Subsidiary strategy and managers’ perceptions of distance to foreign markets

Abstract

Purpose: The purpose of this paper is to examine how headquarters’ managers perceive – cultural, administrative, geographic and economic (CAGE) – distance between countries and its influence on the strategy of international subsidiaries. Design/methodology/approach: This study applies the transaction cost and behavioural theory and presents an exploratory and qualitative methodology approach through six semi-structured in-depth interviews to evaluate managers’ perceptions of distance between countries. Findings: The research findings show that cultural and economic distances indeed have a major influence on subsidiary strategy and a smaller impact of administrative and geographic dimensions, which results into forced changes on the marketing-mix, i.e. product, price, design and brand, as well as on the level of autonomy granted to foreign subsidiaries. Research limitations/implications: The limitation is related to the home country and the entry mode of foreign direct investment. The findings presented here reflect the nature and behaviour of Portuguese companies with subsidiaries. Practical implications: The research provides recommendations for managers to be aware of the influence of more than one dimension of distance between countries to improve their decision-making of standardisation-adaptation strategy for foreign subsidiaries. Furthermore, the study stresses that managers’ perceptions may lead to the conclusion that proximity and knowledge of foreign markets does not make international business easier. Originality/value: This empirical research not only tests the transaction cost theory and behavioural theory on managers’ decisions to invest abroad but also promotes organisational changes to achieve the suitable strategy for international subsidiaries. The study contributes to the area of international business by positing six research propositions concerning distance between countries to be tested in future studies.