Legitimacy Dynamics in Headquarters-Subsidiary Relationships

The relationship between multinational enterprises’ (MNE) headquarters and their subsidiaries has been of considerable interest to international business scholars (e.g., Dörrenbächer and Geppert, 2009). Although a subsidiary is an integral part of an MNE, its interests do not necessarily converge with those of headquarters. Many scholars note that relationships between headquarters and subsidiaries are characterized by the simultaneous presence of cooperation and competition (e.g., Bouquet and Birkinshaw, 2008; Otterbeck, 1981). On the one hand, the subsidiary and its managers are dependent on headquarters’ resources to fulfill its mandate. On the other hand, the subsidiary and its managers have their own particular goals, which may or may not coincide with the goals of headquarters and its managers. Subsidiary managers may also seek to develop the unit’s own sense of identity, which may be at variance with that of the MNE (e.g., Mudambi and Navarra, 2004). The potential for goal and identity conflict between headquarters and subsidiaries leads to the emergence of a mixed-motive relationship between the two units and their managers. A mixed-motive relationship generates conflict, but the mere existence of conflict is not necessarily detrimental to the relationship (Rahim and Bonoma, 1979). However, the emergence of a prolonged conflict and/or its ineffective management may create a dysfunctional relationship between the headquarters and the subsidiary.