Parent-subsidiary Relationship Research Articles

Excess is just as bad as deficiency: Parent director appointments and subsidiary innovation input

AbstractCorporate parents are important to subsidiary development. Drawing on the parent–subsidiary relationship perspective, this paper examines the impact of parent director appointments on subsidiary innovation input. Although existing research indicates that disproportional board representation can enhance control, the literature is silent on the effects of proportional board representation. Using a sample of listed nonfinancial Chinese subsidiaries between 2007 and 2021, we find that parent director appointments in line with shareholdings significantly enhance subsidiary innovation input. The positive effect is more pronounced when the parent appoints an executive manager, and the subsidiary operates in regions with a favorable institutional environment. Based on the analysis of innovation willingness and resource, the mechanism test reveals that parent moderate appointment of directors can improve innovation input by alleviating financial constraints and fostering a greater appetite for risk.

Corporate governance characteristics of Japanese manufacturing companies and ISO 14001 adoption by their subsidiaries in Thailand

Companies have reported some voluntary initiatives such as obtaining an ISO 14001 certification to solve environmental problems and to achieve United Nation's Sustainable Development Goals. While ISO 14001 adoption has been studied extensively on the case of parent companies, there is not much prior research related to the parent-subsidiary relationship. This paper attempts to answer the question why Japanese subsidiaries in Thailand obtain ISO 14001 certification by focusing on corporate governance characteristics of Japanese parent companies such as board diversity and on the share of voting rights in their subsidiaries. We perform a logistic analysis using panel data from 117 subsidiaries in three industrial sectors (rubber products, machinery, and precise machinery) in 2017–2020. We find that characteristics such as direct voting rights in the subsidiaries and long business history of the parent companies have a strong positive correlation with ISO 14001 adoption by their subsidiaries in Thailand. The proportion of independent directors on the parent companies' boards exhibits only a slightly positive correlation. By contrast, our findings show no correlation with the proportion of female directors on the parent companies' boards due to the gender inequality gap in Japan. Our findings contribute to the empirical literature about voluntary environmental management in developing countries with regard to the parent-subsidiary relationship.

The effect of the industrial networks within business groups on the quality of accounting information: evidence from China

ABSTRACT We construct the parent-subsidiary industrial network within listed business groups in China. The results show that the higher the density of parent-subsidiary industrial network, the lower the quality of accounting information of listed companies. The more the parent company is in the centre of the industrial network, the higher the quality of accounting information of the listed company is. Geographical diversification of subsidiaries will intensify the adverse impact of industrial network density on the accounting information quality, and will restrain the parent-subsidiary industrial network governance effect in terms of the centrality of the listed parent company’s industrial network. Based on agency theory and the empirical results of our research, it can be inferred that the parent-subsidiary relationship in the accounting information manipulation of listed business groups is more inclined to a parent company’s supervision of its subsidiaries rather than the ‘collusion’ manipulation of the parent-subsidiary companies.

How knowledge acquisition creates a competitive edge? A qualitative inquiry from international consultancy alliance

PurposeThe current study attempts to bridge the existing gap related to the role of knowledge acquisition from international alliance partners to improve competitiveness by examining the distinct processes of knowledge acquisition and the challenges confronted in this learning process in order to enhance local and international market performance.Design/methodology/approachFollowing case-study approach based on systematic combining, the study presents a case of knowledge acquisition and learning in the context of an international consultancy alliance between leading Pakistani and Chinese engineering firms using six in-depth interviews of key engineers to explore the dynamic mechanisms for knowledge acquisition and learning from the Chinese firm. Grounded analysis drawn upon the Straussian version of grounded theory (GT) {{Strauss, 1990 #136} Strauss, 1998 #139} is used for data analysis in this research.FindingsIt was found that the processes of explicit and implicit knowledge acquisition from Chinese firms are integrated consultancy working, social and technical adaptability and seeking confirmation about the work done and knowledge/theories and models used in work. However, these processes are quite complex, posing serious challenges for National Engineering Services, Pakistan to acquire the required knowledge, which can be addressed through partners' motivation to share and acquire knowledge, cultural intelligence and friendship and informal association. The study also found that the knowledge acquired from technologically advanced international organizations by the host partner in the international strategic alliance not only provides a competitive edge to the local host in its local market but also builds its capacity to undertake similar projects in other parts of the world, substantially enhancing its market success.Originality/valueAdding up to the current literature that focuses on knowledge acquisition in a parent-subsidiary relationship, the current research proposes a framework for knowledge acquisition in the unique context of international strategic alliances. The research provides managerial guidelines to manage knowledge acquisition for gaining a competitive edge that would be helpful for the managers in the era of growing interdependence among the organizations across the borders.

