Firm Networks and Korean Subsidiaries in the United States

Firm Networks and Korean Subsidiaries in theUnited States

DOUGLAS R. GRESS AND JESSIE P.H. POON

ABSTRACT This article examines the role of intra-, inter-, and extra-firm networks in influenc-

ing the location and investment of Korean firms and their subsidiaries in the U.S. Based on a survey

of Korean subsidiaries in the U.S. in 2004, this article finds that inter-firm relations with customers

and suppliers, as well as intra-firm relations in the form of parent firms’ knowledge of the U.S. play

an important role in locational decision. Korean subsidiaries’ relationships with U.S. places are

strongly influenced by home-based practices that favor hierarchical intra-firm organization and

embedded sociopolitical extra-firm relationships that emphasize blood, school, and regional ties.

Location in U.S. industrial clusters does not increase Korean subsidiaries’ level of autonomy from

parent firm’s control that could help facilitate the sourcing of local knowledge and resources. Only

improved intra-firm network positionality positively contributes to increased subsidiary autonomy.

Overall, the findings indicate that while inter-firm relations may be important in locational selec-

tion among Korean firms, network norms are largely maintained through intra-firm and, to a lesser

extent, extra-firm relations.

Introduction

A significant literature has emerged in recent years concerning the role of subsidiariesin foreign environments. Traditionally, foreign or overseas subsidiaries assume the

role of branch plants through their subordinate relationship with parent firms. Firm strategyfor building firm resources and competency are left to parent firms and their headquarters(HQs), which control information flows, exchanges, innovation, and growth. In an era ofthe knowledge-seeking firm, however, international activities are increasingly associatedwith motivations for knowledge acquisition and competency that enhance location-specificassets, including assets and resources that are located in foreign countries and places(Birkinshaw 1997). More specifically, in the firm network context, a subsidiary pursues acomplex network of relations with local and nonlocal suppliers, customers, and trade/professional, and government agencies or organizations (Yeung 1994). Such subsidiary

Douglas R. Gress is assistant professor at the Department of International Office Management,

College of Business Administration, Ewha Womans University. His e-mail address is drgress@

ewha.ac.kr. Jessie P.H. Poon is professor at the Department of Geography, University of Buffalo-SUNY.

Her e-mail is [email protected]. They would like to thank two reviewers for their invaluable

comments that led to the improvement and subsequent publication of the article.

Growth and ChangeVol. 38 No. 3 (September 2007), pp. 396–418

Submitted December 2005; revised July 2006; accepted August 2006.© 2007 Blackwell Publishing, 350 Main Street, Malden MA 02148 US and 9600Garsington Road, Oxford OX4, 2DQ, UK.

mailto:[email protected]

activities in foreign locations can add to the firm’s overall strategic resources by contri-buting to the overall knowledge base of the parent firm. However, the ability to pursueforeign knowledge is influenced by the level of autonomy conferred upon overseas sub-sidiaries as they engage in local economic and network capital building.

International activities are characterized by complex socio-spatial relations at home andabroad, yet there are few studies that attempt to integrate the various network dimensionsof firms. This article seeks to examine the nature of Korean international firm networksthrough an analysis of their subsidiary operations and manufacturing investment in the U.S.Firm network analysis has focused largely on three dimensions, namely, inter-, intra-, andextra-firm relationships. Dicken (1998:285) defines inter-firm relationships as taking place“between firms belonging to separate, but overlapping, business networks as part ofcustomer–supplier relationships,” intra-firm relationships as ongoing, “between differentparts of a transnational business network,” and extra-firm relationships as those betweenplaces (e.g., the government and state agencies) and firm network actors.

The focus on Korean manufacturing investment in the U.S. in this context is interestingfor three reasons. First, most studies on inward foreign direct investment (FDI) to the U.S.have focused on Japan, yet Korea was the U.S.’s second largest Asian investor in 2004,contributing some $4,212 million to inward FDI (Bureau of Economic Analysis, U.S.Department of Commerce).1 Second, business scholars have tended to examine firm socialnetworks in the context of inter-firm alliances (see special issue on strategic networks,Strategic Management Journal 2000, volume 21, issue 3). In contrast, geographers have, inaddition to social relations, also noted the importance of power relations vis-à-vis theoverlapping constituent units of business networks. This consideration is particularly per-tinent to studies of Korean firms, where an “authority hierarchy” that is defined by anorganizational structure of tall ownership and management control system, and that isdominated by founding families, continues to persist (Whitley 1999). Third, under thenetwork perspective of social and relational proximity, firms are thought to acquire thecharacteristics of the environment where they are “placed” (Dicken and Malmberg 2001).Hence, foreign firms in host regional economies, particularly in cluster economies, canadapt and adopt characteristics that may result in local behavioral convergence betweenlocal and foreign firms (Birkinshaw and Hood 2000). It is unclear how Korean firms areplaced in host locations such as the U.S. as they tend to retain strong national characteristicsdespite the internationalization of their investment. Rather, their relatively strong ties to“home” appear to support a more macro explanation of international investment whichsuggests that national culture and institutions are influential factors in their foreign opera-tions (Gertler 2003; Whitley 1999). This has important implications for Korean subsidiaryautonomy and thereby competency in its U.S. operations.

