The Optimal Response Strategy for MNCs in a Complex Environment: An Economic Approach

Abstract

This paper develops an economic response strategy model to analyze the MNC’s optimal response strategy to high external complexity. A cost typology is developed specifically for the context of analyzing a high level of complexity. This is in response to contingency theory’s proposal of matching external and internal levels of complexity, which assumes that MNCs do not differ in their capacity to manage complexity. Through a theoretical cost analysis, we argue that a higher level of external complexity decreases the theoretical optimal level of internal complexity if the MNC does not possess the required capacity to manage complexity. This paper further suggests that when a MNC faces two dimensions of external complexity simultaneously, there exists a trade-off, limiting the MNC’s ability to manage both sources of complexity at the same time. This paper thus highlights the economic superiority of a simplification strategy for example in the form of a regional organizational structure. This response strategy allows the MNC to increase efficiencies through integration while still maintaining operational flexibility, which are both critical factors for achieving high organizational performance in a complex environment.