Intermediate Units in Multinational Corporations: Advancing Theory on their Co‐parenting Role, Dynamics and Outcomes

• Author: José Pla‐Barber,Ana Botella‐Andreu,Cristina Villar
• DOI: http://doi.org/10.1111/ijmr.12243
• Published date: 01 January 2021
• Date: 01 January 2021

International Journal of Management Reviews, Vol. 23, 116–147 (2021)

DOI: 10.1111/ijmr.12243

Intermediate Units in Multinational

Corporations: Advancing Theory on their

Co-parenting Role, Dynamics

and Outcomes

José Pla-Barber, Ana Botella-Andreu and Cristina Villar

University of Valencia, Av. dels Tarongers, s/n, Valencia, 46022, Spain

Corresponding author email: jose.pla@uv.es

Due to the dispersion of headquarters’ activities across organizational and geograph-

ical boundaries, intermediate units (IUs) are emerging as a key actor in international

business. These units are intermediate structural layers between headquarters (HQ)

and local subsidiaries with specif‌ic HQ responsibilities. Through a systematic review

of 68 studies published between 1996 and 2020, we develop a conceptual framework

that integrates complementary streams of theoretical and empirical researchwith IUs

as the focal unit of analysis. Our aims are to disentangle how the main theories in this

f‌ield address the antecedents of IU creation, and explain the dynamismin the roles and

functions of IUs and their outcomes. We also propose a conceptualization of IUs as

co-parents in a dynamic system in which parenting functions are shared by IUs and

headquarters. Finally, we highlight avenues for future research, emphasizing opportu-

nities to advance the understanding of IUs using different theoretical lenses that may

help scholars position their work within the broader streamof literature.

Introduction

In recent years, multinational corporations (MNCs)

have encountered numerous challenges associated

with increasing diversity and decentralization. In this

context, corporate headquarters’ (CHQs’) functions

are being dispersed across organizational and geo-

graphical boundaries in increasingly complex ways

(Benito et al. 2011; Nell et al. 2017). As a con-

sequence, intermediate units (IUs) are emerging as

key actors in the conf‌iguration of the multi-tiered,

nested structure of modern MNCs (Ambos and

Schlegelmilch 2009; Chakravarty et al. 2017; Lun-

nan and Zhao 2014).

IUs are a structural mechanism used to man-

age MNCs’ headquarters–subsidiary relationships.

They connect CHQs with subsidiaries on the front

lines, and have supervisory responsibilities over

other MNC units (Zhou 2015). The rationale for

the existence of IUs relates to the bounded ra-

tionality of the CHQ, which leads to the delega-

tion of decisions to lower levels in order to over-

come information problems (Verbeke and Asmussen

2016).

Early studies in the f‌ield (Daniels et al. 1984;

Egelhoff 1988; Stopford and Wells1972) contributed

immensely to our understanding of the link between

strategy and structure in MNCs, including the cre-

ation of IUs as a response to this link. The results

of those studies suggest that MNCs with a high per-

centage of foreign sales adopt regional (area) man-

agement structures, while global product divisions

are preferred when product diversity is high. Delv-

ing into these results, Egelhoff (1988) and Wolf and

Egelhoff (2002) showed that high levels of foreign

manufacturing – rather than high levels of foreign

sales – led to structures based on regional headquar-

ters (RHQs) due to the regional interdependencies

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Intermediate Units in Multinational Corporations 117

between foreign subsidiaries in terms of operating

synergies and economies of scale.

In the 1970s and 1980s, some researchers began

to pay more attention to RHQs as dedicated struc-

tural solutions. Subsequent research has ref‌lected the

existence of IUs as distinct from dedicated RHQs,

as MNCs are progressively unbundling their HQs

to outstanding subsidiaries in their networks that al-

locate time and resources to handling HQ activi-

ties (Lasserre 1996). This phenomenon ref‌lects an

organizational innovation that creates f‌lexibility in

parenting systems. In addition, as the disaggrega-

tion of HQs becomes increasingly widespread, the

extant literature has made important advancements

with regard to other types of IUs that can as-

sume HQ functions, such as regional management

mandates (RMMs), subregional headquarters, host-

country headquarters and virtual headquarters.

