iBusiness, 2013, 5, 123-127
http://dx.doi.org/10.4236/ib.2013.53B026 Published Online September 2013 (http://www.scirp.org/journal/ib) 123
Roles of Subsidiaries to Parent and Motivations Justifying
Their Presence in Developing Countries (DCs): Synthesis
of Literature
Alexis Abodohoui1, Bolarinwa Osunlalu2, Nie Guihua1
1School of Management, Wuhan University of Technology, Wuhan, China; 2United Nations Economicand Social Commission for
Asia and Pacific.
Email: abodohouialexis@yahoo.fr, osunlalu@un.org, niegh@whut.cn
Received July, 2013
This paper reviews different policies and looks in some detail at the factors influencing the choice of development of
subsidiaries in developing countries. It shows also that the subsidiaries play an important role to the MNC units. We
review in this paper some of motives for international transfer, control, coordination, investment, and development of
new capability. This research highlights the peculiarities in African business world and improves the strategies about
the optimization of the investment in developing countries.
Keywords: Subsidiaries; Parent; Motivations; Developing Countries
1. Introduction
The strategic decision of internationalization has been an
undermined subject matter that continues to fuel the field
of knowledge in International Management. Several de-
terminants may be taken into account in the choice of
entry of the company in the international market. These
factors whether order micro or macro-economic partici-
pate in the creation of one or more subsidiaries abroad.
Indeed, for many economic and strategic reasons related
to the development and business management, such as
access to a new markets and growth, companies often
create ramifications of their entity at various points of a
territory or abroad.
The development of these subsidiaries is crucial for
multinationals. At the heart of a period of economic tur-
bulence, globalization and the new division of Labor,
several multinationals companies adopt a plethora of
strategies to operate in the international markets. It is a
fact, on the one hand that many researchers in the field of
International Management, agree to admit that subsidiar-
ies play a crucial role in the development of multina-
tional and can be considered as a center of excellence
[2,3,18]. This idea draws its essence from the various
theories on the chang ing roles of subsid iaries in time and
space. On the other hand, we also identified in the litera-
ture minimal research on the main motivations of multi-
nationals over their implementation in developing coun-
tries [10]. While empirical studies have shown that sub-
sidiaries in developing countries facilitate knowledge
transfer from in dustrialized countries to develo ping ones,
others argue that it is more specifically the use of natural
resources for the benefit of the parent, minimization of
production costs, or the penetration into new markets[10].
Thus, we seek to synthesis and discover the actual roles
and motivations of multinationals in developing coun-
tries. Seemingly, the reality in these theories remains
ambiguous, contested and does not guarantee the role of
subsidiaries in economic growth and sustainable devel-
opment as deemed desirable in developing countries.
To do this, we will first spend the first part about the
relationship between the parent has with its subsidiary
after a broad definition of both concepts. Then we exam-
ine the motivations underlying the establishment of sub-
sidiaries in developing countries for the multinationals
and the host countries in order to generate positive ex-
ternalities. Finally, our last part will allow us to open up
opportunities for future research that will feed this field
untouc hed resear ch.
2. Conceptualization of Multinational and
To better understand the two concepts it is imperative to
offer a clear definition. Prosaically, the subsidiary is a
company with at least half of the share capital is owned
by another company. This participation enables the par-
ent company to exercise control over the company. The
Copyright © 2013 SciRes. IB
Roles of Subsidiaries to Parent and Motivations Justifying Their Presence in Developing Countries (DCs):
Synthesis of Literature
subsidiary is generally regarded as company with a per-
centage of the share capital belongs to a company called
parent. The subsidiary is above all a company with legal
personality, which can take various legal forms. It is
therefore important to distinguish the subsidiary from
and the branch is "any commercial establishment in the
dependence of a principal business of which he is legally
part, has a sustainable manner, in separate rooms, an ac-
tivity similarly, enjoying a certain autonomy in the eco-
nomic and business world. The branch does not have
legal personality. A multinatio nal, transnational or paren t
is a company established in several countries through
subsidiaries; it owns all or part of the capital. In the re-
cent literature, the multinational is increasingly seen as a
global network of subsidiaries scattered, poorly differen-
tiated and controlled from the parent. Other authors de-
fine it as "a group of geographically dispersed organiza-
tions with different goals and that includes the headquar-
ters and the different national subsidiaries" [15].
A multinational organization is one that operates in a
global environment on the one hand, with a need to co-
ordinate its remote operations. On the other hand, it also
consists of a set of organizations that operate in different
national environments. These definitions lack precision
that can only be perceived by linking the two concepts.
3. Relationship between the Subsidiary and
its Parent
Compared to the relationship parent / subsidiary, the lit-
erature has focused on specific factors such as the level
of autonomy, formalization, control and their impact
performance of the subsidiary. Subsidiaries play very
diverse roles in the multinational. Subsidiaries involved
in the transfer of resources (knowledge, financial and
material). Table 1 allows us to better identify the rela-
tionship or dependency ratio and / or interdependence
between the parent company and its subsidiary. The sub-
sidiary - parent relationships can be viewed from the
perspective of agency theory. Management headquarters
(the principal) implements controls the management of
the foreign subsidiary (the agent) to prevent it takes do
not conform to its own interests decisions.
