as a Spanish investment abroad or a foreign investment in Spain Regulated investments: ! Participation in Spanish companies, including their incorporation and subscription and acquisition of shares in corporations or the subscription of shares in limited liability companies, and any legal transaction under which voting and other non financial rights are acquired. ! Establishment of, and increase of capital allocated to branches. ! The subscription and acquisition of marketable debt securities issued by residents (debentures, bonds, promissory notes). ! Participation in mutual funds recorded in the Registers of the Spanish National Securities Market Commission. ! The acquisition by non-residents of real estate located in Spain valued at more than !3,005,060, or where the investment originates from a tax haven, whatever its amount. ! The formation, formalization or participation in joint ventures, foundations, economic interest groupings, cooperatives and jointproperty entities, with the same characteristics as in the previous paragraph regarding the value of the investment. ! Foreign investments not included in the above list (such as participating loans) are totally deregulated, and no notice is required. Source: Business in Spain 2007, Interest Guide (Garrigues Abogados y Asesores Tributarios)

As explained in exhibit 2-6, business climate in Spain is reasonably deregulated. Additionally there are important differences between Branches and subsidiaries from a Spanish legal point of view that are crucial information for foreign firms doing business there. A subsidiary is a separate legal entity (limited partnership) whereas a branch is not a legal

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entity and has the same legal identity as its parent company. Limited partnerships, S.A and S.L, have a minimum share capital of !60,102 and !3,006 respectively while branches don’t have a legal minimum. From a tax standpoint, both the branch and the subsidiary are liable for Spanish corporate income tax at 32,5% of the net income, although the remittance of profits for distribution of a subsidiary dividend to a non-EU parent company resident in a non-treaty country are taxable in Spain at a rate of 18%. Furthermore, if the parent company is resident in a non- EU country with which Spain does have a tax treaty, the dividends would be taxable at the reduced treaty rate and the remittance of branch profits would, under most of the treaties, exempt from tax in Spain. Tax treaties exist for the purposes of avoiding double taxation of income internationally and preventing tax evasion, exhibit 2-7 presents tax treaties that Spain has signed with some other countries. Exhibit 2-7: Tax Treaties Spain has with Major trading partners and with Japan Country

Ownership Tax

Dividend tax

Interest tax

Royalties

France

10

0 or 15

0 or 10

0 or 5

Germany

25

0 or 5 or 15

0 or 10

10

Japan

25

10 or 15*

10

10

Source: Deloitte International Tax Source/ dits.deloitte.com * The 10% rate applies where the recipient is a company that holds directly at least 25% of the voting shares of the company paying the dividends for the six-month period immediately before the end of the accounting period for which the distribution takes place; otherwise, the rate is 15%.

As expressed in previous paragraphs, the system of autonomous communities gives autonomy to regions of Spain not only in culture and language but also in taxation, for example, The Canary Archipelago enjoys a number of tax benefits intended to compensate for the disadvantages brought about by insularity and distance from the Spanish mainland whose main goal is the attraction of investments to the Canary Islands. Another example is

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The Economic Accord with the Autonomous Community Government of the Basque Country that recognizes the power of the institutions of the provinces of the Basque Country to regulate taxes. In general, they have full or shared authority in the area of direct taxation, but far more limited authority in the indirect taxation area. The institutions of the provinces of the Basque Country also have the power to levy, manage, assess, inspect, review and collect taxes, except with respect to import duties and excise taxes on imports. Furthermore, each region provides specific incentives to foreign firms willing to start business there. 2.3 The Japanese firms in Spain, challenges and opportunities Previously it was emphasized the diverse character of Spain and some of the implications for doing business there. This section intends to explore some of the motivations that Japanese firms, object of study in the present research, find in investing in Spain. According to the Japanese Ministry of Foreign Affairs, MOFA, the Japanese investment in Spain have been increasing since the 1980s as a response to the integration of EC markets. At present, approximately 200 Japanese companies are investing in Spain. Another motivation could be that Spain is the least expensive of the EU countries studied by EIU (Economist Intelligent Unit) for doing business. In particular, Spain has comparatively low cost labor and transport, and the introduction of the single European market has eliminated exchange rate fluctuations and reduced overall transaction costs. It should be noted, however that Spain's comparative cost advantage may be diminished with the accession to the European Union of new members, particularly the lower-cost eastern European countries. However, the structural reforms implemented over the last decade should mean that Spain continues to offer a competitive, yet more secure, stable and

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reliable environment in which to conduct business. Moreover, Yamada and Yamada (1990) conducted a study giving support to the idea that the short-term cyclical Japanese manufacturing foreign direct investment in the European Community in the late 1980s and early 1990s was driven by the Japanese bubble economy situation, when tax-related incentive policies in host countries, for example, an investment tax allowance for foreign direct investment were quite important in attracting Japanese firms. Other researchers, from Spain, studied the determinants of Japanese manufacturing investment, Sole (2000) during the period 1989-1995 found 66% of all Japanese FDI in Spain to be located in the manufacturing sector, also with a peculiar composition of high concentration in three industries: chemicals, representing 25%; electric, electronics and optical, which represents 23%, and transport with 21%. Sole’s research also provided insight into the main way of Japanese companies entering in the Spanish market, which is through share acquisition, in the 70% of the cases. At the beginning the capital participation was in minority, but progressively the Japanese companies increased its participation, first to the 50 per cent Japanese capital, after majority, and finally total Japanese capital ownership, which actually represents the 65 per cent of capital participation cases studied by Sole (2000). Further details about the performance of Japanese investments were not covered by Sole and other authors, and since will be covered in coming sections of this thesis, nevertheless; it may be important to highlight as a challenge for Japanese firms in Spain the existence of openly recognized problems about employment in Spain. Exhibit 2-8 presents an extract from the website of MOFA Japan where it states some issues related to labor that

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Japanese government ask Spanish government to deregulate and make more flexible in order to ease human resources management of subsidiaries in Spain. Exhibit 2-8: Problems related to employment in Spain 1- Regulations related to overtime work and time off are excessively severe. (Article 35, Item 2 of the Labor Charter) Working time in excess of legally prescribed working hours is limited to 80 hours per year. However, this has to be reserved for production slowdowns due to equipment breakdown and cannot be used to increase production in response to sudden increases in demand, causing companies to miss sales opportunities. Japan requests that more flexible regulations be enacted for increasing the limits on overtime as described above. 2- A workers' wage level cannot be lowered even when the worker is demoted (Article 39, Item 3). Once a given wage level has been attained, it cannot be reduced even if the worker's skills have declined. Japan requests that this regulation be eliminated to allow adjustments of wages corresponding to position and skills. 3- Regulations related to transfers of workers in groups are excessively strict (Article 40). In cases in which companies transfer over 10% of all employees to different regions to work for more than one year there, they are required to get prior approval from the labor union by a majority of the members (unions have the right of refusal) and to inform the government. Due to these requirements, when there are great differences in workloads of different factories, it is impossible to temporarily transfer employees to other locations in order to equalize workloads per person. Although consultations with labor unions are necessary, Japan requests that the situation be rectified to permit the business managers to make the final decisions on this matter. 4- Compensation for dismissal is excessively high (Article 56, Item 1). The amount of compensation that must be paid to former employees is set at the rate of 45 days multiplied by the number of years of service (for a maximum of 42 months). Under new regulations, the compensation to newly hired employees is set at the rate of 33 days multiplied by the number of years of service. Japan requests that this new regulation be applied to all employees. Source: MOFA website, http://www.mofa.go.jp/region/europe/eu/overview/regulation.html

2.4 Deep into Spanish culture and differences with Japanese culture Psychologists and sociologists have studied the impact of cultural differences over International understanding. A well-recognized research is the one of Hofstede's Dimensions of culture: (1) Power Distance (PD): The degree of inequality among people. In organizations, Power Distance is related to the degree of centralization of authority and autocratic leadership. The higher the PD scores the more inequality between the superior and a subordinate. (2) Individualism vs. Collectivism (IDV): The relation between an individual and his or her fellow individuals. In collectivist societies, group interests

