Capital Dependence, Financial Risk, and Change from the Multidivisional to the Multilayered Subsidiary Form

Abstract

Students of the modem corporation continue to assume that corporations have the same form as they did before the turbulent 1980s when the economy became increasingly globalized and competitive. Our analysis shows that corporations are changing from the multidivisional form to a multilayered subsidiary form. Previous research showed that most corporations were multidivisional in the late 1970s. However, by 1993, 42% of the largest 100 industrial corporations had one or no divisions. The mean number of divisions per corporation declined from 8.8 in 1981 to 4 in 1993, while the mean number of domestic subsidiary corporations increased from 23 in 1981 to 51 in 1993. Parent corporations are creating a hierarchy of subsidiary corporations. Most of these changes occurred after the mid-1980s change in state business policy. The theoretical framework historicizes the corporation by identifying how capital accumulation constraints and changes in the institutional arrangements (e.g., the state) within which corporations are embedded created motives and behaviors that resulted in a change in the corporate form. Findings from logistic regression suggest that corporations that have low profits, have low working capital, have a decline in dividend payments, and manufacture high-risk, liability prone product lines have an increased probability of change to the multilayered subsidiary form. Our results provide support for the capital dependence perspective.