Business group opportunism: the difference in real earnings management between parent firms and nonparent firms

PurposeThis paper aims to understand real earnings management behavior in the context of a parent–subsidiary relationship. It explores the differences between business groups and firms that do not have controlled subsidiaries and provides potential explanations for any measured difference.Design/methodology/approachThe study uses the random-effects generalized least squares (GLS) estimation to find the difference between the real earnings management behavior of business groups, represented by the ultimate parent firms and the nonparent firms from 73 countries.FindingsThe results show that ultimate parent firms have lower abnormal production costs and abnormal discretionary expenses than nonparent firms. In contrast, parent firms have higher abnormal cash flow from operations (CFO) than nonparent firms. The results are unexpected because abnormal production costs usually have a dominant direct relationship with abnormal CFO. The results indicate that business groups use a route different from manipulating production costs and discretionary expenses.Research limitations/implicationsThe results reveal that parent firms use a route different from manipulating production costs and discretionary expenses. The results can be used to extend the discussion to specific business group cases, such as tracing the route or allocation of real earnings management (REM) pressure from a parent firm to its listed and private subsidiaries, and if the consolidation of minority voting rights and the transitivity of control affect the behavior in its subsidiaries.Originality/valueInstead of the degree of diversification or affiliation, this paper investigates REM behavior based on the parent firm's control of its subsidiaries. With this approach, the study argues that business groups prefer a route other than manipulating production costs and discretionary expenses. The results may redirect the attention of regulators to the activities of parent firms that need more policing.

The Role of Capital on Islamic Bank Spin-Offs in Indonesia

"Research Aims: Some Islamic banks have experienced decreasing performance after spinning off from the parent company, and it is presumed that the amount of capital may have contributed to the decline. Hence, this paper aims to find a minimum amount of capital that Islamic banks must own after spin-offs in order to be able to compete in the market and to achieve excellent performance. Design/Methodology/Approach: We employ the OLS method for small banks (assets below Rp 5 trillion) with variable Capital as the dependent variable and Bank Performance (ROA, ROE, BOPO, and NPL) as the independent variable. We conduct several rounds of regression analysis by including different dummy variables to capture an increase in bank performance when certain capital limits are applied. Various results of the interaction between Capital and Bank Performance are mapped into the frontier line formed by the regression equation. We then compare the frontier results with the actual bank identifier to map the position of each bank relative to the frontier. We add cluster analysis to confirm the results further. Research Findings: Descriptive statistics of the small banks shows that conventional banks perform better in overall performance, efficiency and risk in comparison with the Islamic banks. Several dummy variables are set to represent the size of bank capital (Rp. 800 billion, Rp. 1 trillion, Rp. 1.2 trillion, and Rp. 1.5 trillion), and all dummy variables are significant; the corresponding coefficient reveals that the higher the capital, the better the average performance. Also, the relationship between performance and bank capital is a non-linear (quadratic) relationship that is convex, indicating that capital is not the only critical factor that contributes to the bank’s improvement. The cluster analysis partially confirms that there is a specific pattern of capital in each of the clusters. Theoretical Contribution/Originality: The result of this study is in line with some previous literature on the relationship between capital and bank performance. In banks with small capital, capital has a positive influence on bank performance but has the opposite effect after reaching a certain point. In the literature related to spin-offs in Islamic banking, there are only a few studies about the performance of small banks after the spin-off and even fewer (or none) that discuss the critical role of capital and its relationship with the bank’s performance after the spin-off. Our findings support previous studies conducted by Siswantoro (2014). Managerial Implications in the South East Asian Context: With the implementation of the dual banking system in several southeast Asian countries, many conventional banks have Islamic bank subsidiaries. Findings from this research could help banking regulators in the South East Asian countries to carefully re-evaluate their spin-off strategy for the unit bank, especially regarding the limit of capital requirement before the spin-off. The bigger the capital size, the better the performance of the business unit after the spin-off. Research Limitation & Implications: This research only uses variable capital as a determinant for the bank’s performance after spin-offs. However, as suggested by the resulting R-Squared from the regression formula (66%) and the convex trend line of the frontier analysis, other factors may contribute to the banking performance. Future research should include several other indicators for spin-off success, such as parent-subsidiary relationship (Tubke, 2004; Lindholm-Dahlstrand, 2000) and parent’s size (Cristo and Falk, 2006), credit and liquidity position before spin-offs."