In the next section, theorization of firm networks is presented and summarized along withan elaboration of the aforementioned framework in the context of Korean firms. This isfollowed by a discussion of the data that were compiled from a postal survey in 2004 as wellas the major variables under consideration for studying Korean firm networks. The results ofthe survey are examined next and the article concludes with major findings of the research.

KOREAN SUBSIDIARIES IN THE U.S. 397

Theory: Firm Networks and Korean FirmsFirm networks. The firm as a socio-spatial network has emerged as a popular theme

among geographers, business scholars, and social scientists in recent years. The popularityof studying firms as social and relational networks may be traced to a general dissatisfac-tion among business scholars, geographers, and other social scientists about the under-socialized account of economic exchanges in firm behavior (Granovetter 1985; Gulati1998; Gulati, Nohria, and Zaheer 2000; Yeung 2005). As Gulati (1998) notes, the marketcontains interactions between participants, and, therefore, cannot be characterized as ablack box. Under the transaction cost theory, these interactions consist of pairs ofexchanges as participants seek to overcome opportunistic behavior arising from informa-tion costs and asymmetries that underscore economic transactions. In this type of analysis,firm action is motivated and measured in terms of contractual costs and obligations(Johanson and Mattson 1987), and the focus of the analysis is on the type of exchange(Dicken and Thrift 1992). The network form that is of central interest in transaction coststudies appears to be inter-firm exchanges because a major aim is to describe an appropriategovernance mechanism (market or hierarchy) for certain types of exchanges (e.g., Jones,Westerly, and Borgatti 1997; Rangan 2000).

In business strategy, didactic or contractual relationships are pursued to help firms buildresources and competency. The resource-based view of the firm correlates the competitiveadvantage of a firm to its ability to accumulate and control strategic resources. Inimitablesocial networks constitute resources that are difficult to imitate by competitors, enabling thefirm to create competencies that are associated with production, marketing, or distributionnetwork capabilities (Olalla 1999). From the transaction cost as well resource-based theo-ries, a principal economic advantage of firm networks lies in the minimization of searchand monitoring costs through better quality information sharing between partners and thereciprocity norms that social networks generate.

While business strategists view relational networks in terms of direct cohesive ties(Gulati 1998), geographers adopt a more spatialized interpretation of social proximity. Tothe extent that relational proximity describes a social community of practice rather thanmere physical distance, it is possible for firms to engage in relational ties with distant firmsas long as the participants share similar cultural, trust, cognitive, or tacit frameworks (Aminand Cohendet 2004). A central tenet of the network perspective is that interconnectednessinvolves the creation of norms at a network level, and that these norms help promotereciprocal or cooperative behavior that improves information seeking and sharing pro-cesses among firms. These norms further act as a social control mechanism that assists, forexample, in the reduction of risks associated with the need to maintain reputation (Rowley,Behrens, and Krackhardt 2000). In the case of Korean businesses, much has been writtenon the importance of social control in the form of family relations in management, a pointthat will be elaborated in the next section.

More importantly, relational networks suggest the presence of unequal power relations.Gulati, Nohria, and Zaheer (2000), for instance, note that an important dimension ofnetwork studies in the management literature concerns firm inequality that is generated

398 GROWTH AND CHANGE, SEPTEMBER 2007

through differential access to resources. Among geographers, this inequality extendsbeyond resource access and availability at the firm level to firm–place competition, such asthe ability of territories or regions to attract and retain firm investment (Malmberg 1995)and to social group dynamics that reflect unequal power relations between different socialgroups within a firm. Indeed, it is this possibility to explain firms’ present behavior in termsof an embedded history of unequal social relations, as well as in a context of widerrelations, that network proponents value over the more discrete events of didactic economicor contractual exchanges presented by the transaction cost literature.

