An Innovation Theory of Headquarters Value in Multibusiness Firms

Abstract

A fundamental question in corporate strategy is how headquarters in multibusiness firms can create value above and beyond the burden of its own overhead. The leading theories from Chandler and Williamson hold that this is possible through resource allocation across businesses. Yet, there are multibusiness firms for whom reallocation opportunities are limited—e.g., chains. Accordingly, we propose, model, and test an alternative theory, one in which headquarters facilitates market-like dynamics between businesses that fuel innovation and growth. Whereas Chandler’s and Williamson’s theories involve the visible hand of managers, ours involves an invisible hand of managers. We construct an interacting agent model of the theory, which yields three propositions relating multibusiness structure to firm growth. We test those propositions in the banking industry and obtain results consistent with the model’s predictions. In particular, knowledge growth increases in the number of units and heterogeneity in their knowledge, and increases then decreases in their geographic distance. Interestingly, once we account for these structural elements, scale and hierarchy both suppress innovation. Thus, neither Williamson’s nor Chandler’s theories hold in our setting (consistent with the argument motivating the need for an additional theory).