Distance matters

If General Motors’ headquarters had been in Belgium, Opel Antwerp would not have been closed. Or would it? Why are managers more reluctant to downsize nearby affiliates than distant ones? Vlerick Professor Filip Abraham, together with researchers at the KU Leuven, investigated whether decisions to downsize taken by multinationals are affected by the geographical distance between headquarters and subsidiaries. Their results were published in a paper entitled “Staying Home or Moving Away? Restructuring Efforts within Multinational Enterprises”.

So far, only few studies have examined this distance effect. Literature, mainly based on research involving US multinationals, suggests three possible reasons why management’s restructuring decisions are affected by distance:

  • Information flows: the closer to the headquarters the affiliate is located, the easier and more effective the information transfer and communication between the affiliate and headquarters. Headquarters risks having incomplete information on more distant sites and, as a result, will treat these differently.
  • Social aspects: restructuring measures taken at nearby subsidiaries are likely to be more visible than those taken at affiliates located further away. Not being insensitive to social pressure, public exposure and reputational damage, managers will therefore be less inclined to lay off people in nearby subsidiaries.
  • Subsidiary performance: it is suggested that performance or profitability of subsidiaries located close to headquarters is systematically better than that of more distant ones.

Two questions

Filip and his colleagues studied the restructuring efforts of a sample of 43 Belgian multinational companies with 245 subsidiaries spread across Europe. While restructuring can take on many different forms, for the purpose of the study, the measures taken into account were limited to downsizing events, i.e. personnel cutbacks.

Firstly, the team analysed whether the probability of observing a downsizing event at a subsidiary depends on its distance from the headquarters. Secondly, they considered the impact or magnitude of the downsizing event – if it occurred – by examining how many redundancies were made, analysing whether the number of redundancies differed with distance.

Three conclusions

From the analysis of the results the following conclusions could be drawn:

  • Probability: the likelihood of a downsizing event does not depend on the distance, except when large restructurings, i.e. involving at least 10% of the workforce, are being considered. These large restructurings are more likely to occur further away from the headquarters.
  • Magnitude: The number of dismissals is higher at more distant locations, i.e. the magnitude of the downsizing event depends on the distance to the headquarters.
  • Explaining factors: While performance does seem to influence the likelihood of observing a downsizing event, i.e. the better the performance, the less likely personnel cutbacks become, the distance effect was still present when correcting for profitability. This suggests information flows and social aspects are the more important explaining factors.

“However, the study doesn’t allow us to make any bold statements about the relative importance of information flows and social aspects, as these factors are difficult to measure objectively,” Filip explains. “Looking at the social aspects, for example, it’s safe to assume that the risk of managers being confronted with the consequences of their decisions is higher in areas with few other headquarters, i.e. less densely populated areas. In our study we used population density as a proxy for visibility. And we can indeed confirm that the more visible a manager is in his community, the less likely he is to downsize nearby divisions.”

One advice: invest in headquarters

This paper provides solid findings to support several intuitive assumptions and, more importantly, it also has both political and business relevance.

First, these findings tie in with the anchoring debate: “You could argue that it’s important to attract and hold onto headquarters in Belgium as their presence would, to a certain extent, protect local offices from major cutbacks in the event of a restructuring. If the distance effect is a universal phenomenon, then policy makers should be concerned about the systematic loss of headquarters because this will result in Belgian sites becoming distant affiliates, i.e. more vulnerable to severe restructurings than they would have been with headquarters in Belgium. Mind you, this study only highlights the issue, it’s up to policy makers to establish coherent policies and to create an environment conducive to attracting and retaining headquarters of Belgian and foreign multinational organisations.”

Secondly, these findings underscore the importance for managers to build and maintain good relations with headquarters, in order to optimise communication and information flows: “Local sites should stimulate their managers to spend some time at headquarters to better understand the strategic vision and plans. Also, don’t underestimate the importance of being able to put a face on a name. Especially in large organisations, it’s vital to stay in touch. If you don’t, you risk making yourself, your site that is, more vulnerable.”

Source: The paper “Staying Home or Moving Away? Restructuring Efforts within Multinational Enterprises” has been published in The World Economy Volume 37, Issue 6, pages 765–782, June 2014.

Accreditations
& Rankings

Equis Association of MBAs AACSB Financial Times Economist Intelligence Unit