4. Summary Evolution of Internal and
External Roles of Subsidiaries
Until recently, multinational innovations come from the
North to the South and in tu rn the parent company to the
subsidiary. However, business development and interna-
tionalization unprecedented firms today allow us to say
or assert that this innovation is multidimensional and
multi-platform. They also emanate from the affiliate of
the multinational and even the external environment of
the production units or services. In support of this idea,
several authors have argued that the existence of the
house depends on its ability to internal knowledge man-
agement and external market mechanisms [11]. The sub-
sidiary is seen as a center of excellence for its place in
the development of activities within the multinational.
This pole is defined as an organizational unit that in-
cludes a set of capabilities explicitly recognized by the
company as an import source of value creation, with the
intention that the supreme capabilities can be exploited
and / or broadcast by the other parties of firm [14]. The
following table allows us to understand and identify the
different roles of the subsidiary in the capacity of the
parent company.
Table 1. Degree of relationship between parent and subsidiary.
Perspective Definition Relationship
Competitive Advantage The multinational is a competitive advantage by locating and
coordinating overseas activities of its value chain [22]. Coordination
Logic of Production A multinational is company with production units of goods and services in more than one
country abroa d [17]. Ownership
Cultural and
Sectorial diversity A multinational works in more environments and responds to a complex set of factors:
multiculturalism, geographical dispersion of its units and the disparity of its objectives [1]. Dispersion cultural,
geographic and strategic
Turnover Multi-nationality is based on the percentage of foreign sales to total sales of the entity, the
percentage of foreign assets to total subsidiaries Productivity
Organization and
For [21], multinational may be ethnocentric (now turned to his country), polycentric
(the company implements its subsidiaries in many countries) or geocentric (the implements
business-orien ted gl oba l m ark et considers s ub si di a ri es as a whole). Multinationals are
characterized by a distribution of resources and delegation of responsibilities to
subsidiaries in the host country [17].
Degree of process ing and
distribution of resources
Foreign Direct
Investment (FDI)
Multinational company is holding any direct investments in at least two foreign countries,
actively managing the international operations and consi der s t hem an integral part of all its
operations [15
Management and control
of international operations
Knowledge Transfer The company has been presented as a vehicle for organizational learning and organizational
knowledge accumulation [13]. Mutual transfer of
organizational practices
Copyright © 2013 SciRes. IB
Roles of Subsidiaries to Parent and Motivations Justifying Their Presence in Developing Countries (DCs):
Synthesis of Literature 125
They also emanate from the affiliate of the multina-
tional and even the external environment of the produc-
tion units or services. In support of this idea, several au-
thors have argued that the existence of the house depends
on its ability to internal knowledge management and ex-
ternal market mechanisms [6-11]. The subsidiary is seen
as a center of excellence for its place in the development
of activities within the multinational. Th is pole is defined
as an organizational unit that in cludes a set of capabilities
explicitly recognized by the company as an import
source of value creation, with the intention that the su-
preme capabilities can be exploited and / or broadcast by
the other parties of firm [14].
The Table 2 allows us to understand and identify the
different roles of the subsidiary in the capacity of the
parent company.
5. Paradoxical Motivations in Developing
and Emerging Countries and Emerging
In the country as a whole is generally a foreign invest-
ment component of strategic development. This means
that foreign investment in a country generate cash flow
and can act as an economic catalyst. It is obvious that
investment promotes the transfer of technology and sk ills
and also participates in the formation of human capital.
The subsidiary of a multinational can be a facilitator for
the introduction of new forms of dynamic management.
These investments therefore encourage many benefits
or externalities (spillovers) to the host country. External-
ities are mainly indirect effects that benefit local busi-
nesses when they are not fully captured by the foreign
Recent studies by the United Nations (Table 3) and
specifically specialized institutions such as the United
Nations Development Program (UNDP, 2011) and the
United Nations Conference on Trade and Development
[26] have shown that FDI has increased in developing
countries but show that the main driver of these invest-
ments is the research or the need for natural resources.
Table 3 above gives an overview on the distribution of
FDI in developing countries. These improvements are the
results from the regulations in the country of origin of
investment, the liberalization of the capital account,
signing agreements on trade, investment and taxation and
various incentives.
Table 2.
Roles Determinants Theoretical Perspectives and Visions
Absorptive capacity of knowledge, transfer of good
practices between the subsidiary and the parent to
stimulate innovation
Theories based on resources[23-18 -28]. Economic transaction costs [27]
Transfer of Knowledge and Skills [16-3-14-28]
Exploitation of existing advanta ges and seeking the
acquisition of new benefits and new capabilities Prospecting and Performance [20-24].
Communication (in all forms) inter-subsidiary and the
parent company, determination and goals set by the
parent company to the subsidiary Achievement of the main objectives of the subsidiary [5-6].