Korean firm networks. The above discussion on the network perspective is particu-larly pertinent in the context of Korean firms and their outward investment. The dominanceof the chaebols, that is, large and diversified family-owned and managed Korean conglom-erates that tend to be vertically organized (Steers 1989) in Korea’s contemporary industriallandscape, is not only a result of their size and wide-ranging functions, but is also a functionof their extra- and intra-firm arrangements. Studies that detail chaebols’ external linksindicate that the genesis, growth, and evolution of postwar chaebols may be explained inlarge part by their relationship with the Korean government (Amsden 1989; Kim 1998).The government, for example, controlled the chaebols’ access to capital, policy loans, andexport credits in the early postwar period. These controls were largely exerted through theEconomic Planning Board (EPB) (Chang 1999; Kwon and Suh 1998). Such state–corporation alliance emerged under Park Chung Hee, who seized power through a militarycoup in 1961 and remained the country’s president until 1979. Park not only established theEPB but also modeled the country’s industrial organization after Japan’s hierarchically,centrally owned and managed conglomerates called zaibatsus that were subordinate togovernment industrial planning (Lee 1995). Unlike the zaibatsus, however, the chaebolswere not allowed to own banks and this increased their reliance on state-owned banks forfinancing. Such close government–business relationships are widely documented in thepolitical economic literature on Korean chaebols (Amsden 1989; Fields 1994). Extra-firmembeddedness also manifests itself in the social constitution of institutions. The Federationof Korean Industries (FKI), for example, was formed by the burgeoning chaebols in 1961in conjunction with the government, and ex-government officials regularly participated inthe organization after retiring from public service (Park 1997). The continuing importanceof personal connections to the FKI for the chaebols, and thereby indirectly to the govern-ment, has become an industrial fixture of the modern business environment in Korea. Theseconnections have been shown to continue to influence domestic-level firm locationalstrategies (Lee 2002) and firms’ ability to forge international strategic alliances (Siegel2004).

In terms of intra-firm arrangements, chaebols have historically relied on the family asa direct primary controller, and this has resulted in tall hierarchies with significant orga-nizational control manifested from the top. Family control is achieved through directownership, or through more complex ownership and control mechanisms derived througha holding company structure or through cross-shareholding. Up until the Asian financialcrisis that saw a dramatic withdrawal of portfolio investment from East Asia in 1997–1998


(Poon and Thompson 2001), families and relatives controlled 10 percent of average internalholdings among the top thirty chaebols (Kim 1998). For the top five chaebols, namely,Korea Electric Power, Samsung, LG, SK, and Hyundai Motors, total average internalholding rates amounted to as high as 61 percent in 1994 (Lee 1995). In cases where directcontrol of a group was not achieved given lower levels of direct family ownership, it wasobtained through family member ownership of a series of interrelated intermediary sub-sidiaries (Chang 1999). Chang (2003) further points out that while cross-shareholdingbetween two firms is illegal, it is not illegal for the chaebols to pursue this strategy througha web of three or more firms. Postcrisis reforms may have diminished this type of operationby reducing the average number of the top thirty chaebol affiliates, but domestically, thelargest chaebols have nonetheless maintained their industrial dominance through the acqui-sition of affiliates. This dimension of their evolution is quite different from the strategiesand structures that characterize Western firms (Hwang 2000). Indeed, the World Bank(2003) estimates that some two-thirds of Asia’s publicly traded companies are currentlyunder the control of a central stockholder. In Korea’s case, the central stockholder is stillfamily oriented. In contrast, control by a central shareholder in the U.S. characterizes onlyabout 3 percent of U.S. firms.