IPO underpricing and ownership monitoring in Japan

We examine how Japanese corporate governance characteristics affect IPO underpricing. The results show that parent ownership does not affect underpricing in IPO firms. We also find that greater CEO ownership is expected to cause principal–principal conflicts and to exacerbate underpricing in IPO firms. Our empirical results also reveal that bank ties mitigate underpricing and function as effective monitoring mechanisms. Furthermore, the positive correlation between CEO ownership and IPO firm underpricing is moderated by the parent–subsidiary relationship. Finally, independent venture capital firms do not mitigate underpricing of IPO firms with parent–subsidiary relationships.

Transfer of Japanese-style management to the Czech Republic: the case of Japanese manufacturing firms

This study examines the level of application of Japanese-style management to the Czech Republic from the perspective of hybridization, by employing a survey of Japanese manufacturing firms based in this country. The survey reveals that the Japanese system of production control is strictly enforced, while work organization, labour relations and group consciousness have been—despite targeted practices used by Japanese companies to facilitate application of the Japanese system—largely adapted to the local conditions. Furthermore, this study identifies the transitional process from relying upon Japanese expatriates towards engaging local human resources in the parent-subsidiary relationship. In addition, even though the Japanese-style procurement method is applied with a large number of local suppliers, the local content ratio nevertheless remains relatively low in the Czech Republic. Overall, Japanese manufacturing firms, via their vigorous effort to transfer their distinctive management style, are challenging European business practices and Czech socio-cultural traditions, even though the level of hybridization is strongly variegated according to particular management spheres.

Corporate governance failure at Ricoh India: rebuilding lost trust

Subject area The case “Corporate Governance Failure at Ricoh India: Rebuilding Lost Trust” discusses the series of events post disclosure of falsification of the accounts and violation of accounting principles, leading to a loss of INR 11.23bn for the company, eroding over 75 per cent of its market cap (Financial Express, 2016). The case provides an opportunity for students to understand the key components of corporate governance structure and consequences of poor corporate governance. The case highlights the responsibility of the board of directors, audit committee and external auditors and discusses the changes required in the corporate governance structure necessary to ensure that such incidents do not take place. The case also delves into the classic dilemma of degree of control that needs to be exercised by the parent over its subsidiaries and freedom of independence given to the subsidiary board, which is a constant challenge all multinationals face. Such a dilemma often leads to the challenge of creating appropriate corporate governance structures for numerous subsidiaries. Study level/applicability The case is intended for MBA courses on corporate governance, business ethics and also for the strategic management courses in the context of multinational corporations. The case can be used to develop an understanding of the essential of corporate governance with special focus on the role of the board of directors, audit committee and external auditors. The case highlights the consequences and cost of poor corporate governance. The case can also be used for highlighting governance challenges in the parent subsidiary relationship for multinational corporations. The case can be used for executive training purposes on corporate governance and leadership with special focus on business ethics. Case overview This case presents the challenges faced by the newly appointed Chairman Noboru Akahane of Ricoh India. In July 2016, Ricoh India, the Indian arm of Japanese firm Ricoh, admitted that the company’s accounts had been falsified and accounting principles violated, leading to a loss of INR 11.23 bn for the financial year 2016. The minority shareholders were agitating against the board of directors of Ricoh India and were also holding the parent company responsible for not safeguarding their interest. Over a period of 18 months, Ricoh India had been in the eye of a storm that involved delayed reporting of financials, auditor red flags regarding accounting irregularities, a forensic audit, suspension of top officials and a police complaint lodged by Ricoh India against its own officials. Akahane needed to ensure continuity of Ricoh India’s business and also act quickly and decisively to manage the crisis and ensure that these incidents did not recur in the future. Expected learning outcomes The case provides an opportunity for students to understand the key components of corporate governance structure and consequences of poor corporate governance. More specifically, the case addresses the following objectives: provide an overview of corporate governance structure; highlight the role of board of directors, audit committee and external auditors; appreciate the rationale behind mandatory auditor rotation; appreciate the consequences of poor corporate structure; explore the interrelationship between sustainability reporting and transparency in financial disclosures of a corporation; understand management and governance of subsidiaries by multinational companies; and understand the response to a crisis situation. Supplementary materials Teaching notes are available for educators only. Please contact your library to gain login details or email support@emeraldinsight.com to request teaching notes. Subject code CSS 11: Strategy.

