Multinational companies operate in an environment that is simultaneously highly interconnected and politically, economically and technologically fragmented. Uniform control from headquarters therefore may not be an advantage. The board needs to know which capabilities and decisions genuinely create value through global integration and where local teams instead need to retain their knowledge of markets, relationships and institutions.
A multinational company cannot be managed for the long term as a domestic company with several foreign branches. INSEAD points out that globalization has entered a phase in which economies and business systems are highly interconnected while political, regulatory, cultural and technological conditions are diverging at the same time.
For leadership, this creates a problem that cannot be solved by a simple choice between centralization and decentralization. Some activities gain value precisely from a unified global system. Others need to respond to the local market so quickly and accurately that central control instead reduces value.
INSEAD therefore distinguishes between areas where global integration makes sense and situations in which a company needs to “act local” or directly “be local.” A board should not make decisions based only on the financial results of individual regions. It needs to monitor political, economic, social and technological developments in key countries regularly.
A practical example can be a product platform. Its technological core may be globally shared because uniformity reduces costs and accelerates development. Distribution, pricing or work with public institutions, however, may require strongly local solutions. If headquarters applies the same rule to both areas, it loses either economies of scale or the ability to respond to the local environment.
The board therefore needs a map of decision rights. For key areas, it should be clear whether authority belongs to headquarters, the region, the country or a combined structure. A formal organization chart is not enough. The actual availability of local information at the moment a decision is made also matters.
Another task is converting distributed knowledge into innovation. INSEAD points out that local units do not have to serve only as the distribution arm of headquarters. They can contribute knowledge and ideas from which new products, processes or business models with global use emerge.
This changes the relationship between headquarters and subsidiaries. Local teams should not only execute a strategy created at the top. In some areas, they are the source of information without which the strategy cannot be designed correctly.
The board’s task, therefore, is not to centralize control as much as possible. It is to design a system that can combine global scale with local knowledge while precisely determining where each of those two advantages should take priority.
KEY TERMS
- Global integration: Connecting selected processes and capabilities across countries where a unified system creates greater value.
- Local specialization: Adapting decision-making to the conditions of a specific market or country.
- Decision rights: A clear definition of the organizational level that has authority to decide a particular issue.
- Distributed knowledge: Information and experience that exist across different countries and units of the company.