24

supersede those of individuals. The higher the IDV score the more a culture emphasizes the right and obligations of the individual over the group. (3) Uncertainty Avoidance (UAI): Uncertainty avoidance involves the acceptance or tolerance of uncertainty. High uncertainty avoidance societies socialize their members not to accept uncertainty. The higher the UAI score the less the citizen of a culture is comfortable with ambiguity. (4) Masculinity vs. Femininity (MAS): In masculine societies, masculine social values such as the importance of showing off; achieving something visible, or making money predominate, while feminine societies would be more oriented to quality of life and personal relationships. The higher the MAS score the more "masculine" a culture is. Although it cannot be dogmatized that the main determinant of business success is the fitting together of diverse cultural aspects it’s a common sense statement that cultures that don't match and don’t make continuous efforts to tolerate or understand each other will have difficulties to reach agreements of any kind. As explained in previous sections Japan and Spain have certain openly said issues about the management of human resources. Exhibit 2-9 presents a Hofstede’s analysis of the Japanese national Culture and Spanish national Culture. Exhibit 2-9: Hofstede Scores for selected countries: France, Germany, Japan, Spain, Venezuela and USA Country

Power Distance

Individualism

Uncertainty Avoidance

Masculinity

Long term orientation

France

68

71

86

43

NA

Germany

35

67

65

66

31

Japan

54

46

92

95

80

25

Spain

57

51

86

42

NA

Venezuela

81

12

76

73

NA

USA

40

91

46

62

29

Source: Hofstede (For a full list of country scores see annexes)

In the exhibit above it can be observed how Spain has similar scores with its main trading partners France and Germany. With Japan, however, Spain has similar scores on power distance, individualism and uncertainty avoidance but over 50 points difference regarding Masculinity, this fact entails that Japanese is a more masculine society, giving importance to material achievements while in Spanish society predominate feminine labeled values such as: quality of life and relationships, among others. Although Hoftede’s research is very famous it has also many critics, because his sample data came from several IBM subsidiaries worldwide and therefore arises the question on what makes IBM employees representatives of the whole country population. Furthermore, McSweeney (2002) criticizes Hofstede's apparently sophisticated analysis of extensive data because according to her analysis, relies on a number of profoundly flawed assumptions to measure the 'software of the mind', she argues that trying to frame cultures is an attempt to measure the unmeasurable since cultures are affected by historical events and social conditions such as the foreign influence. Hoftede’s also fails to recognize cultures as in constant change and evolution. What can be understood from the reviews on different perspectives about national cultures is that in order to make theories, reality should be simplified and framed, however, if one recognizes the culture as the software of the mind one should recognize as well that building cultures takes time and big events. It is

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like building a bridge. It takes time and effort. The same applies to sociological changes, including cultures. Exhibit 2-9: Summary of Hispanic Business Culture compared to Japanese business culture

Names and Titles

Regionalism

Meetings language Negotiating style Relationship development Miscellaneous

Hispanic

Japanese

! Important Basic courtesy titles Sr (Mr) Sra (Mrs) ! Moderately job important titles ! Use of two Surnames two names ! Strong regional feelings: Castilian, Catalan, Basque and Galician are the four languages coofficial, official languages that enjoy equal legal status in Spain. ! English, Spanish, Basque or Catalan ! Heated discussions, go quick from conflict to solution

! Extremely important to use courtesy titles (san) ! Extremely important job titles (Manager, President, Vice-president, etc) ! Use only family name, plus san (i.e: Tanaka san) ! Unlike there are several dialects like in Hiroshima and Kansai, there is not aversion to use the official Japanese language in formal situations.

! Personal questions OK: be comfortable at business situations ! OK sign with the hand has a vulgar meaning and should be avoided ! Individualistic-Pride: strong leadership is more important than systematic procedures, group discussion, brainstorming, forecasting, and operating plans. ! Pride is valued ! Shake hand and kiss (female) Stand close to the other party, may also pat on the arm or shoulder. Try to retreat into your own private space causes offence.

! Japanese or English ! Frontal conflict is avoided to the least resource, ringi and nemawashi and out of the office socialization ! Never getting personal at the working place: accepted after hours (hon ne tatemae) ! OK sign with the hand means literally OK and is widely used ! Colectivism

! Modesty is appreciated ! Never touch each other, personal space is well defined, bowing

Source: Author’s own experience

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Chapter 3 Literature review and hypotheses statement Managing across borders involves both the challenge and the opportunity of transferring advantages from one area of the planet to the others. The advantages that firms choose to transfer to or to obtain from a distant country vary in each case. Controls in the form of expatriate managers and ownership patterns, or lobbying skills to gain access to natural resources represent examples of the kind of invisible assets that firms mobilize internationally and the motivations for going overseas. Looking for control and efficiency firms often decide to engage in direct operations in a foreign country, by establishing subsidiary (equity) presence. The Strategic Management academics have developed in recent years a robust body of literature concerning Parent-Subsidiary relationships, Internationalization Strategies and Corporate Governance. Japanese firms have gained an important place in the works of those academic writers. This section outlines a review of the current topics concerning Japanese Multinational Firms Management as well as the fundamentals considered for the development of the hypotheses used in the present research. 3.1 Japanese Multinational Enterprises Japanese firms are highly respected worldwide for their commitment to reduce the waste and to find innovative ways to enhance the customer satisfaction. Any foreigner visiting Japan can testify about the many differences. Still Japanese Multinational firms expand their operations to new markets in order to deliver their products to a wider array of users while finding costs advantages.

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But, what makes effective the Japanese firms? In the international aspect, several authors attribute it to the Strategy. Itami (1987) argued that a strategy should fit its level of resources and take advantage of its corporate culture; however, resource fit and organizational fit both require that the firm, in the long term, create deviations from the static fit, generating a sort of dynamic fit that allows what he defines as Overextension. This seems to be related to the situation of Japanese firms, where the overextension sometimes follows the need to excel in manufacturing, while reaching access to foreign natural resources. Historically, Japanese firms have shown hallmarks of successful strategies, achieving zero defects, creating world-class manufacturing, fast product development, mastering distribution channels. In a more specific sense, authors like Barlett and Ghoshal point out the fact of centralization of the management as a determinant fact of Japanese companies abroad where the consensus decision–making process is culturally! dependent and required intensive communication with the head-quarters. This managerial flow is difficult for nonJapanese managers who lack both the language ability and the cultural background to participate in subtle communication styles such as nemawashi1 and ringi2. Centralization is

1 Nemawashi is an informal process of quietly laying the foundation for some proposed change or project, by talking to the people concerned, gathering support and feedback, and so forth. It is considered an important element in any major change, before any formal steps are taken, and successful nemawashi enables changes to be carried out with the consent of all sides. 2 Ringi is referred as decision-making by consensus

29

considered easy to establish and operate (Barlett and Ghoshal) facilitating rapid decisionmaking and minimizing frictions between headquarters-subsidiaries. Since Centralized in their management, group oriented, these authors classify Japanese firms as “Global Firms”, Global firms are based on a centralization of assets, resources and responsibilities where foreign subsidiaries are used as levers to achieve global scale. Subsidiaries of global firms have comparatively less freedom. The management perspective in these firms is that the world could, and should be considered a single unit, where similarities are more important than differences. The world is seen as a chessboard by this kind of organizations. The centralization traits of Japanese multinational enterprises as Global firms are going to be further analyzed in fore coming! sections under the scope of agency theory and transaction cost theory. 3.1.2 Parent-Subsidiary relationships and influence To achieve power and influence over an increasingly international network of operations is a challenge that multinational managers try to cope with. In most cases the strategy makes the difference between success and failure, beyond the availability of resources, the timing and the combination of the human outcomes may help determine the shape of successful strategies. The problem of controlling one’s interests when delegating certain activities is described by Agency theory (Jensen & Meckling, 1976) using the metaphor of a contract.