Recruitment of qualified personnel, access to foreign
talent and differentiated technologies, increasing
proximity to customers, d e v el o pment of new products,
legal incentive
Market factors [8-9].Technological factors [14]. Institutional factors [7].
Table 3. Share of FDI projects by BRIC countries, by host region, average 2005–2007 (pre-crisis period) and 2011 (Per cent).
Source: UNCTAD, FDI / TNC database.
Copyright © 2013 SciRes. IB
Roles of Subsidiaries to Parent and Motivations Justifying Their Presence in Developing Countries (DCs):
Synthesis of Literature
The real paradox is that these investments are accom-
panied by a real economic development of countries.
There are other incentives factors that lead firms to locate
developing countries are summarized in Table 4 below.
It is clear that developing countries put in a great deal of
efforts in order to promote the development of subsidiar-
ies in the country but the real motivations of investors are
often far from reconciled with those of national hosting
6. Discussions and Future Research
Since the 80s, several strategies have been undertaken to
conquer the international market. Sometimes it may be
from the same subsidy policy from the country of origin
of the company or incentive on the part of host country
policies in order to attract the investment. The general
finding for understanding the subsidiaries in developing
countries are more driven by the creation of competitive
advantage and provide centers of excellence for the eco-
nomic development of the parent company. Many re-
searches have proved undoubted ly that the su bsidiar ies in
developing countries contribute to the likely reduction in
the unemployment rate but nevertheless, they do not play
a major role in the economic dynamics. Further research
allows us to analyze the relationships between the enti-
ties required to maintain them. The parent maintains in-
tra-organizational relationships with its subsidiaries. As it
is shown that both the subsidia ry is a center of excellence
for the development activities of the multinational, it is
unclear that this division continues in this spirit. The
center of excellence provides to the subsidiary many
household activities and other subsidiaries. This may be
detrimental to the control power of the parent company.
Research in this direction should be developed in order to
promote the control of the dyadic relationship between
these entities. It should be adde d that the center of excel-
lence for which it qualifies also depends on the degree of
local competition. De facto, it is not a confirmed case but
depends on several factors and parameters that need to be
In relation to the transfer of knowledge and technolog y
between the parent and the subsidiary, studies have
shown that the parent usually transfer older technologies
and especially when there is a threat of the latter at the
country level Home. This fact contributes to the balanced
development of the understanding of the technology in
the country of origin or those who receive. Other re-
search analyzes the development of the subsidiary in the
developing countries participate in the industrialization
of the country but th en forgets the po sitive feed b acks that
should raise Foreign Direct Investment in these countries.
Other factors are not conducive to the development of
local subsidiaries. We can cite among others, government
corruption in developing countries, the administrative
difficulties, problems of insecu rity, crisis emanatin g from
poor governance at a national and global level,, expro-
priations are bottlenecks for the development of eco-
nomic activities. These factors are studied carefully in
order to showcase sustainable development in developing
countries and not to mention a fight against tax evasion.
While existing institutional agreements are positioned
to strengthen key natio nal policies to maximize the b ene-
fits of FD, It is important to seek to preserve a national
discretion to allow developing countries, within their
international obligations, to pursue policies that contrib-
ute to their development. This is how and to what extent
international investment agreements can be designed to
foster development. This is an issue that deserves atten-
tion especially at a time when each host country means to
attract FDI and benefit from it. Analyzes can be gone in
the direction of how developed countries can help de-
veloping countries and countries in transition in their
efforts to attract FDI. This analysis in this direction can
be very frui t f ul.
The internationalization and development subsidiaries
also assume the management of diversity and recognition
of subcultures. Any country or region must implement
strategies for creating a unique culture of "global citi-
zenship" cosmopolitan entrepreneurs and executives.
Cultural tolerance, and recognition of their flexibility
allows operation in various uninhibited environment or
frustrations. Effects must also be taken in this field of
research that is becoming more and more complex
rhythm of many theories and paradigms developed in
order to apprehend it.
It is an international technology transfer internalized
and externalized transfer, it is important for the host
country to determine which of the two modes can have a
positive impact on its economy. For multinationals
choose the mode of transfer to a non-trivial inclination
Table 4. Analysis of factors related to the actual establishment of subsidiaries in developing countries.
Incentives factors Attraction factors Management factors
Sources of creating
subsidiaries in the
host country
Narrowness of the domestic market;
Internationalization policy of the com pany;
Development of commercial synergies;
Imitation of competitors; Technologies transfer
Low production costs;
Access to natural resources;
Institutional incentives authorities
of the host country
Access to skills and local knowledge;
Sharing a consulting firm;
Successful internationalization and
assembling alliances (joint venture,
acquisition, Greenfield, Fusion ...)
Copyright © 2013 SciRes. IB
Roles of Subsidiaries to Parent and Motivations Justifying Their Presence in Developing Countries (DCs):
Synthesis of Literature 127
but are based specifically on certain variables such as
nature and pace of technological change, the nature of
the subsidiary, the in dustry and certain features and poli-
cies host country. It can also be no question local com-
petitive environment in which the subsidiary operates.
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