Multinationals have been carrying out foreign direct investment (FDI) as part of their management strategy for global competitiveness and internationalization. In order to properly respond to the globalization trend, multinationals are trying to increase their efficiency through ‘standardization’ strategy while securing diverse resources through ‘localization’ strategy, and which should be affected by the capabilities of the headquarters and subsidiaries of multinationals.
Noting that headquarters and subsidiary capabilities of multinationals affect the localization strategy of their subsidiaries, this study empirically analyzed the impact of the foreign subsidiary capabilities(R&D, marketing) on its localization strategy(production localization, marketing localization) from the perspective of competency-based theory, and also tested the moderating effects of the multinationals’ headquarters internationalization capability and subsidiary-industry on subsidiary capabilities links to subsidiary localization, and finally the analysis was also conducted to show how these localization strategies actually affect subsidiary performance(ROA).
While existing studies have mainly focused on subsidiary localization out of the corporate level through qualitative survey, this study was conducted by a quantitative way, focusing on local sales and local procurement to clearly address the concept of localization that can be defined at the corporate level. And also, US-based multinationals were targeted operating their subsidiary in Korea, belonging to S&P 1000 and Russell 3000, and which are known to carry out locally-oriented mandate and strategy to shed lights on inward-FDI rather than outward-FDI widely covered in existing literatures.
Furthermore, the panel data with time gap of 19 years from 2000 to 2018 was built up for longitudinal study as well as cross-sectional study, and a two-way error component fixed effects model was set up and analyzed using Stata program, and the following results are obtained.
First, there are positive relationships between the capabilities and the level of localization of US subsidiary in Korea.
Second, headquarters’ internationalization capabilities and subsidiary industry are found to moderate the influence of some subsidiary capabilities on subsidiary localization. The relationship between subsidiaries’ marketing capabilities and subsidiary localization(production and marketing) are both weakened by the headquarters'' internationalization capabilities, and also the relationship between marketing capabilities and both subsidiary localization(production and marketing) are weakened in manufacturing industries.
Third, no significance is found between subsidiary localization and performance except only production localization in the manufacturing industry.
Based on the results of analysis, this study found a few implications as follows: multinationals should maintain a good balance between localization and standardization strategies in line with their internationalization strategy and local environment they face. And also, the subsidiary should develop their own capabilities which play an important role in localization.
This study provided theoretical contributions by exploiting the relationship among headquarters’ capabilities and subsidiary’s capability and localization strategy of multinationals from competence-based theory. Also this study endowed practical contributions by suggesting implications related to critical factors for localization strategy for the performance.