Coping with complexity by making trust an important dimension in governance and coordination

Abstract

Multinational business enterprises (MBEs) have created and/or discovered opportunities to improve on their businesses, by engaging in technological change and establishing presence by ownership or cooperation with local parties on foreign markets. This development has increased the level of complexity to managers dramatically. Accordingly, the MBEs have developed governance and coordination means to cope with that growing complexity, mainly by inventing governing modes in between the market and the hierarchy and delegating coordination to network or value-chain parties. To be able to explain this development, the internalization approach has been modernized with assumptions more similar to those of the Uppsala model. Micro-foundational findings support a process approach to trust building and exploitation, making trust an essential ingredient in research on exchange behavior.

Introduction

Governance and coordination of economic activities are general phenomena discussed in the academic literature across economics and business disciplines. Ours, international business, is no exception, and perhaps we are researching such issues rather intensively as the IB context is very complex with various value-adding activities distributed across borders. Concepts and methods rooted in general economics and business have been applied in the IB area. Of course, there has been a lot of progress but still we can add to our stock of knowledge as we can rely upon new scientific progress made both within and outside of international business. A rapidly changing context, digitization and the evolution of emerging market multinational business enterprises for example, also necessitates further study of governance and coordination. Our goal with this paper is to add to knowledge in those areas by combining existing insights with behaviorally based findings on management in the international business area.

Our approach is simple. We study the literature on governance, coordination and findings from cognitive and psychological research and apply these on the multinational business enterprise (MBE) as we know it. We follow Verbeke and Fariborzi (2019): 1214) in defining structural governance as ownership and control forms, including organization structure. Managerial governance includes decision rules, practices and routines, mainly tools for coordination and monitoring. Coordination between units, internal and also external, serves the purpose of creating fit as to arrive at joint higher goal achievement, whether that is in dimensions such as productivity or innovations, or both (Vahlne, Ivarsson, & Johanson, 2011). We subscribe to the typology of various coordination tools as outlined by Martinez and Jarillo (1989). Of course, structural governance and managerial governance methods always appear in combinations and we will apply the terminology of governance and coordination respectively.

No doubt, internalization theory (Buckley & Casson, 1976) grounded in transaction cost economics (TCE) (Williamson, 1975) has dominated the research on the existence of the multinational enterprise and internationally applied governance modes (Buckley, 2016). Assuming firms are searching for efficiency, Williamson (ibid.) found that because of market failure, transaction costs incurred by relying upon the market mechanism, might be larger than the costs for administering the transaction within the firm hierarchy and hence it would pay off to internalize the transaction. However, the assumptions underlying the Williamson, Buckley and Casson argumentation were rigid and far from what has been perceived as the practice, the business world (Pitelis & Teece, 2018; Vahlne & Johanson, 2014). Among those early assumptions were that it was the character of the individual transaction that mattered in spite of the fact that most business relations, between for example seller and buyer, may last for very long periods of time, even decades (Johanson & Vahlne, 2009). Also, it was believed that predominantly semi-processed products, such as components to be fitted into a larger system, was a typical example where transaction costs would be higher than costs for managing the hierarchy (Buckley & Casson, 1976). This is no doubt true, due to the need for very close coordination between the two parties. However, why this would be named “market failure” is strange: the failure is then in relation to a theoretical construct, the perfect market, as developed by neo-classical economists. This may be understandable as long as micro-level models are constructed with the purpose to explain for example the macro-level size and structure of stock of foreign direct investment (Rugman, 2010). We argue, on the contrary, as we are interested in the micro-level, that the MBEs′ development of sustainable governance modes should be named “business success” (Lazonick, 1991). Different analytical frameworks may be needed as a base to explain the choice of governance mode (cf. Schermann, Dongus, Yetton, & Krcmar, 2016). We believe that what is missing so far are explanations based at the micro-foundational level.

Our intended contribution is to shed light on how MBEs cope with complexity by applying various modes of governance and coordination. We argue that trust is the asset making it possible to decentralize coordination and cope with complexity and uncertainty. We prefer to apply the concept of multinational business enterprise (MBE) and not multinational enterprise (MNE) to distance ourselves from the neo-classical connotation of the international business firm. We will discuss this concept below.

To begin with, we describe structural governance modes: internalization, hybrids and the market mechanism according to the modernized internalization approach. Then we proceed by describing tools for managerial governance in the network approach. Finally, we discuss governance and coordination in the Uppsala model context and how MBEs can cope with complexity and subsequent uncertainty.