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3.2 Agency Theory Agency theory examines the principal-agent relationship, in which a principal delegates work to agents and agents perform tasks on the principal’s behalf (Jensen & Meckling, 1976). The interest of principals and agents differ in most cases and, as a consequence, designing control mechanisms that makes agents behave in the principal’s interests is the main determinant for desired performance (Eisenhardt, 1989). The headquarters-subsidiary relationship in MNEs has a principal-agent structure (Roth & O’Donnell, 1996) and considering the findings of Yaping (2003) Japanese firms deploy these controls by te use of expatriates. Agency theory has been a framework to interpret determinants foreign market entry decisions ( Tihanyi and Ellstrand, 1998 ) and foreign subsidiary compensation strategy ( Roth and O’Donnell, 1996 ), besides of the entry mode, subsequent stages demand increased control and coordination between parent and subsidiaries. In order to explain the mechanisms used to manage foreign subsidiaries within the MNE Agency theory, which is based on economic assumptions of self-interest and opportunism, can be applied to the headquarters – foreign subsidiary relationship to develop and test a model of foreign subsidiary control (O’Donnell, 2000). Agency theory has recently, begun to be applied more frequently in researching the context on Multinational firms (e.g., Gedajlovic and Shapiro, 1998; Nohria and Ghoshal, 1994; Roth and O’Donnell, 1996; Sanders and Carpenter, 1998; Sharp and Salter, 1997). In order to avoid the opportunistic behavior, agency theory suggests that monitoring results in increased information about agent actions, and thus, leads to increased efficiency

31

by reducing the risk that the agent will engage in behavior that is not in the interest of the principal (Holmstro¨ m, 1979). (O’Donnell, 2000) adds up that in the MNE context, monitoring can be defined as activities or mechanisms used by headquarters to obtain information about the behaviors and decisions of subsidiary management. The most direct form of monitoring is the personal supervision of managers ( Eisenhardt, 1985; Ouchi, 1977 ). However, in the case of the MNCE the absence of proximity makes it difficult for headquarters to supervise directly the behavior of foreign subsidiary managers. Thus, it is likely that activities other than direct supervision will be used to monitor foreign subsidiary management. Research has examined the use of expatriates in top management positions at the foreign subsidiary as a means of control through monitoring, in which the expatriate top manager is considered an extended form of headquarters supervision ( Boyacigiller, 1990; Egelhoff, 1984 ). Back to the main theory of Principal-agent interactions, Jensen and Meckling were focused on ‘the problem of inducing an “agent” to behave as if he were maximizing the “principal’s” welfare. Similar challenge exists in the context of the MNE, headquarters, as the principal, delegate responsibilities and decision-making authority to the management of a foreign subsidiary. An agency problem exists if subsidiary management makes decisions that are not congruent with those desired by headquarters, due to misinterpretations or goal incongruence between headquarters and the subsidiary and self interested behavior on the part of subsidiary management. According to agency theory, to resolve the agency problem the principal can use monitoring, which limits the ability of the agent to engage in selfinterested behavior, or incentives, which serve to align the goals of the principal and agent

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(Jensen and Meckling, 1976). 3.3 Transaction Cost Theory (TC) theory! (Williamson, 1975; 1985). TC theory is concerned! with explaining what is the most efficient! governance structure—markets, hierarchies, or a! hybrid— under which to govern a specific! set of! transactions. Transaction costs theory has been used to explain foreign ownership decisions ( e.g., Hennart and Park, 1994 ) . Gatignon and Anderson in 1998 used transaction cost framework to explain the control and ownership decisions of Multinational enterprises and found that as MNES gain experience abroad, however, they do tend to opt for wholly owned subsidiaries, moreover they find that firms achieve control over tangible and intangible resources by opting to different combinations of control and ownership trough different stages. Their research also prompts for further studies on the governance of those subsidiaries. 3.4 Theory Critics One of the most outspoken critics of the Agency Theory and Transaction cost theory is Sumantra Ghoshal, who in 2005 wrote an article blaming (dogmatic belief in) those two theories as triggers of a wave of corporate scandals. Ghoshal points out, and uses as an example the fact that people find some degree of pride in their job and that reducing this to a transaction cost idea by inculcating the lack of values or moral towards strict pragmatism in business community involves a potential threat that managers will forge financial reports in order to get larger bonuses checks, he instead urges for deeper ethical education on managerial courses.

33

As an alternative to those criticisms other authors such as Sharef in 2007 suggested that a shift from the normal science paradigm of Kuhn (1970) for scientific discovery might help the development of new theories. Sharef furthermore argues that the clear alternative to Kuhn’s paradigms is Karl Popper’s prescriptive and normative concept of science as revolution in permanence. Popper’s concept consists in generating better theories after old ones are discarded because having failed rigorous empirical test. Popper calls this as “falsation” which goes in contraposition with the ideas of self-fulfilling prophecies attributed to agency theory and transaction cost theory by Ghoshal. Other authors, such as (O’Donnell, 2000) explain that an important step in building theory in international management research is to apply and test different management theories in the unique context of MNCs in an attempt to contrast their predictive ability and limitations in such a setting. Besides of applying testing these theories seem to be an important element considering the critics by Ghoshal and others. 3.5 Firm performance Getting back to the track of the present research and after reviewing the current situation of the theoretical framework surrounding the problem of control and influence over subsidiaries: Agency Theory, Transaction cost approach and the critics to the current status quo, now, the work some empirical researchers is going to be reviewed, particularly those relevant to the variables object to study. Determinants of firm performance will be predicted. Few academics have studied Japanese MNE subsidiaries in Spain. The contents presented in the literature review are summarized in exhibit 3-1.

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Exhibit 3-1 Summary hypothesis table, relation to performance and Empirical Studies Hypothesis / Variable

Expected sign

Main author(s)

Having an Expatriate CEO

+

Chung, Ghoshal

Majority of Japanese executives in the sBoard

+

Erhardt, Dalton

Regional ownership network

+

Beamish, Gupta

Information Technology availability and readiness

+

Gupta, Rao

Subsidiary’s total Equity

+

Chang, Beamish

Degree of Internationalization of Parent firm

+

Beamish, Delios

Source: different empirical studies

3.6 Managerial Analyzing the determinants of the performance of Japanese subsidiaries in Spain involved sorting out three dimensions: Managerial, Information Technologies and Financial, Regarding the Managerial aspects, Three traits to consider are: The Expatriate Managers, The Composition of The Board of directors and the degree of centralization in the ownership structure.

3.6.1 Expatriate Manager The role of expatriates as trustworthy executors of the principal’s interest have been long studied on the management literature. Chug et al (2006) found that the Japanese employed few administrative control instruments while relying further on the appointed Japanese executives. The Expat managers in Japanese firms are far larger that in US or European subsidiaries. On a similar fashion, Harzing (1999) shows that US MNCs tend to

35

rely more on formal control systems, while Japanese MNCs rely more on personal controls in the form of expatriation. But the outcome of the deployment of controls to foreign subsidiaries in the form of expatriates have been studied by few researchers, Selmer (2001) adds that although the link between international adjustment and performance of business expatriates is neither conceptually nor empirically clear, it is probably quite safe to assume that ill-adjusted expatriates would seldom be excellent performers, thus negatively affecting their firm's business operations in the foreign location. Moreover, Yaping (2003) emphasizes that Japanese multinational enterprises have a stronger tendency to control subsidiaries through expatriate parent country nationals (Kopp, 1994; Peterson, Napier, & Shim, 1996). Japanese MNEs also have distinctive human resource management (HRM) practices, such as lifetime employment and extensive internal job rotations, which facilitate the development of firm- specific human capital. It is therefore quite appropriate to apply agency theory (Eisenhardt, 1989; Jensen & Meckling, 1977) to study expatriate staffing. The present research aims to analyze the previous elements already studied by others about the relationship between expatriate managers and performance, however it stands apart from previous studies in the sense of making it over a sample of non Asian and not Anglo-Saxon host country in relation to Japanese Subsidiaries. Other researchers have found linkages that support managing culturally distant locations via expatriates, since distant subsidiaries, agency costs are greater because of the information asymmetry problem, whereby information available on-site may not be available to a parent company. Previous research has indicated that Japanese expatriate parent country nationals tend to be

36

committed to a parent organization as a whole (Gregersen & Black, 1996) and therefore are trustworthy agents in culturally distant locations. Agency theory examines the principal-agent relationship, in which a principal delegates work to agents and agents perform tasks on the principal’s behalf (Jensen & Meckling, 1976). The interest of principals and agents differ in most cases and, as a consequence, designing control mechanisms that makes agents behave in the principal’s interests is the main determinant for desired performance (Eisenhardt, 1989). The headquarters-subsidiary relationship in MNEs has a principal-agent structure (Roth & O’Donnell, 1996) and considering the findings of Yaping (2003) Japanese firms deploy these controls by the use of expatriates. Staffing of expatriate parent country nationals in culturally distant locations may improve subsidiary performance (Yaping, 2003). Given the increasing diversity of tasks and the varied institutional environments in culturally distant locations, bureaucratic control (such as extensive behavioral monitoring and rigid rules and regulations) becomes less viable or effective, while cultural control through trustworthy expatriates becomes more advantageous in managing the increasing uncertainty. Staffing culturally distant subsidiaries with expatriates exerts implicit cultural control over the subsidiaries. Shared values and goals may not only reduce agency costs, but also make rigid bureaucratic control less necessary (Pfeffer, 1983). A key benefit of the use of expatriates is that an MNE’s headquarters may be able to award subsidiaries greater flexibility in tacit and firm-specific knowledge and skills through daily experiential learning from expatriate parent country nationals (Luo & Peng, 1999).