At the theoretical level, studies on the emer-

gence of IUs and their characteristics are grounded

in a wide variety of theories, including clas-

sical, eff‌iciency-based theories (e.g. information-

processing theory or agency theory) and, more re-

cently, approaches that emphasize the role of IUs as

value creators, such as network theory, resource de-

pendence theory and parenting theory. Empirically,

the bulk of the extant research relies on case stud-

ies that examine the characteristics of IUs, while arti-

cles using large samples, cross-regional samples and

longitudinal samples are lacking (Kim and Aguilera

2015; Piekkari et al. 2010). Other studies investi-

gate the role of IUs in eff‌iciently organizing regions

(Amann et al. 2014; Schotte et al. 2017), acting as

cornerstones for cross-regional internationalization

(Hutzschenreuter and Matt 2017; Pla-Barber et al.

2018), adding f‌lexibility to enlarged MNCs (Alfoldi

et al. 2012; Asakawa and Lehrer 2003; Piekkari et al.

2010) and serving as knowledge repositories inside

the organization (Hoenen et al. 2014; Lunnan and

Zhao 2014).

Given this expanding and often disconnected body

of literature on IUs, there is a need for a deeper

understanding of the emergence of these units. We

believe a literature review is a useful way to take

stock of the extant knowledge and move research

on IUs forward. Our aim in this literature review

is to develop an integrative, conceptual framework

of IU research undertaken using different theoretical

approaches. Our research objectives and conceptual

boundaries are encapsulated in three overarching re-

search questions: (1) What has been the research tra-

jectory in this f‌ield? (2) What is the current status of

theoretical and empirical research on the antecedents,

roles and outcomes of IUs? and (3) What avenues for

future research are suggested by our f‌indings?

We contribute to the literature in three main re-

spects. First, at the theoretical level, the extant re-

search is highly fragmented and eclectic, with little

integration across theories and themes. We aim to

clarify insights into the theoretical foundations of this

body of research and emphasize opportunities to ad-

vance our understanding of IUs using different theo-

retical lenses. To enhance theory building in this f‌ield

of research, we offer a framework that integrates the

research domain in terms of theories, themes and re-

search gaps.

Second, despite the shift in emphasis from unitary

to dual HQs (Nell et al. 2017), most studies tend to

ref‌lect a HQ-centric orientation or largely focus on

CHQ–subsidiary dyads (Zhou 2015). The perspec-

tive we adopt addresses the position of the ‘counter-

part’ HQ. As such, we enhance the concept of co-

parenting, which we def‌ine as the sharing of parent-

ing roles and accompanying responsibilities between

CHQ and IUs. This shift in approach, which involves

a focus on IUs as the unit of analysis, helps to frame

the notion of IUs in MNC studies. Moreover, it goes

beyond the oversimplif‌ications seen in the general

literature on CHQs by introducing them as systems

of interrelated responsibilities, thereby overcoming

the idea of the unique CHQ (Kunisch et al. 2015).

Third, the extant research tends to examine IUs’

roles and responsibilities within the MNC in a some-

what static manner. This is limiting, as one might an-

ticipate that such a conf‌iguration would (or should)

tend to evolve in line with the changing capabili-

ties of the units concerned. In this sense, our liter-

ature review stresses the importance of taking a more

dynamic approach in order to better understand the

shifting roles and responsibilities of the co-parenting

function at the IU level. This focus is important for

recognizing that IUs do not always act as HQ super-

visory agents (Zhou 2015). At times, they serve as

entrepreneurial units that drive business development

at the regional level (Verbeke and Yuan 2018). Given

the mobilization of power and resources that HQs’

decentralized activities entail, as well as the inf‌luence

of spatial relations, these IUs are particularly impor-

tant not only within the MNC but also in their local

economies.

To achieve these aims, we systematically review

the literature on IUs and organize it into three groups

– antecedents, roles and outcomes – based on the

main research focus and the approach to theory. The

© 2020 British Academy of Management and John Wiley & Sons Ltd.

118 J. Pla-Barber et al.

remainder of the paper is structured as follows. First,

we introduce the phenomenon of IUs and key def-

initions, before describing our methodology. Then,

we introduce our conceptual framework and detailed

outlines of key aspects of IU research. Finally, we

present our conclusions and propose avenues for fu-

ture research.

