The Effectiveness of Performance Measurement System for the Principal's Decision Making in a Context of Foreign Subsidiary Management

Abstract

This study examines the effectiveness of performance measurement system (PMS) for the principal’s decision making in a context of foreign subsidiary management. In the midst of the current competition, global organizations are faced with tensions resulted from the pursuit of centralization and decentralization. The headquarters decentralizes decision-making authorities to the foreign subsidiaries so that they can deal with local affairs autonomously. At the same time, the headquarters, with some centralization, involves into the local affairs so that global efficiency can be ensured. Thus, the global organizations need to balance such tension to acquire global competitive advantage. The prior literature has focused on the roles of PMS in controlling decentralized organizations. In contrast, how PMS supports the centralized decisions by the headquarters as a principal still remains unclear. This study argues that PMS helps the headquarters to gather the environmental information about the foreign subsidiary and to make better decisions on the subsidiary. We hypothesize that the environment-relevant information (ERI) available for the headquarters mediates the relation between PMS and the subsidiary performance.We used a sample of 600 headquarters managers of global organizations based on our questionnaire survey. Using the structural equation model analysis, this study demonstrates that PMS increases the amount of ERI available for the headquarters and then ERI leads to the subsidiary performance. Furthermore, we investigate what factor moderates the extent to which the headquarters relies on PMS for increasing the amount of ERI. We find that the effect of PMS on ERI depends on a characteristic of the market of the foreign subsidiary. With this new finding, this study adds the empirical evidence to the relevant literature on PMS.