Foreign subsidiaries and strategic flexibility: being prepared for an increasingly uncertain global economy

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Purpose The purpose of this paper is to demonstrate the importance of embedding strategic flexibility into organizational structures, and while this comes at a cost, such strategic flexibility pays off in the face of economic downturns. Furthermore, as the world has become more uncertain, so too has the relative importance of strategic flexibility. Multinational enterprise (MNE) managers should, therefore, assess the degree of uncertainty they face in the markets in which they operate and decide upon the appropriate level of flexibility that should be embedded within their organizational structures. Design/methodology/approach This paper proposes measures of organizational flexibility at the firm level and hypothesizes that these measures will be directly linked to the amount of flexibility exercised during the 2008–2009 global financial crisis. This paper also hypothesizes that amount of flexibility embedded within MNE organizational structures will increase during periods of increased uncertainty. These hypotheses are tested using data on all firms operating within Canada over the period 2003–2014. Findings The empirical analysis confirms that the amount of strategic flexibility exercised by MNE firms operating in Canada is directly linked to the measures of organizational flexibility proposed in this paper. This paper also documents evidence of the increased uncertainty in the global economy in the period after the 2008–2009 global financial crisis and that embedded flexibility in organizational structures of foreign affiliates also increased in this period, thus better preparing MNEs for the increased uncertainty they face. Research limitations/implications This study provides several implications for MNEs managers. While the lowest cost organizational structures have little to no flexibility, such structures leave the MNE unable to respond effectively in the face of significant changes in external environments in economies where they operate. Embedding flexibility into an MNE’s organizational structure can be viewed as buying real options which pay off in periods of significant economic downturns. Given the world has moved into a period of increased uncertainty, so too have the value of these real options. MNE managers must, therefore, consider the tradeoff between the increased costs associated with embedded flexibility and the potential benefits that can arise when such flexibility is valuable. The analysis in the current paper underscores the importance of MNE managers being systematic in determining the amount of flexibility to build into their operations. Practical implications The practical implications for MNEs managers fall into several dimensions. First, the decision to embed strategic flexibility into an MNE’s organizational structure must consider the associated costs. Given the documented evidence of the world moving into a period of increased uncertainty, the value of such flexibility has increased. As such, MNE managers must (re-)consider embedding more strategic flexibility into their MNE structures. This requires an explicit consideration of the uncertainty they face in the markets where they operate and the increased costs associated with that flexibility. Second, while the analysis presented here has focused on one country over time, the practical implications apply across countries as well. Given that some markets are more uncertain than others, MNE managers should consider the optimal amount of organizational flexibility to build into MNE operations across countries. As such, the optimal amount of flexibility, therefore, may vary across affiliates within the same MNE. Social implications Economic downturns typically have a disproportionate impact on racialized, marginalized and lower income communities. To the extent MNEs can build flexibility into their operations, MNEs can mitigate reductions in their own output and that of the overall economy. In the process of building in such flexibility, the negative impacts on such communities can be mitigated. To the extent MNEs can use strategic flexibility available to them but not available to purely domestic firms, this can improve the social implications of the presence of MNEs in the economies they operate in. Originality/value This paper proposes specific and tangible firm-level measures MNE managers can consider when measuring strategic flexibility. In this sense, MNE managers can better understand both how to measure organizational flexibility and how such embedded flexibility can payoff in periods experiencing an economic downturn. While previous studies have considered strategic flexibility at a point in time, this paper considers how these measures, at the firm level, have changed over time in light of a change in uncertainty. Also, while previous studies have either focused on foreign MNEs or lumped together domestic and foreign MNEs operating in any given domestic market, this paper has separated these two groups of MNEs. This paper then benchmarks both organizational flexibility and the exercising of strategic flexibility during the 2008–2009 global financial crisis for each group of MNEs separately and relative to non-MNEs.