Measuring Third-party Tracker Power across Web and Mobile

Third-party networks collect vast amounts of data about users via websites and mobile applications. Consolidations among tracker companies can significantly increase their individual tracking capabilities, prompting scrutiny by competition regulators. Traditional measures of market share, based on revenue or sales, fail to represent the tracking capability of a tracker, especially if it spans both web and mobile. This article proposes a new approach to measure the concentration of tracking capability, based on the reach of a tracker on popular websites and apps. Our results reveal that tracker prominence and parent–subsidiary relationships have significant impact on accurately measuring concentration.

How the parent–subsidiary relationship encourages subsidiary-driven innovation and performance in Korea: the perspective of subsidiary autonomy

ABSTRACTFrom the perspective of subsidiary autonomy, this study addresses what affects subsidiary-driven innovation in multinational corporations (MNCs). This study examines this question from three dimensions: (1) top management team (TMT) leadership, (2) knowledge links and (3) organizational size. Our model is tested using a sample of 250 MNC subsidiaries located in Korea. We found that non-expatriate or entrepreneurship-oriented TMT leadership generally enhances subsidiary-driven innovation. We also found that the level of networking with local knowledge sources is associated positively with subsidiary-driven innovation. In addition, the relative size of the subsidiary shows an inverted U-shaped relationship with subsidiary-driven innovation. Finally, the relationship between subsidiary-driven innovation and subsidiary performance is positively moderated by environmental dynamism. The results suggest that as foreign subsidiaries gain autonomy, the likelihood of subsidiary-driven innovation increases.

Cash Conversion Systems in Corporate Subsidiaries

This paper models a cash conversion system in a subsidiary of a parent company where there is an active internal capital market, but otherwise the subsidiary has no access to additional external funds. The cash conversion system consists of a treasury, a single-product make-to-stock inventory, and a receivables pool. It implements a perpetual flow cycle, where funds convert to product and back to funds. The system is stationary, and revenues and costs flow directly to the parent company. The parent company aims to maximize equilibrium (long-run) financial metrics in terms of net profit rate and rate of return. To this end, we model this system as a discrete-state continuous-time Markov process and compute its equilibrium state distribution using analytic and numerical methods. These are then used to derive statistics of the equilibrium cash conversion cycle and define equilibrium financial rate metrics and cumulative counterparts that incorporate the time value of money. We further optimize the financial and operational designs of the system and, specifically, the internal capital allocation and inventory base stock level. Finally, noting the potential for friction in the parent–subsidiary relationship, we study numerically the impact of moral hazard and internal capital market inefficiency on optimal designs. The online appendix is available at https://doi.org/10.1287/msom.2017.0625 .