Furthermore, chaebols’ ownership and management structure tends to be organized ina patriarchal and hierarchical manner, the origin of which may be traced to the influence ofConfucianism on Korean culture. During the early period of the chaebols’ development,Confucian attributes of trust and loyalty and the importance of the family all manifestedthemselves in the appointment of family members to key management positions (Lee1989). However, as the chaebols grew larger, the need arose to recruit, train, and utilize alarger number of professional managers (Hattori 1989; Steers 1989). The acquisition ofprofessional managers was largely carried out via culturally embedded vehicles. Forexample, managers from outside the family in Korea were recruited through school ties,and the importance of university peer groups influenced the ability to attain managementpositions at the largest chaebols. Steers (1989) points out that as late as the end of the1980s, 84 percent of the top management positions at six top-ranking chaebols came fromSeoul National University, Korea University, or Yonsei University. Also, at Hyundai, thefirst recruits were personally groomed by members of the founder’s family or their friends(Kwon and Suh 1998). The personnel practices of the chaebols in turn reinforced thepatriarchal and hierarchical decision-making process that continues to exist in the man-agement structure of Korean firms. Since the 1997–1998 economic crisis, scholars havefound that employment practices in Korea are still regionally and culturally biased (Beck1998; Lee 1998): decision-making remains top-down and favors blood, school, andregional ties, although Lee also suggests that there appears to be a gradual diffusion ofWestern-style practices that are promoting creativity and innovation among Korean firms.A more recent study by Bae and Rowley (2001), however, concludes that there have beenfew changes in Korea, and that most firms are still managed based on seniority.

The above outline of intra- and extra-firm networks is incomplete without a discussionof Korean inter-firm networks, that is, relationships that are associated with customers and


suppliers. The industrial dominance of the chaebol implies that vertical relationshipsbetween chaebols and suppliers are more typical than horizontal relationships. Indeed, inKorea, the chaebols have systematically integrated smaller firms into tightly controlled,integrated production networks as they have grown both in size and industrial diversity overtime (Cho 1997). Vertical arrangements have also traditionally been used to improve thechaebols’ ability to acquire capital in an internal capital market that has, until very recently,been heavily regulated by the government as intra-firm relationships have allowed firmgroups to maximize their borrowing power. Hence, Kim (1998) suggests that inter-firmarrangements do not tend to work well between the chaebols, and they opt instead to buyup supplier firms.

Firm and place in the Korean context. The influence of “place” on firms and theirnetworks is discussed at two levels in the literature. The first level of discussion focuses onthe tensions in intra-firm relations, particularly those underscoring parent and overseassubsidiary power relations, and overseas subsidiary autonomy (McCann and Mudambi2005; Poon and Thompson 2003). As Dicken and Malmberg (2001) note, hierarchicalorganization is probably the dominant form of governance among most firms. Tensionsoccur if, on the one hand, parent firms exploit scale advantages in a hierarchical organiza-tion, while on the other hand, subsidiaries contest for greater local autonomy that facilitatesthe transfer of host locational knowledge. Strong social control by the parent firm couldmean that subsidiaries in overseas leading clusters of competence are unable to realize theirlocal competitive advantage (Mudambi and Navarra 2004). In turn, the strength of thefamily patriarchal system that governs the operations of the chaebols may prevent localmanagers in overseas subsidiaries from exercising any autonomy as described in theprevious section. This latter view of international investment, which focuses on the impor-tance of national institutions and culture in foreign host operations, is best captured inWhitley’s (1999) diverging business systems explanation, or by the more institutionalframework presented by Gertler (2003). Both argue that business organizations developdistinctive organizational forms arising from the nature and origins of sociopolitical insti-tutions that underpin economic activities. As noted previously, a key feature of chaebolorganization is the lack of separation between personal/family ownership and managerialcontrol. Such an authoritarian hierarchy, in which the owner’s family maintains strictmanagement control from the top based on power magnified through strategic networks ofcross-share ownership of member firms, is embedded in the country’s culturally andpolitically embedded political-economic institutions, which in turn results in firm practicesthat are nationally distinctive and that may impact business operations across space.

The next level of discussion concerns the question of scale of U.S. host locations whereKorean firms are placed. Network geographers do not privilege a particular scale ofanalysis because the focus is on relational proximity that may be articulated at local,regional, or global levels. However, for operationalization purposes, the cluster appears tobe a useful heuristic device for capturing firms’ network activities in space (Dicken andMalmberg 2001; Yeung, Liu, and Dicken 2006). While Porter (1998, 2004) highlights theimportance of the local scale for cluster productivity, it is apparent that this has been


criticized for its conceptual and spatial ambiguity (Martin and Sunley 2003).2 Porter’sidentification of clusters is based on employment, establishments, wages, and patent dataanalyzed against Standard Industrial Classification (SIC) codes at various geographicscales, including state, economic area, metropolitan area, and county.3