37

Learning from expatriate parent country nationals helps establish a subsidiary’s own knowledge base and enhances its ability to assimilate additional knowledge and skills from the parent firm, making these individuals less necessary over time. On the other hand, as a potential disadvantage for the use of expatriates, the continuous heavy reliance on expatriate parent country nationals at later stages of subsidiary operation may generate serious HRM problems, such as low motivation among host country nationals stemming from a lack of advancement opportunities (Kopp, 1994). Moreover, continuous heavy reliance on expatriate parent country nationals may also harm the effectiveness of expatriate parent country nationals in a subsidiary’s workforce.

This way the first Hypotheses of the present research is as follows:

H1

Having an Expatriate CEO has a positive relationship to performance

3.6.2 Composition of the Board of Directors Dalton et al. in 1998 wrote about a consensus in the conceptual literature! that effective boards are comprised of! greater proportions of outside directors (Lorsch! and MacIver, 1989; Mizruchi, 1983; Zahra and Pearce, 1989). They found support on the fact that the corporate community is even more outspoken on this issue, considering that among practitioners, especially institutional investors and shareholder activists, it is not unusual to find advocates for boards which are comprised exclusively of outside directors.

38

Dalton et al also add up that preference for outsider-dominated boards is largely grounded in agency theory. Cultural distance may influence the foreign entry process and subsequent performance (Davidson, 1980). Barkema, Bell, and Pennings (1996) demonstrated that the presence of cultural barriers punctuates organizational learning, and cultural distance is a prominent factor affecting international expansion. It may also hinder the evolution and development of rent-generating capabilities in new domains (Chang, 1995; Doz and Prahalad, 1991) Furthermore, Erhardt et al. in 2003 studied the diversity in board of directors from different perspectives, based on that research and previous literature one may suggest that diversity leads to a greater knowledge base, creativity and innovation, and therefore becomes a competitive advantage (Watson et al., 1993). Simons and Pelled (1999) argued that experience diversity had a negative impact on return on investment and overall organizational performance due to informal communication among top teams. Others have investigated board diversity and performance and found positive results. For example, Siciliano (1996) used data from 240 YMCA organizations to construct and compare multiple measures of board member diversity. The findings revealed higher levels of social performance and fundraising when board members exhibited greater diversity. The results also demonstrated that gender diversity played a role in organisation’s level of social performance. Maznevski (1994) examined the literature on group diversity and challenged previous research findings that homogeneous decision making groups perform better than diverse ones. She argued that diversity has the potential to considerably benefit group decision-making.

39

From a different perspective, other researchers suggested that board diversity could be hindering group performance. In the case of Hambrick et al. (1996) they conducted a longitudinal study on the effects of diversity on top management team performance in 32 major US airlines. Diversity was measured by functional, educational and tenure heterogeneity. Their findings demonstrated that homogeneous top-management teams had superior performance than heterogeneous ones. They also reported that heterogeneous teams were slower in their actions and responses and less likely than homogenous teams to respond to competitors’ initiatives. The explanation they offered was that in a heterogeneous group individuals were more likely to disagree, thereby weakening the team consensus. Regarding demographic diversity, Knight et al. (1999) found that demographic diversity was negatively related to consensus. They further suggested that greater time and effort was necessary for heterogeneous teams to reach decisions, ultimately reducing team performance. Treichler (1995) came to a conclusion similar to Knight et al. and Hambrick et al. Treichler concludes that workforce diversity requires higher expenditures due to increased initiatives and coordination to accommodate the needs of different types of employees, and has the potential to increase work group conflict and communication difficulties. In sum, these authors point to the potential negative effects of diversity due to the difficulty of integrating these resources into an effective harmonized group or team. There is variable outcome and crescent debate about the effects of diversity on group and firm performance. Diversity both enhances performance by increasing decisionmaking capacity, but detracts from group performance by increasing conflict. Since this

40

research aims to Principal – agent theory the presence of Japanese executives on the board will be considered as presence of the principals.

H2

Having majority of outside executives in the Subsidiary’s Board is positively

significant to performance.

3.6.3 Ownership structure The global strategy pursued by multinational enterprises has a key element that is the constitution of the network of subsidiary firms. Firms achieve international advantages through foreign direct investment in the form of Greenfield, mergers or acquisitions. Chang, 1995 studied Japanese companies and found in their pattern preference for frequent small investments made over a long period of time. By progressive investment in their core businesses and expanding their operations Japanese subsidiaries expand the network if this investment performs well. The companies might later make big investments and even diversify into new business areas through foreign entry. The unique traits of Japanese human resource management and strong dependence over the headquarters in Japan make them likely to use sequential entry and expansion over time. Kagono, Nonaka, Sakakibara, and Okumura (1985) described Japanese companies as "evolutionary firms". Precisely the uniqueness of the Japanese way of managing subsidiaries have been criticized, for example Ghoshal (1999) stated that the excessive centralization of Japanese firms on the main Headquarters hinders opportunities to become true Transnational firms and foster opportunities in world markets.

41

The monopolistic advantage theory (Caves, 1971; Hymer, 1960) and the internalization theory (Buckley & Casson, 1976; Hennart, 1982) help explain motivations for going overseas: Firms invest overseas to exploit monopolistic advantages or to internalize markets for advantages or intermediate goods. However, the widely available research regarding motivations for foreign direct investment still fails to outlook the process of international expansion and the impact that the degree of centralization has over the firms network have been also overlooked. Delios and Beamish (1999) found that the equity position of a foreign investor should increase as the specificity of the assets transferred to the foreign affiliate increases, but a lower equity position should be assumed when the foreign investor requires complementary assets to establish a foreign entry. In the case of Japanese MNE in Spain it is found that are mostly wholly owned subsidiaries, therefore the need for specific complementary assets or local influence is measured by the author in whether the ownership is directly held via Headquarters in Japan, or Headquarters in other European country. Delios and Beamish (1999) several studies! have demonstrated that the entry mode choice has! critical implications for the foreign investment’s! performance (Root, 1987; Woodcock, Beamish,! and Makino, 1994) and its survival (Li, 1995). although scholars soon! began to concentrate on the! level of ownership! question, specifically the choice between wholly owned! subsidiaries and the joint! venture mode! (Hennart, 1982). These and other studies in the! internalization stream explained higher! ownership! levels as being a response to the need to protect! firm-specific knowledge (essentially!