Parent-Subsidiary Investment Layers and Audit Fees

This study investigates whether the number of investment layers within a parent-subsidiary consolidated group is associated with a firm’s audit fees. Using a unique sample of publicly traded Taiwan companies, which are required to disclose information on all of their affiliates, we measure the number of vertical layers in the parent-subsidiary relationship, from the parent company to the lowest-tiered subsidiary. Our results show a positive association between audit fees and the number of investment layers. In addition, we find that the positive association between audit fees and the number of layers becomes stronger for firms which have more investees located in tax haven countries. Our results also show that the positive association between audit fees and the number of investment layers is more pronounced as companies’ engagement in related-party transactions increases. Overall, the results support the argument that auditors attach higher audit risks to firms with more investment layers and therefore charge higher audit fees.

Drawing the Boundary between Joint and Unilateral Conduct: Parent–Subsidiary Relationships and Joint Ventures

Competition law systems typically draw a fundamental and basic distinction between concerted and independent action. In particular, the former is viewed more skeptically and considered to be more ‘inherently fraught with antitrust risk’ than unilateral conduct. The question of which set of rules applies in a given antitrust case (those governing agreements or those governing unilateral conduct) is frequently straightforward and uncontroversial. In some situations, however, it may be more difficult. For example, it may not be easy to determine whether an apparently unilateral act of a firm actually forms part of a contractual arrangement with another firm or firms.Further agreements concluded between members of the same corporate group and acts of joint ventures (‘JV’s) may be difficult to characterise. Although firms within the same corporate group may constitute separate legal entities, agreements or arrangements between them may more closely resemble the internal workings of a firm than the collusive activities the antitrust laws are designed to prevent. Conversely, a separate JV company may display concerted as well as unilateral characteristics. Even though these lines between firms, cartels and joint ventures are indistinct, they are nonetheless crucially important as the determination will profoundly affect the antitrust analysis applied. A challenge for an antitrust system is therefore to draw a clear line between concerted conduct falling within the scope of rules designed to prohibit anticompetitive agreements and unilateral conduct falling outside it. Nonetheless, different jurisdictions adopt different approaches to the issue, creating complexity for firms. Section B commences by introducing the single economic entity or economic unit doctrines which have been developed in the US and EU respectively and their relevance for determining whether the conduct of a parent and its subsidiaries should be treated as joint or unilateral for the purposes of the competition law rules. Section C then considers whether, and if so when that doctrine might have relevance to the characterisation of the conduct of a JV. Section D concludes that the the exact boundaries of the ‘single entity’ principles developed in the US and EU are not clear and create uncertainty for firms in circumstances where the characterisation may result in significantly different exposure to antitrust liability. It consequently makes some proposals for evolution of the law.

Determinants of Controlling in Foreign Subsidiaries of MNEs: On the Explanatory Potential of the Institutional Perspective

Objective: The main aim of this paper is to identify gaps in extant literature on controlling in MNEs, in particular factors affecting related managerial decisions. Secondly, the relevance of the institutional perspective will be examined for its potential to explain the design of controlling in foreign subsidiaries. Research Design & Methods: The dimensions of international controlling are discussed. Further, the institutional approach is examined for its applicability to advance the understanding of the determinants of shaping controlling systems in foreign subsidiaries of MNEs. Findings: Institutional aspects can have a significant impact on the functioning of MNEs in relation to their controlling systems. Informal institutions can influence the formation of the controlling system in the relations between the subsidiaries of the MNE, whereby also institutions within the MNE itself should be taken into account. Implications & Recommendations: Conducting in-depth qualitative research will allow for a set of recommendations that are relevant to managers responsible for an effective implementation of management control systems. Contribution & Value Added: The relevance of the controlling system in parent-subsidiary relationships has not received significant attention in existing studies in the discipline of international controlling.

Financial constraints and negative spillovers in business groups: Evidence from Korea

We examine the negative spillover from one group-affiliated firm to other group-affiliated firms in the same business group, using credit rating downgrade announcement data in Korea. We hypothesize that the existence of controlling shareholders and internal capital markets is a major cause of the negative spillover. We find that the financial constraints of a group-affiliated firm negatively affect the value of other group affiliates. Furthermore, we show that both the parent–subsidiary relationship and the credit rating difference between a downgrade firm and its group-affiliated firms affect the extent of negative spillover. In addition, our robustness test results support the argument that the internal capital market within a business group is a key factor in understanding negative spillovers.