Despite its shortcomings, local clusters will be used in this article because they areuseful for examining Korea’s firm–place relationships in the U.S. First, the popularity ofthe industrial cluster as a “place” for investigating firms’ competitive advantage appears tolie in its innovative capacity; hence, the cluster has emerged as an important source ofknowledge for firm transformation and growth with the implication that Korean firms in theU.S. can benefit positively by locating in a cluster (McCann and Mudambi 2005). Second,Birkinshaw and Hood (2000) find that foreign subsidiaries embedded in local U.S. clustersidentified by Porter (1998, 2004) are more autonomous through the adoption of host placecharacteristics. Put another way, foreign subsidiaries are expected to become more like thelocal firms in terms of behavior if they are embedded in U.S. clusters. Such local autonomyis important to the extent that it improves the relative position of the subsidiary vis-à-visother subsidiaries and the parent company, potentially transforming the power configura-tion of the firm’s overall network. In this case, an outcome of increased control to exploitnew and local knowledge away from the center is more likely to occur if Korean firms arelocated in U.S. clusters.

The discussion in this section suggests that the Korean firm may be described by allthree forms of network relations. Further, a major advantage of deploying the networkperspective is that it offers insights into the power relations of the network, not justimproved information exchanges. As the location of subsidiaries in an overseas cluster isthought to enhance the knowledge base of the firm, it follows that location of a Koreansubsidiary in a U.S. industrial cluster should contribute to increased subsidiary competencythat arises from inter-firm knowledge and technological spillovers between cluster firmresidents and the subsidiaries. Overall, the literature review in this section suggests thatintra-firm network controls between parent/HQ and subsidiary can affect the efficiency ofknowledge acquisition by limiting overseas subsidiaries’ autonomy, and thereby power tosource for resources and technology. Taken together, it is expected that the followinghypotheses may be advanced in the context of Korean subsidiaries in the U.S:

Hypothesis 1: Location in a U.S. cluster is positively related to increased subsidiary autonomy.

Hypothesis 2: Intra-firm networks positively influence subsidiaries’ level of autonomy.

Further to Hypothesis 2, we propose that parent–subsidiary control in intra-firm net-works is unlikely to vary across space given the strong influence of the firms’ nationalculture and political economy.

Korean Investment in the U.S.From the discussion in the previous section, it appears that Korean intra- and extra-firm

arrangements are major features that help define their national characteristics. Yet asDicken, Kelly, and Yeung (2001) note, a significant dimension of firms operating in


overseas locations relates to their inter-firm relationships with inter-firm suppliers and/orcustomers, not just intra- and extra-firm relationships. In the sections below, we examinethe relative role of intra-, inter-, and extra-firm relationships among Korean firms throughthe internationalization of their investment in the U.S.

Variables. Using Rugman’s (1997) and Rugman and D’Cruz’s (1994) notion of theflagship firm, which assumes the principal responsibility of defining the overall strategy andstructure of the network, a survey of the U.S. subsidiaries of first-tier affiliates of Koreanfirms was undertaken in 2004.The relevance of focusing on first-tier affiliates is based on thefollowing rationale: Chang and Hong (2000) concluded that the study of first-tier Koreanaffiliates (e.g., Samsung Electronics) rather than “the group” (e.g., the group HQs ofSamsung) reveals substantial gains in synergies actualized by each individual firm within agroup of companies as well as sets of actor firms. Following Chen and Chen (1998) andYeung (1994), intra-firm relations are operationalized through variables that measure variousrelationship dimensions between parent firms and their Korean subsidiaries in the U.S.,between the more macro Korean company groups and their subsidiaries, and between Koreansubsidiaries in the U.S. and other international (i.e., outside of the U.S.) subsidiaries that aremembers of the same firm network. Inter-firm relations are investigated through firms’relationships with suppliers and customers in the U.S. that are not members of the firms’intra-firm networks. Extra-firm networks, on the other hand, are associated with externalinstitutions and organizations, in this case, with trade and investment agencies as well asprofessional and trade associations in the U.S. and Korea. Finally, place–firm relations areexamined in the context of the firms’ location in U.S.-based clusters following Birkinshawand Hood (2000) and McCann and Mudambi’s (2005) proposition that cluster economiesand their spillovers are a good source of knowledge and localization for foreign firms. U.S.clusters here refer to those identified by Porter (1998, 2004) described in an earlier section.4

Data and survey. Data on Korean investment in the U.S. was collected based on apostal survey that was administered in 2004. To build the population database, two con-siderations were used. First, we surveyed both chaebols and non-chaebols. The literaturemaintains that chaebols have better access to resources arising from size advantages andthat they experience more favorable conditions for outward investment (Hollingsworth1998; Kim 1998). Second, the survey focused on firms that perform either production ormarket-oriented functions. The rationale for this stems from the fact large-scale KoreanFDI to the U.S. has been dominated by the chaebol and the fact that their investmentfunctions have served to augment their domestic production and sales (Jyoung 1997). Alisting of the firms in the U.S. was obtained from the Korean Chamber of Commerce andIndustry (KOCHAM). KOCHAM maintains affiliation with major industry associationssuch as the FKI and the Korean Trade Promotion Center, making it one of the mostcomprehensive databases on Korean firms and their activities in the U.S.

