Subsidiary power: Loaned or owned? The lenses of agency theory and resource dependence theory

Abstract Research Summary We analyze power relationships in subsidiaries of multinational corporations. We explain how despite many advances in the literature, there is still an unresolved debate with respect to the critical question of whether subsidiary power is loaned or owned. We develop an overarching framework that encompasses both agency theory and resource dependence theory as the two pillars to understand decision‐making by managers in subsidiaries. We propose that agency theory applies more when the subsidiary's decision rights are “loaned” by headquarters, while resource dependence theory applies more when the subsidiary “owns” its decision rights. We also explain how subsidiary evolution integrates the arguments of these two theories. Agency appears to apply earlier while resource dependence is more relevant at later stages. Managerial Summary We provide a framework that helps address the challenges of managing power relationships in subsidiaries of multinational firms. Traditionally, studies have proposed to explain these relationships using either agency theory and the idea that subsidiary managers need to be controlled by headquarters or resource dependence and the idea that subsidiary managers can chart their own path. We solve this conflict by proposing that agency theory applies when the subsidiary's decision rights are “loaned” by headquarters, while resource dependence theory applies when the subsidiary “owns” its decision rights. We also explain how the analysis of subsidiary evolution integrates the arguments of these two theories as agency seems to apply earlier in the evolution of the subsidiary while resource dependence seems to apply at a later stage.