Towards a Legally Binding Instrument on Business and Human Rights

This paper examines key options for the negotiation of a new "internationally legally binding instrument on Transnational Corporations (TNCs) and Other Business Enterprises with respect to human rights", in accordance with the terms of resolution 26/9 of the UN Human Rights Council adopted in June 2014. It first recalls the historical background of the debate (Part II). It then reviews four options for the negotiation of such an instrument (Part III). The first option is for the new instrument to define in greater detail the content of the States' duty to protect human rights by regulating transnational corporations. A new instrument could usefully clarify certain implications of this obligation of States concerning extraterritorial obligations, the parent-subsidiary and business (contractual) relationship and the right of victims to have access to justice. The second option is for the new legally binding instrument to take the form of a Framework Convention on Business and Human Rights, imposing on States to adopt national action plans or strategies on business and human rights, and to report on the progress made in this regard. These first two first options essentially aim to strengthen the Guiding Principles on Business and Human Rights endorsed by the Human Rights Council in 2011, by transforming the recommendations they contain into binding legal obligations. In contrast, the third and fourth options appear more ambitious. Yet, they too build on existing precedents in international law. The third option would be to directly address corporate behaviour, beyond what is already achieved in this regard through the Special Procedures of the Human Rights Council (including the Working Group on Business and Human Rights). This could be done by providing that States bound under the new instrument accept that the corporations operating under their jurisdiction can be attributed human rights wrongs where the domestic remedies available to victims have proven insufficient to remedy such harms. It could also be achieved by providing that corporations under the jurisdiction of the State concerned can be prosecuted for serious human rights violations or violations of humanitarian law amounting to international crimes, where national jurisdictions have failed to address such international crimes.Finally, the fourth option is that of a new instrument on business and human rights that would provide for legal mutual assistance between States. One major source of impunity for transnational corporations which commit human rights violations is that the States concerned generally do not lend themselves such assistance, for instance in order to take evidence, to perform searches and seizures, to freeze or to recover assets following a judgment favorable to the victims. An instrument focused on legal mutual assistance would aim to fill this gap. Such an instrument would have a strong added value. It would also seem to have the support of a wide range of States, from the different regional groups. It would present the advantage of being easy to defend on the ground that the transnational nature of the activity of corporations poses specific challenges that this instrument would seek to address.These four options are not necessarily mutually exclusive. Any internationally legally binding instrument in the area of business and human rights could contain elements of each. Part IV of the paper concludes by illustrating which combination of these various items could achieve the best balance between the need to improve the protection of victims, and the need to move towards proposals that are politically achievable.

Mecanismos de coordinación y relaciones matriz-filiales en entornos volátiles: una aproximación teórica

Mecanismos de coordinación y relaciones matriz-filiales en entornos volátiles: una aproximación teórica

The Parent-Subsidiary Relationship in EU Antitrust Law and the AEG Telefunken Presumption: Between the Effectiveness of Competition Law and the Protection of Fundamental Rights

This paper discusses how the protection of fundamental rights has become an issue in European Antitrust Law especially with reference to the parent-subsidiary relationship and the so-called AEG Telefunken presumption.

Market Orientation of SMEs in Southeast Asia: An Empirical Analysis

There is a growing consensus among policymakers and academics that internationalization of domestic firms will create jobs and wealth, yet relatively little is known about the incentives for small and medium enterprises (SMEs) to undertake this process. I analyze the motivations of SMEs from Vietnam, Indonesia and the Philippines to engage in exporting in the context of triangulation, which considers the impact of the global economy, national economy, and societal milieu on SMEs. I find that scarce demand in the home market is positively and significantly correlated with exporting, while favourable government incentives are less significant. Significant foreign demand and existing parent–subsidiary relationships are important explanations for SME exports from Vietnam, but not for Indonesia or the Philippines. These findings suggest that national economies are currently more important than the global economy for SME exports in Southeast Asia; my results call into question the ability of governments to encourage SMEs to internationalize via exporting.