From KOCHAM, a total of 115 firms were compiled. Of these, 14 firms did not meet thecriteria outlined above; for example, they did not have a parent company in Korea or theywere in the process of withdrawing their investment from the U.S. Of the remaining 101subsidiaries, 73 had chaebol membership, and 47 of them were affiliates of the top thirty


chaebols in 2002. Of the 47 affiliates, 28 were members of the top five chaebols. The finallisting was cross-checked against the database for Korean outward investment by the Bankof Korea (BOK). The latter listing is confidential and generally inaccessible to the public.The BOK database also allowed us to search for chaebol subsidiaries in the U.S. against theKOCHAM directory and this yielded some 62 subsidiaries, with the remaining 39 sub-sidiaries being members of non-chaebol firms.

To design the survey instrument, a pilot survey was first conducted with three Koreansubsidiaries in the U.S. The final instrument was translated into Korean, and both Englishand Korean versions of the questionnaire were mailed to the 101 firms after an initial roundof telephone calls to introduce the project to the respondents. The telephone calls wereuseful for two reasons. First, they confirmed that targeted respondents were in seniormanagement positions. Second, Korean HQs control their subsidiaries tightly and, in manyinstances, subsidiary managers required HQ permission before they were able to respond.The latter may be one reason we only received 32 responses although the sample constitutesa reasonably high response rate of 32 percent. Potential response bias was tested usingArmstrong and Overton’s (1977) procedure for early (n = 14) and late (n = 18) responses.No response bias may be found for sector (c2 = 70, p = 0.203), age (c2 = 2.18, p = 0.704),and size (c2 = 18.2, p = 0.574).

Analysis. Of the thirty-two manufacturing subsidiaries that were surveyed, approxi-mately two-thirds indicated that they hold chaebol status; hence, about half of them hadworldwide sales over $250 million (Table 1a). In terms of sectoral mix, the sample coveredtextile, computer, electrical equipment, telecommunication equipment, and fabricatedmetals (Table 1b). Unlike firms from other Asian industrializing countries whose invest-ments tend to be fairly recent (Poon and MacPherson 2005), 40 percent of Korean sub-sidiaries have been in the U.S. for more than 20 years (Table 1c). Approximately 55 percentof the firms also reported undertaking market-oriented functions such as sales and distri-bution while the remaining share of the more production-oriented firms are engaged inR&D and manufacturing.

To examine the relative influence of intra-, inter-, and extra-firm relations on the locationof Korean subsidiaries in the U.S., firms were asked to rank each of the factors in Table 2 from1 to 7 with the rank of 1 indicating no influence at all and a rank of 7 indicating significantpositive influence. The table reports mean responses based on the analysis of covariance(ANCOVA). ANCOVA is used to control for the effects of firm age, subsidiary role, andsector. The results suggest that inter-firm relations with U.S. customers (overall mean = 6.1)and to a lesser extent U.S. suppliers (overall mean = 4.1) constitute important locationalconsiderations along with the intra-firm factor “parent firm’s knowledge of location andmarket in the U.S.” (overall mean = 5.1). These network relations are equally important forboth chaebols and non-chaebols as indicated by the lack of significance in the F-statistics.The relative importance of the aforementioned inter-firm relations may be explained by thefact that the subsidiaries are important suppliers of fabricated metals, auto parts, rubber, andplastics to U.S. manufacturers. Many of the Korean firms are original equipment and originaldesign manufacturing suppliers to U.S. companies; hence, location near their customers is


TABLE 1. SUMMARY STATISTICS OF FIRM

CHARACTERISTICS.

(a) Firm size

Size Number ofsubsidiaries

Below US$50 million 7US$ 50 million–US$ 250 million 11US$ 251 million–US$ 500 million 6US$ 501 million–US$ 1 billion 4US$ 1.1 billion–US$ 5 billion 2Over US$ 5 billion 2

(b) Industrial sector

Sector Numberof firms

Food 1Textiles 4Chemicals 2Plastics and rubber 4Fabricated metals 6Machinery 5Computers and electronic components 3Electrical equipment 1Transportation equipment 4IT 2

(c) Age

Years of operation inthe U.S.