Intermediate units: Def‌initions and

types

The term ‘intermediate units’ refers to units within

a corporation that are located between global CHQs

and local subsidiaries. An explicit def‌inition of IUs

can be found in Hoenen et al. (2014, p. 77), where

they are def‌ined as ‘hybrid organisational entities

that are distinct from subsidiaries and CHQ units

although they share some of the same characteris-

tics’. IUs occupy an intermediate position in terms of

strategy and structure, and they help the organization

make sense of and interpret local conditions (Villar

et al. 2018). IUs hold a narrow or wide range of

supervisory responsibilities over other units that

are under its spectrum of inf‌luence (Zhou 2015).

These responsibilities may relate to a business unit,

a specif‌ic market or region, or a specif‌ic activity

(e.g. f‌inancial control or exploration of new business

opportunities). They have been viewed as two-way

communication agents (Lunnan and Zhao 2014),

information-capacity builders (Piekkari et al. 2010)

and translators of corporate strategies into local

strategies that are able to leverage local initiatives in

the MNC (Budhwar 2012; Chakravarthy et al. 2017).

Furthermore, the existence of IUs changes the

analysis of HQ–subsidiary relationships in interna-

tional business by incorporating another layer into

the framework. The distribution of the supervisory

responsibility of CHQs to this second layer encom-

passes ‘cascading agency relationships’ (Hoenen and

Kostova 2015, p. 110) and new forms of distance

(Baaij and Slangen 2013). The IUs become princi-

pals (pursuing alignment) for the units under their su-

pervision and at the same time, they act as agents for

HQ (pursuing self-interest) (Pla-Barber et al. 2018).

A variety of micropolitical dynamics emerge as a

consequence of this dual role. For instance, IUs have

to build legitimacy for strategic decisions in three ar-

eas: externally, internally with the parent and inter-

nally with the subsidiaries (Balogun et al. 2019).

IUs exercise a double function (Hoenen et al.

2014). On the one hand, they consistently build

and maintain connections with the local networks

in their area of inf‌luence. On the other hand, on

behalf of the CHQ, they integrate dispersed sources

of knowledge, assist in information processing and

communication, and take over HQs’ activities in a

specif‌ic area (Conroy et al. 2017; Zhou 2015).

In Table 1, we cover the wide variety of IUs found

in the extant research. The vision of HQ activities as

a complex parenting system (Goold and Campbell

2002) has its roots in the M-form organization. M-

form organizations are assumed to disaggregate HQ

functions depending on the evolution of their struc-

ture into product divisions managed by divisional

headquarters (DHQ), RHQs or both. DHQs are

described as units responsible for the strategy for a

specif‌ic product or business unit (Benito et al. 2011;

Chandler 1991; Dellestrand 2011; Wolf and Egelhoff

2002). They work closely with local subsidiaries

on operational tasks, such as innovation projects

(Decreton et al. 2017; Dellestrand 2011). On the

contrary, RHQs are ‘organisational units concerned

with and involved in integration and coordination

activities (…) within a given geographical region

representing the link between the region and the

CHQ’ (Schütte 1998, p. 103). Yeung et al. (2001)

def‌ine the RHQ as a business establishment that has

control over the operations of one or more other sub-

sidiaries or aff‌iliated companies located in the same

region. Lunnan and Zhao (2014) attribute the func-

tions of identifying and adapting knowledge from

units and actively locating suitable receivers (i.e. a

role as knowledge brokers) to RHQs. The literature

on RHQs is largely focused on Asia (Enright 2005a;

Li et al. 2010; Schütte 1997). These studies show

that when RHQs manage a region for which a single

regional strategy is insuff‌icient due to the region’s

size or complexity, MNCs tend to segmentthe region

into subregions and build new sub-IUs (Li et al.

2010). These units are known as subregional HQs

or regional off‌ices, and they are situated between the

RHQ and the local subsidiaries. Differences between

RHQs and subregional HQs relate to the number and

extent of responsibilities (Schütte 1997). Usually,

these IUs assume a control or supervisory role (Zhou

2015), thereby giving the RHQ room to developother

strategic activities. Other described types of IUs are

innovation relays (Asakawa and Lehrer 2003), which

are regional off‌ices that mediate between knowl-

edge generation at the local level and knowledge

application at the global (or a superior) level.

Since Lasserre (1996), authors have explicitly

differentiated between RHQs and other types of

© 2020 British Academy of Management and John Wiley & Sons Ltd.