42

technological! and R&D expertise) from unwanted dissemination.! Hence, internalization theory stated ! that ! full ownership and control would be observed ! when a firm transferred unique, firm-specific ! knowledge to the host country when making its! foreign investment. TC theory has been particularly useful in understanding! the determination of ownership levels! (e.g., Anderson and Gatignon, 1986; Gatignon! and Anderson, 1988; Gomes-Casseres, 1989). In! bringing the ideas of TC theory to the entry! mode question, Anderson and Gatignon (1986)! provided an extensive review of the ownership! literature. In this literature, the amount of equity! ownership was equated with the amount of control! that a firm could exert over its subsidiary’s! operations. Control was considered important! because it provided the foreign parent with the! ability to influence systems, methods, and! decisions (Anderson and Gatignon, 1986) and! with a means to resolve disputes that could arise! in the joint management of an enterprise! (Davidson, 1982). The International Strategy pursued by Japanese firms in Spain may be following similar patterns as in other countries. Previous studies by! Konopaske et al. (2000) found that ethnocentric staffing is positively and statistically significantly related to subsidiary performance. Konopaske’s research focuses on the staffing practices and its relationship to performance, he identifies two main approaches, one is called Ethnocentric staffing and characterizes MNES that extensively use of expatriates in overseas positions. This staffing strategy tends to be utilized when foreign ventures have little autonomy, strategic decisions are made at headquarters in the parent country, and most of the key positions at the foreign venture are occupied by parent country nationals (Adler, 1991; Dowling et al., 1999; Zeira,

43

1976). Other approach to staffing is defined as polycentric, when an MNE considers each of its overseas ventures as a unique national entity that possesses autonomy in decisionmaking. The overseas ventures tend to be managed by host country nationals (locals) who rarely receive promotions to headquarters in the parent country. That is, a firm believing in this approach will decentralize its HRM functions on a country-by-country basis; coordination between overseas ventures will be minimal, and the individual locations will be responsible for developing their own personnel policies and guidelines (Dowling et al., 1999). As per the question on which approach will be better towards high performance, ethnocentric or polycentric, the debate remains open. Konopaske et al. (2000) did research on Japanese firms and found ethnocentric style advisable for ! early stages of internationalization or when the firm is establishing a new product overseas and prior experience is critical. Still Konopaske et al. research didn’t explore the implications of the regiocentric and ethnocentric ownership patterns to explain intra-firm coordination! and its consequently effect on performance. In order to explore further into the issues related to control, this research thesis will test a different perspective to measure ethnocentricity as determinant of performance in wholly owned subsidiaries, instead of consider only staffing, I will consider the ownership pattern of the subsidiary firm, since it’s a proxy of the way these firms are managing their communications, influence and controls.

Based on the previous review, the third hypothesis is presented:

44

H3

Ownership via regional Headquarters is positively significant to performance.

3.6.4 Size (Control variable) Firm size, measured as per the number of full time workers is still widely used as a predictor of firm performance in financial terms. In the study of subsidiaries, Luo (1999) used Organizational size (SIZE) as number of employees to test relationship with performance asset turnover. This research however used firm size as a control variable to improve the fit of the overall model and therefore no hypotheses are addressed around this criteria. Fang et al. 2007, research included subsidiary-size, measured as the log of the number of employees in a subsidiary, subsidiary age as control variables as well. 3.7 Information technologies

The study information technologies as a form of control and influence over subsidiaries is gaining territory among researchers, Gupta et al. 2000 talks about the flows of knowledge in multinational enterprises as the focus on the behavior of the entire network and among others, talks about the systemic view. The network, or view of the organization as a conglomerate of inter-firm relationships has been favored by Barlett and Ghoshal (2000). Moreover, The network could be seen as the human contracts and financial transactions or information flows via optical fibers and Internet.

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3.7.1 Availability of Information Technologies

In regards to the control and coordination of headquarters with international subsidiaries Rao et al. 2007 researched that the strategic relationship between a headquarters and subsidiary Information Systems management operations is relevantly associated with the use of formal and informal mechanisms of control and coordination. However, the implications to financial performance were not mentioned. Rao et al. found that in order to foster advantages within international competition, both the headquarters and subsidiaries may be negatively affected by failure to coordinate in the dynamic relationship (regardless of the lack of power imbalance stemming from subsidiaries’ operating in a resource-rich environment). Therefore it may be logic to think that subsequent failures in coordination and control of usage Information Systems may also affect financial performance, although this is not explained in the reviewed literature. Moreover, Chang (1995), adds that, information-intensive resources, like Information technologies, IT, create a need for internalization since renting or licensing them through market transactions involves high costs. Often, information-intensive resources are embedded in the people working for an organization. The difficulties of codifying and transferring knowledge are well documented in Kogut and Zander (1993). Therefore, firms decide to use such resources through international expansion rather than by renting or selling them. The previous review leads to study further and consider the relationship of IT availability with performance:

46

H4

Subsidiary IT resources availability is positively related to performance.

3.7.2 Parent Firm Experience (control variable)

The transfer of invisible assets (i.e. experience) from a parent firm to a subsidiary has been also object of study by management academics (Beamish, 2001). Recently, in 2007, parent firm host country experience and parent company internationalization experience, respectively, were analyzed by Fang et al. using a logarithmic transformation of the number of years of investment history the parent firm had in the host country, and a logarithmic transformation of the number of years of international investment history a firm had accumulated (Delios and Beamish, 2001) and studied the relationship with firm experience, founding positive results. These studies still do not try to match parent experience with firm performance; therefore, the number of years of operation of the parent firm is used in this research to refine the model fit. 3.8 Financial 3.8.1 Equity entry modes and Greenfield investments Firms may enter foreign markets in many different ways, including exporting, licensing, and direct investment (Root, 1994). When focusing on the choice of entry mode in foreign direct investment (FDI), outlined as investment that involves ownership and confers effective management control previous researches were found. This equity

47

participation was analyzed by Chang et al. 2001, More recently, transaction cost theory, which views multinational enterprises as principals constituting a network of agents for transferring resources, has been helpful in explaining both the extent of ownership (full vs. partial) as well as the choice between Greenfield investment and acquisition. Regarding full vs. partial ownership, transaction cost theory asserts that because joint ventures involve a partner they run considerable risks of free riding and other opportunistic behavior. Furthermore he studied the cultural distance Cultural distance between the home market and the host market will be positively associated with Greenfield investment and found it to be significant for early entries. Since the present research aims exclusively at equity positions of Japanese parents in Spain the intent will be to explore the relationship to performance.

H5

Higher Subsidiary Total Equity is positively related to performance.

3.8.2 Sales at foreign markets as a measurement of Internationalization The amount of International sales that a company has as part of their domestic sales can be considered as a measure of its degree of Internationalization or International experience. Fang et al. (2004) studied the effects on the international experience of firms, finding those that have accumulated extensive international experience having general knowledge about operating in international environments. They argue that this form of knowledge can contribute to the understanding of a specific dimension of an institutional environment, such as culture (Barkema, Bell, and Pennings 1996), and it can contribute to the development of procedural knowledge about international operations that can be

48

applied to current and new businesses (Eriksson et al., 2000). Although this experiential learning can be beneficial, it is not without its inherent challenges. The international experiential learning process involves both time and effort (Barkema and Vermeulen, 1998). Once internalized within a firm, diverse country experiences lead to a fairly standarized knowledge asset (Erramilli, 1991; Barkema et al., 1996).

This research about Japanese subsidiaries in Spain finds support on the arguments of Fang et al. and uses a different measure for experience, instead of time, the degree of international sales out of domestic sales of the parent company are being used to predict performance.

H6

Higher international sales (parent) are positively significant to performance.

3.9 Performance Previous research about Corporate Governance have established linkages to performance (Erhardt, 2003) by measuring organizational performance using financial ratios: return on assets (net income divided by total assets or ROA) and return on investment (net income divided by invested capital or ROI). Furthermore, Sakakibara at al. (2008) researched the profitability of Japanese firms abroad using panel data and ROS as a measure for their research; they found that the determinants of profitability differ among host regions and are influenced by the economic and institutional factors specific to host regions. Besides, the size effect on the subsidiary performance is present in all the regions, other influences, such as experience; local

49

supplier networks, local sales and macroeconomic conditions affect the performance of subsidiaries in a different manner by region. Their study did not consider, however, deep cultural differences that may be determining management of the firms and human resources adaptation.

In sum, the hypotheses to be tested in this research are: 1. Hypothesis one: Having an Expatriate CEO has a positive relationship to performance 2. Hypothesis two: Having majority of outside executives in the sBoard is positively significant to performance. 3. Hypothesis three: Ownership via regional Headquarters is positively significant to performance. 4. Hypothesis four: Subsidiary IT resources availability is positively related to performance. 5. Hypothesis five: Higher Subsidiary Total Equity is positively related to performance. 6. Hypothesis six: Higher international sales (parent) are positively significant to performance.