Numberof firms

1–5 26–10 111–20 16More than 20 13


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important (Poon and MacPherson 2005).5 In other words, because many Korean firms arecontract suppliers to U.S. companies, location near the latter increases producer–userinteractions that contribute to product improvement and development.

Subsidiary managers also report the importance of parent firms’ knowledge in loca-tional decision, which points to the role of home environment where HQs and parentcompanies continue to exert considerable control over their U.S.-based operations. On theother hand, intra-firm relations that are associated with startups or spinoffs from otherKorean firms, and, extra-firm relations with Korean and U.S. government agencies, as wellas professional/trade associations, are all well below 4.0 reflecting the relative unimpor-tance of these relations. When the ANCOVA is examined in terms of subsidiary roles, thatis, subsidiaries whose functions are predominantly market or production based, the sameinter- and intra-firm network features emerged as important with means well over 4.0 for:1) U.S. customers and 2) parent companies’ knowledge of U.S. market and location. U.S.suppliers appear to be important for production-oriented subsidiaries with an adjustedmean of 4.8, but interestingly the F-statistics do not indicate that this mean is significantlydifferent from more market-oriented subsidiaries after controlling for age and sector.Indeed, the F-statistics reveal that differences in subsidiary role do not have an effect onlocational motivations; hence, both types of subsidiaries are described by relatively similarlocational influences. While the F-statistics do indicate a 10 percent significance level for“Korean firm in the U.S.” between production and market-oriented subsidiaries, the meanscores are well below 3.0, so it is reasonable to conclude that this factor hardly matters forKorean firms unlike overseas Chinese firms where co-location between Chinese firms tendto occur from strong ethnic relations (Yeung 2003).

In the previous section, it was proposed in Hypothesis 1 that Korean subsidiaries that arelocated in U.S. industrial clusters are likely to help build firm knowledge and competency ifthey are given greater autonomy to acquire location-specific assets. Inter- and extra-firmnetwork spillovers from firm residents’ activities in clusters as well as increased subsidiarycontrol of local resources relative to distant parent firms help contribute to such competency.Hypothesis 2 further proposes that given the importance of national, and thereby homecharacteristics of Korean firms, intra-firm network relations affect the nature of subsidiaryautonomy through strong controls from the center. Because part of organizational control,and thereby power relations, is related to the internal governance of firms, the position of asubsidiary vis-à-vis its parent firm, the firm’s group of companies, and other subsidiariesshould determine the structure of intra-firm networks (Blumentritt and Nigh 2002). Intra-firm positionality (INTRAPOS) is therefore measured in terms of three dimensions in thesurvey, namely, the subsidiary’s evaluation of its performance via the company’s overallgroup of firms, its parent firm, and other subsidiaries within the network.

In order to avoid potential problems of variable omission that could lead to modelmisspecification, we include other relevant factors that may affect network transformationsto test the two hypotheses. These factors are: market power (MP) and subsidiary positionwithin its inter-firm networks (INTERPOS). The Appendix details the measurement of allthe variables. The rationale for including these two variables is elaborated further below.


Yeung (2005) suggests that subsidiaries that possess greater market power (in this casehigher sales) also tend to contest both internal as well as overall network social controls,leveraging the acquisition of local market knowledge (e.g., knowledge of U.S. customers)that distant parent or group firms are less likely to possess. For the purpose of this research,a Korean subsidiary’s overall market power is measured in terms of its total worldwide sales.Following Holm, Eriksson, and Johanson (1996), INTERPOS seeks to capture subsidiaries’interdependence with other firm actors such as customers and suppliers. This is operation-alized through the subsidiary’s ranking of its interdependence with direct customers, indirectcustomers, direct suppliers, and indirect suppliers.6

For both INTRAPOS and INTERPOS, firms were asked to rank the aforementioneddimensions on a Likert scale of 1 to 7 with 1 indicating low performance or strength and7 being high performance or strength. Given the multiple dimensions associated with eachof the two variables, principal component analyses were conducted to reduce the dimen-sions, thus capturing the INTRAPOS and INTERPOS variables through their factor scores.In addition to the four explanatory variables above, two control variables—industrial sectorand subsidiary role—were also introduced, as both factors have been shown to influencefirm positionality (Poon and Thompson 2003). To obtain the dependent variableAUTONOMY, we asked the Korean subsidiaries to rank various levels of autonomy interms of six dimensions, namely, personnel, production planning, corporate guidelines,costs, information sharing, and finance (see the Appendix). As with the generation of theINTRAPOS and INTERPOS variables, the six dimensions were then subjected to a prin-cipal components analysis. All of the dimensions loaded heavily on one component and thiscomponent may be interpreted as summarizing the six measurements of AUTONOMY.Using the factor or component scores output generated by the principal componentsanalysis, ordinary least squares estimations may be performed on the regression below asthe dependent variable AUTONOMY is continuous in nature:

