The role of subsidiary social capital in international takeovers

Paper by Dana Minbaeva og Steen E. Navrbjerg

When multinational corporations (MNCs) take over subsidiaries in other countries and institutional settings, the HQ quite often encounter employment relations systems that differs markedly from the one they know from the MNCs country-of-origin. As it has been well described in the literature, there are numerous clashes between the HQ-originated HRM policies and the employment policies practiced in the taken-over enterprises.

This paper argues that by employing HRM practices that are sensitive to the local cooperative culture on micro-level and the IR-system on macro-level, MNCs win by receiving often unexpected return on their investment – advantages in work organization and cooperative culture. To argue for this we build upon the insights from the social capital theory.

With Denmark as a starting point and the story of a local enterprise developing from a family owned SME to a MNC-owned subsidiary over 16 years as the case, the analysis shows that MNCs do not always understand the complexity of the business system in the country they invest in.

Confronted with employment practices that deteriorate the working conditions and ultimately threatens the subsidiary’s survival employees and management use social capital to find common ground for voicing their dissatisfaction.

Responses in the form of exit, loyalty or neglect are not used. Rather voice in different forms are the kind of response chosen, and a high level of social capital at enterprise level as well as on institutional level makes this the most obvious choice.

We conclude that social capital is underexposed when MNCs overtake subsidiaries and this could potentially result in a no-win situation for the MNC’s as well as other stakeholders. The results also indicate that local management and employees (in cooperation) actually are capable of using social capital as one of the features of the local business system in the international competition with other subsidiaries in the same MNC.

By ‘selling’ social capital as an important resource for the quality of the products and services provided by the subsidiary in question, management and employees are able to compete with other subsidiaries in the same MNC, even though labor costs in Denmark are considerably higher.

The full paper was presented at the anual meeting of Academy of Internatíonal Business, Vancouver, 23-26 August 2014. It was also presented at the annual meeting of Academy of Management, Boston, 7 August 2012.