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Chapter 4 Research Framework and Methodology This is a study about the agent relationship between Multinationals, their subsidiaries, the interests of the parent as a Profit seeking Enterprise and hence about the managerial layout that generates outstanding performance of those subsidiaries. In order to examine the dynamics of this problem it was chosen to use the case of Japanese multinational enterprises with subsidiaries in Spain. Three criteria’s were identified as potential determinants of the performance for a subsidiary firm: Managerial, Financial and Information Technologies availability. 4.1 - Sample The basic data for population of Japanese MNE's subsidiaries in Spain was obtained from the Kaigai ShinShutsu Kigyou Souran (Japanese Overseas Investment) year 2005 which is an annual handbook covering the overseas activities of more than 20,000 Japanese subsidiaries and representative offices. Pages 1134 until 1143 contain the list for Spain which was totally transcribed into a spreadsheet as a template dataset. The Japanese Overseas Investment data book comprehends basic data, such as the local address, phone number, lines of business, sales, and number of employees provided for each overseas operation. Since the ambitions of the present research were to study deeper some firm traits that affect performance more data sources were needed. Once the list of 127 Japanese firms with equity operations in the Spanish market was deployed from the Toyo Keizai book it was identified a second data source using Internet

51

search engine Google and Google Patent Search. The name of the second data supplier is Bureau van Dijk Electronic Publishing (BvDEP) : This is a global media research firm which provide detailed, analytical databases, for in-depth investigations, such as AMADEUS (a pan-European database), ORBIS (40 million companies around the world) as well as extensive country-specific databases (FAME, DIANE, DAFNE). Bureau Van DIJK databases are intended for in-depth research of companies complying with specific criteria plus detailed analysis of company peer groups and benchmarking. In addition, the database covers M&A deals and rumors around the world. The main advantage of using this data source was to have extensive information on company ownership structures, specifically accessing to both direct and indirect shareholders and the ability to back to the ultimate owner. Ownership connections were clearly identifiable for the purpose of this research, with the help of the Japanese Overseas Investment Book. It may also be useful for other researchers to consider the benefits of MINT (Bureau VAN Dijk) database. The BvDEP database products are available upon contacting a representative of the BvDEP, therefore it was possible to use a limited number of reports without further commitment. More than 150 queries were performed to the MINT Global database. The queries returned several complete reports of financial, managerial and other information about the consulted Japanese MNE and its subsidiaries in Spain. The elements related to the analytical framework used in this research were extracted from the MintGlobal database that makes a cross reference of balance sheets and P&L statements of subsidiary firms with that of the Gobal Ultimate Owner (GUO) or

52

parent firm. Furthermore, three years were included to the sample in order to deliver a more dynamic and broad evidence of the phenomena studied. Missing values were eliminated to conduct the panel data study, result was a final refined sample of 55 subsidiary firms that were arranged by reported 3 years of operations, 2003, 2004, 2005. Panel data consisted therefore of 165 observations. In the annex section there is available a list of the names of all subsidiaries consulted by the author 4.2 - Measures Independent variables In this study the Spanish subsidiaries of Japanese firms were analyzed in the following three dimensions: Managerial, Information Technologies and Financial. Making operational those 3 criteria, 7 variables were established: Managerial: 1. Nationality of the General manager

XpatCEO

2. Ratio of Japanese members of the board of directors

BrdCOMP

3. Ownership (Direct from Japan or Via Regional HQ)

OwnStyle

Information Technologies: 1. Information systems availability

ITint

Financial: 1. Total Capital

TeQuity

2. Segment (sales) data: Japan / Rest of the World

SgtDta

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Control Variables 1. Years of experience of the parent (Control variable)

LgEXP

2. Size of the subsidiary firm (Control variable)

LgSze

It is acknowledged by the author that the variables above may not be the only elements that shape a subsidiary performance. Particularly common in the consulted literature is the country risk, considered as a determinant for the outcome of international investments. However, since the present research scope is to a single country and since the intent is to explore the elements inside of the subsidiary, the country risk and other macro economical elements were deliberately excluded. Details about variable formulations are explained below in exhibit 4-1. Dependent variable The dependent variable for this research is the return on sales, ROS because it provides information, in real terms of the net financial result in US dollars that the firm produced for a specific year compared to the total sales of that year. There are two reasons in using this indicator as the dependent variable instead of other financial ratios like ROI or ROA. In the case of Return on Investment (ROI) it is important to know the specific moments of investment and disinvestment of each firm in order to judge each subsidiary equally. The same limitation applies to ROA as a measurement of performance. Besides, in the case of ROA, since any industry benchmark for the optimal level of assets for different industries it’s not available for this research, it’s difficult to judge all firms homogeneously. Moreover, ROA presents the limitation that firms operating with old depreciated assets will erroneously exhibit a better performance than those firms operating with state of the art

54

assets and more expensive technology. Finally, other studies of the performance of Japanese subsidiaries have made use of ROS as a profitability indicator (Sakakibara and Yamawaki, 2008). Hence, for simplicity purposes and to guarantee that all firms are, to some extend, homogeneously studied, return on sales obtained form financial statements of each firm were selected as a performance measure. The importance of understanding the determinants of the performance of a firm lies in the fact that it allows to take decisions and path of actions. Since the case of this research is the international context, particularly a Geographically distant and culturally different country such as Spain, understanding the facts will allow firms to make improvements on investments, resource allocation and reduce or improve efficiency of incurred transaction costs.

Exhibit 4-1 Details about Independent variable formulations Variable Name

Measure Explanation

XpatCEO Expatriate CEO

Yes / No Is the General Manager a Japanese? How

many

Japanese

are

members

of

the

BrdComp Board Estructure % Subsidiary Board? Direct ownership from Japan or via a Regional OwnStyle Ownership Style Yes / No HQ? LgSze

Size

Integer

Number of Full time workers at the subsidiary

55

ITavail

IT availability

Yes / No Does the subsidiary have a local website?

Parent LgEXP

Integer

Years of experience of the Parent

Experience Total equity ammount during observed years in TeQuity

Total Equity

Integer USD

SgtDta

Transnationality %

Sales Rest of the world/ Sales Japan

ROS

Return on sales

Return on sales for the given year

Integer

Source: Author’s own framework and data from Toyo Keizai Databank 2005 4.3 – Analytical Framework Once reviewed the procedures seek to gather and refine the data and define the sample of the study. The variables are inserted in the analytical framework (figure 4-2) that aims to identify some determinants of the performance of Japanese subsidiary firms in Spain.

Figure 4-2 Analytical framework

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Figure 4-3 Expanded analytical Framework

The figure above is an expanded framework (figure 4-2), which reveals details about variable interactions and the expected relationship with the dependent variable Return on Sales. 4.4 Data analysis The data about 55 Japanese subsidiaries is Spain was analyzed using multiple linear regressions. For operational reasons the sample of the years 2005, 2004 and 2003 was deployed in a pooled cross-section analysis resulting in 165 observations. The software SPSS 14 was used in order to test the significance of the relationship between the dependent variable ROS and the independent variables (XpatCEO, BrdComp, OwnStyle, Sze, ITint, yrEXPprnt, TeQuity and SgtDta).

57

For illustrative purposes, the figure 4-3 presents an example of the ownership tree, and structure of the equity relationships and its main subsidiaries as well as top shareholders. This is particularly important for explaining the criteria used to determine inter corporate relationships, where for example WO means wholly ownerd and the numbers explain the degree of ownership, for example “51” in the case of Epson engineering Europe.

Figure 4-3 Ownership tree for Epson Corporation

58

Source: Mint Global database, Bureau Van Dijk

Chapter five will present the outline of results and detailed explanations.

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Chapter 5 Results and findings Running multiple experiments several times over the sample generated one model that fits the objective of this research. That model includes the results presented in this chapter. The descriptive statistics summary of the sample is presented in exhibit 5-1. As reported in exhibit 5-1, it can be observed that BrdCOMP has a quite high mean of 0.5896, delivering the fact that the sample of Japanese subsidiaries in Spain stand for boards with majority of Japanese executives, a similar situation happens in the case of XpatCEO with mean of .4909 with the standard deviation of .50144 which seems high considering that the largest value for this variable is one (1). Exhibit 5-1 - Summary Descriptive Statistics main dataset Descriptive Statistics N

Minimum Maximum Mean

SD

XpatCEO

165

.00

1.00

.4909

.50144

BrdComp

165

.00

1.00

.5896

.29425

OwnStyle

165

.00

1.00

.4545

.49945

TeQuity

165

-4391.72

26516.42

2425.3195

4359.91622

SgDta

165

.12

2.70

.6402

.46933

ITavail

165

.00

1.00

.7818

.41427

ROS

165

-.5404

1.0000

.030452

.1574741

60

Lgsze

165

.95

3.38

1.9524

.55196

LgEXP

165

.48

2.13

1.8651

.22953

Segment data mean of .6402 tells about the average degree of internationalization of Japanese firms doing business in the Spanish market. Most firms’ international revenues are near 64% percent of their total sales in their domestic Japanese market. Other remarkable facts are the huge range for the values on Total equity (TeQuity) and the Standard Deviation of that variable. The average Japanese subsidiary in Spain is a midsized firm, with over 200 employees.

5.1 Regression procedures Multiple linear regressions were performed for testing the relationship of the dependent variable ROS with the other elements in the analytical framework. The information presented in this section will help outline the different layouts observed in the Japanese subsidiaries in Spain and the impact that these different configurations have on performance measured by ROS. Previous research has used similar measurements for ROS (Sakakibara and Yamawaki, 2008) to study profitability of Japanese subsidiaries in different countries. 5.2 Regression results Running the multiple linear regressions for a three year data of 55 subsidiaries of Japanese firms in Spain results in a model with an R square of .155, this means that the accuracy of the model fits well over 10% and the multi co-linearity between independent

61

variables measured as per the Durbin Watson coefficient is kept also among reasonable values of 2.219. Exhibit 5-2 - Summary of Multiple regression model N= 165, dp. Variable= ROS Model Summaryb Model R 1

.393a

R Square Adjusted R Square Std. Error of the Estimate Durbin-Watson .155

.111

.1484615

2.219

a. Predictors: (Constant), LgEXP, XpatCEO, Lgsze, ITavail, OwnStyle, SgDta, TeQuity, BrdComp b. Dependent Variable: ROS

The overall fit of the Model stays in .393. While other researchers have also used Return on sales (ROS) as a dependent variable for the performance of Foreign Subsidiaries. Sakakibara et al, 2008 researched the profitability of Japanese firms abroad using panel data and ROS as a measure for their research. They found that the determinants of profitability differ among host regions and are influenced by the economic and institutional factors specific to host regions. Besides the size effect on the subsidiary performance being present in all the regions, other influences, such as experience; local supplier networks, local sales and macroeconomic conditions also affect the performance of subsidiaries in a different manner by region. Their study did not consider, however, deep cultural differences that may be determining management of the firms and human resources adaptation.

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5.3 Multiple regression results analysis:

Exhibit 5-3 – Multiple regression results Standardized Coefficients Model 1

Beta (Constant)

Collinearity Statistics t

Sig.

.689

.492

Tolerance

VIF

XpatCEO

-.210

-1.986

.049

.485

2.061

BrdComp

.245

2.236

.027

.450

2.224

OwnStyle

.151

1.871

.063

.831

1.203

TeQuity

.191

2.002

.047

.593

1.687

SgDta

.130

1.629

.105

.855

1.170

ITavail

.172

2.240

.026

.915

1.093

Lgsze

-.311

-3.320

.001

.619

1.614

LgEXP

-.029

-.371

.711

.889

1.125

Accordingly, it can be observed in the significance column of exhibit 5-3, that all variables are significant at a 5% level, with the exception SgDta this results answer the first research question about the elements that shape and influence the performance of Japanese Subsidiaries in Spain. Likewise, in order to analyze in what degree those elements influence performance one may consider an analysis of the Beta coefficients, where it can be observed BrdComp as the most determinant one, followed by XpatCEO with a negative

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sign, meaning that appointment of host country managers may be a good strategic decision. In third place are the variables related to the availability of resources like equity and IT and last but not least the coordination from the center, or ethnocentric (OwnStyle).

5.4 Hypothesis 1 Having an Expatriate CEO has a positive relationship to ROS This hypothesis was not supported. The negative sign in the beta coefficient indicates a negative significance of the expatriate CEO or Japanese general manager as an influence to the performance measured as per return on sales. Sometimes a good manager is not a good manager for any position, anywhere. Researchers agreed that an ill adjusted manager exhibit a lower performance than one that has successfully adapted to the new environment. Regarding the problems of expatriation we may consider several reasons for the potential failure: Individual, Familiar, Cultural and Organizational causes. Individual causes are the personality of the manager, the low motivation for the assignment and the lack of technical proficiency. Family may also be an influence in the bad adjustment of expatriates, for example if the family doesn’t feel content in the host country. Cultural and Organizational causes, on the other hand, may be easier to spot; managers lacking key understanding of the local culture, language and nonverbal communication skills and social values may fail to develop relationships with key people, local employees and the government. Moreover, the right manager for one assignment is not necessarily the one who is actually appointed. Most of the times, the

64

failure in picking the right executive for the position is a costly mistake for MNEs and in order to avoid misplacement of human resources better practices are needed. The firm operates as an open system and the interactions with its external environment are crucial. In this case it was studied the role of a Japanese manager appointed to subsidiaries in Spain and the principal agent principle seem not to be applying in the expatriate managers appointed as a form of control. In Spanish culture, pride is very important. In order to create better human performance the need of host country managers of feeling equally judged and capable as the parent appointed managers may be an important feature to consider as well.

5.5 Hypothesis 2 Having majority of outside executives in the sBoard is positively significant to ROS. This hypothesis is supported. Having a majority of Japanese executives on the board, as external member to the operative management of the firm exerts a positive influence to control a geographically distant and culturally different subsidiary. Since directorship involves a more strategic role, one may remark that the factors that may be hindering the performance of the Japanese General Manager don't affect directors in the same manner. The establishment of controls in the form of trusted directors in the board appointed from headquarters in Japan delivers some degree of peace of mind to the headquarters that their interests in Spain are being taken care of appropriately. Moreover, Board members exert an influence over plans and decisions but they don't

65

operate the firm, therefore need fewer cultural skills than the general manager to develop relationship with locals. Additionally, the presence of enhanced diversity in the subsidiary board balances the interest of Headquarters in Japan with those of the host country partners or managers who can perceive a wider understanding and better communication.

5.6 Hypothesis 3 Ownership via regional HQ is positively significant to performance. This hypothesis is not supported. Those firms with ownership from another subsidiary in Europe that at the same time is wholly owned from Japan, showing a decentralized style exhibit worse performance in terms of ROS than those having a centralized coordination from Japan (Ethnocentric style). This result can be explained differently; it seems that Japanese MNEs, regarding the decision-making process and managerial coordination need closer control and constant communication to feel safe that their interests are being accomplished abroad. In this sense the coordination via Regional Headquarters (i.e in Germany) created an additional bureaucratic layer, when ultimately someone in Japan makes the decisions. Hence, we have a situation like for example: Spain reporting to Germany and Germany reporting to Japan, Japan decides and then informs Germany what to do, Germany consequently instructs Spain. This obviously creates further transaction costs and potentially creates unnecessary time lag, while risking the integrity of messages by different understandings. To sum up, it

66

seems that these firms should focus on their natural patter of decision flow and keep it as direct as possible. Barlett and Ghoshal (2000) when referring to Japanese firms argued that both centralization and formalization are powerful facilitators of the decision making process but must fit within the formal hierarchical structure, what Itami defines as “Corporate Culture”. In addition to centralization and formalization, transnational firms are using extensively socialization, which entails the built of coordination through the careful development and management of informal relationships in an organization.

5.7 Hypothesis 4 Higher Subsidiary IT resources availability is positively related to performance. This hypothesis is supported. Subsidiaries that exhibit signs of having extensive availability of Information technologies at a local level seem to perform better than those that don't have such availability. Beyond the human interactions in the network of subsidiary firms there are an increasingly available number of tools that facilitate distant communication in real time and that allow information exchange to be conducted more efficiently. Until now, the availability of this kind of tools as determinants of good performance in distant subsidiaries, like Spain, was not studied in detail. The results of this hypothesis bring some light into the question about the role of Information Technology tools, like software, available to conduct business overseas.

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In addition, this result reflects the impact of the change in communication systems to the approach that firms must have to international markets, since it is found that firms deploying local efforts in IT systems, like websites and software, that appeal markets and consumers hold an organizational pattern towards desired business performance.

5.8 Hypothesis 5 Higher Subsidiary Total Equity is positively related to performance. This hypothesis is supported. The results reveal that subsidiaries holding a larger Capital investment exhibit better signs on the Return on sales. Firms having deeper interests in certain market tend to make larger and consequent investments, and if the subsidiaries perform as expected, they increase their positions. Accordingly, the result of hypothesis number 5 supports the idea that companies with greater market power and specific knowledge assets will invest more than those that struggle to achieve it. Japanese firms follow a sequential pattern of investment in the Spanish market where it may start as a Joint venture and progressively turn into a wholly owned subsidiary.

5.9 Hypothesis 6 Higher international sales (parent) is positively significant to performance. This hypothesis is not supported. As per the results of the multiple regression indicate, the degree of international sales of a parent firm shows no significance for the studied sample.

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This result is quite different than the ones of Fang et al (2004) who considers that firms with wider international experience and overseas interest, develop a standardized body of knowledge about international operations as a result of their interactions with several countries.

Although the experience of fang et al. have a strong support and

common sense fundamentals, the results for Spain seem to be different. The complexities posited by a geographically distant and culturally different host country and the specific idiosyncrasy and managerial practices of Japanese multinationals seem to be affecting the results. Although the experience is available to these firms there should still be some dimensions of complexities that do not show clear relationships with performance measured as ROS.

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Chapter 6 Conclusion and Discussion From the results of the hypotheses tested, there appears to be mixed results about whether

or not a firm should keep centralized management of subsidiaries. More than

wondering if centralized or not, the right question to be answered is where it should be centralized, where to be decentralized and in what situations. The overall results of this research reflect this reality. At a first sight it may seem inconsistent that expatriate managers are positive determinants of subsidiary performance when appointed in a directorship position, this is a fact that supports the principal-agent theory, but expats exert a negative impact when in a more operative role like the general management of the firm, where appropriate understanding and use of social skills shaped by the local culture and idiosyncrasy are crucial for success. These results justify the fact of analyzing each variable separately; in a directorship an executive should be in constant communication with headquarters, easing communication, helping the Parent agree that things are being taken care of, while in a CEO position, the midst of the local market determines the order of the day in decisions and coordination. Moreover, one can highlight that the uniqueness of Japanese management is characterized by a tight control from the center, which in some dimensions, like the way subsidiaries are owned, has a positive influence on performance. But in the day to day management the Firm needs a more liberal approach where host country managers are given rights to participate and advance in their careers the same way home country

70

nationals do, since locals are the one who show ability to develop relationships and deal with situations in the host country more successfully. The diversified human resources management practices may lead to increased performance of these Subsidiary networks. Furthermore, as supported by the literature review and statistical procedures, diversity is a source of creativity for decision-making and coordination. Performing a quick analysis of the Beta coefficients shown in chapter 5, lead to further conclusions. It can be observed in the significance column of exhibit 5-3, that all variables are significant at a 5% level, with the exception SgDta. These results answer the first research question about the elements that shape and influence the performance of Japanese Subsidiaries in Spain. Likewise, in order to analyze in what degree those elements influence performance one may consider an analysis of the Beta coefficients, where it can be observed BrdComp as the most determinant one, followed by XpatCEO with a negative sign, meaning that appointment of host country managers may be a good strategic decision. In third place the variables related to the availability of resources like equity and IT and last but not least the coordination from the center, or ethnocentric (OwnStyle).

A high performing subsidiary will stand for a mix of decisions and courses of actions. The mix that defines a high performing subsidiary involves the consideration of diversity as an asset and not as a problem, knowing where to refrain and where to release, keeping an influence over the international interests by having loyal executives as advisors but trying to create group synergy and participation within the host country managers and local employees. This last element may be particularly important.

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An explanation, and a solution to the evidence brought by this thesis research may be in the work of Hofstede (1991). His lifework stands for differentiating organizational cultures from national cultures. He argues that national cultures distinguish similar people, institutions and organizations in different countries. Organizational cultures, distinguish different organizations within the same country or countries. Cultures manifest themselves, from superficial to deep, in symbols, heroes, rituals and values. Organizational cultures differ mainly at the levels of symbols, heroes and rituals, together termed 'practices' (process-oriented

versus

results-oriented,

job-oriented

versus

employee-oriented,

professional versus parochial, open systems versus closed systems, tightly versus loosely controlled, and pragmatic versus normative); national cultures differ mostly at the deeper level, the level of values. As a consequence, the complexities of national cultures are based on values, but beyond usefulness as tools for comparing organizations. Furthermore he considers that one solution to organizational cultures conflicting with national cultures could be deeper understanding of organizational and national cultures at the same time, while recognizing that organizational cultures are somewhat manageable, while national cultures are given facts for management. Therefore, the solution is to accomplish a standardized and transferable organizational culture.

6.1 Recommendations for practitioners Japanese domestic market is still huge and represents an average of 150% of the sales of the studied MNEs abroad. This reality may be hindering the possibility for these Japanese MNEs in Spain to focus on more diversified and global human resources

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management practices. Generally speaking Japanese firms continue to be more ethnocentric than MNEs of other nationalities and the former keep strong traits of their unique organizational culture. Still the effective propagation of Japanese organizational culture towards the subsidiary (including the host country managers) is unknown. The involvement of third country nationals is an option that is increasingly available to MNEs, still the implications for Japanese firms remain unexplored. But this idea seems attractive if considered the high cost of expatriate assignments and specially failures. Also, increasingly global human resource practices may help host country nationals feel identified with the MNE and it can further help the firms attract a wider range of talented professionals over the scope of the parent country nationals. This way, the construction of a more transnational organizational culture seem to be a valid option for these networks of subsidiary firms to be managed toward better results.

6.2 Limitations and further research Any research project poses many challenges, and at the end, besides of the answers provided, many questions flourish and the limitations become obvious. This research project intended to bring up some light and new arguments towards social problems, particularly the ones of the Multinational Firm. One of the first and most important limitations observed was caused by the intentional omission of the Macro-economical conditions and country risk. The elements outside of the Firm’s control were not considered for two reasons: one because the research aims at the firm level and two because the study is conducted within only one country, Spain, hence macroeconomic conditions are assumed

73

to be uniform. However, as discussed in chapter two Spain is a country with distinct features between regions and main cities, future research considering detailed country variables may help refine this model to achieve a better-fit level. On the other hand, considering 3 years intended to provide a larger picture of the reality of those subsidiary firms. However, with an understanding of the specific years of investment and periods of return the results can be more homogeneously analyzed and provide a better impression of the reality. The consequent limitation can be the use of only three years and not ten or more. A third main limitation to be overcome by future research is the utilization of plain secondary data obtained from financial statements and footnotes. The use of secondary data becomes a constraint because the researcher must try to fit the model within the available data resources, while using primary data from perceptions and opinions of managers that face day to day situations gives the researcher plentiful of creativity and room to maneuver when designing a richer analytical framework. The use of primary data may be especially helpful in this case because of the dynamics of human behavior and decisions that are not necessarily reflected in financial statements Regarding one of the innovative perspectives of this research, the evaluation of IT availability as determinant of performance: it popped out that judging the simple availability might not be objective enough. It may be necessary go deeper into the firm situation and explore if there is a specific IT department, number of staffs, the amount invested every year in IT resources and the overall understanding of the human resources of

74

the subsidiary about these IT tools. As we can see, there is still a new window of research on these topics. Beyond the limitations, it may deliver a positive feeling to finish with a question. After reviewing extensively Japanese and Spanish culture, MNEs organizational culture and the determinants of performance; considering that many other countries inherited Spanish culture several years ago, it will be interesting to explore the situation of those other Hispanic influenced countries: Argentina, Bolivia, Chile, Colombia, Costa Rica, Cuba, Dominican Republic, Ecuador, Equatorial Guinea in Africa, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Puerto Rico, The Philippines in Asia, Uruguay, and Venezuela. As a highlight, all previously mentioned countries are emerging markets and since may present interesting opportunities for profit and development. If a firm nurtures a solid transnational organizational culture that reflect social responsibility, diversity in their organization and achieves understanding of host country’s culture can effectively spread its influence worldwide towards successful performance.

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7.1 Worldwide web* - Wikipedia.org - World fact book - Google search and Google patent search - Spanish institute of foreign trade ICEX

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- Ministry of Foreign Affairs Japan, MOFA - Jetro: Japan External Trade Organization jetro.go.jp - Mint Global Database online Bureau Van Dijk - The Economist Intelligence Unit - Delloite

* All previously mentioned URL can be reached by entering google.com with the above mentinoned keywords and clicking “I feel lucky”

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