AUTONOMY MP INTRAPOS INTERPOS CLUSTER

SECTOR

= + + + ++ +β β β β β

β0 1 2 3 4

5 ββ ε6ROLE i+(1)

whereAUTONOMY = degree of local autonomyMP = market powerINTRAPOS = intra-firm positionalityINTERPOS = inter-firm positionalityCLUSTER = location in a U.S.-based clusterSECTOR = industry sectorROLE = subsidiary roleVariance inflation factor (VIF) diagnostics for detecting the presence of multicollinear-

ity indicated the lack of multicollinearity with values of less than 1.8 for all of theindependent variables. Table 3, which reports the regression results, reveals that marketpower, inter-firm positionality, and location in a U.S. cluster do not result in a shift of powerbetween subsidiaries and parent firms through greater local subsidiary autonomy. However,


subsidiary autonomy is positively and significantly related at the 5 percent level INTRA-POS. The regression results would seem to support Hypothesis 2 but not Hypothesis 1. Thatis to say, potential cluster-derived knowledge arising from inter-firm interactions withcustomers and suppliers in the U.S. does not play a significant role in helping to transformnetwork power relations, while culturally embedded intra-firm networks do. These resultswould seem to favor Whitley’s (1999) and Gertler’s (2003) emphasis on national cultureand institutions as influential factors in international operations over those who point to therole of local knowledge empowerment through exploitation of specific U.S. locationaladvantages.

From Table 3 it would appear that Korean subsidiaries’ inter-firm relations with U.S.suppliers and customers have not resulted in increased autonomy that could potentiallycontribute to firm competency. Foreign ownership may explain this finding to someextent as Birkinshaw and Hood (2000) find that foreign ownership tends to diminishsubsidiaries’ ability to embed themselves in local U.S. cluster networks. The experienceof Japanese subsidiaries in the U.S. suggests that time, too, may influence subsidiaryautonomy because Japanese subsidiaries were found to be disembedded in initial stagesof development when they first located in the U.S. Initial disembeddedness was explainedby a lack of trust and cooperation between the Japanese subsidiaries and U.S. suppliers(Perucci 1994). Over time, however, a network of U.S. suppliers became integrated intothe production system of Japanese subsidiaries thereby increasing the latter’s localembeddedness. To investigate the effect of time on subsidiary autonomy, we re-ran theabove regression with firm age but found that introducing this factor did not change theresults in Table 3. In a sense, the Korean chaebol may be distinguished from its Japanesecounterpart through its relatively durable structure of vertical governance. Hence, asproposed in an earlier section, Korean intra-firm networks, more specifically parent–subsidiary control, would seem to vary little across space and also across time. In

TABLE 3. REGRESSION RESULTS: THE RELATIONSHIP BETWEEN KOREAN SUBSIDIARY

LOCAL AUTONOMY AND NETWORK RELATIONS

Variable b estimate t-value

Intercept 0.220 0.375MP 0.119 0.127INTRAPOS 0.385 2.084**INTERPOS -0.189 -0.193CLUSTER -0.440 -0.429SECTOR -0.077 -0.078ROLE -0.014 -0.117R2 0.249

**P < .05.


contrast, the Japanese keiretsu has significantly relinquished family ownership andcontrol to stockowners and professional managers (Chang and Chang 1994). Japaneseauto firms in particular have successfully embedded in the U.S., even forming “hybridfactories” (see Fruin 1999).

To understand why Korean subsidiaries’ intra-firm networks might be important inexplaining their increased local power, and thereby autonomy, we examine national andcultural factors. The subsidiaries were asked to relate the importance of Korean blood,school, and regional ties to the successful operation of their business activities in the U.S.vis-à-vis their political and cultural relations in the U.S. and Korea. The term “blood” ties ispopularly used to describe ethnic cultural relations particularly among East Asian firms(Hsing 1996) Respondents ranked these ties from 1 to 7, with 7 indicating that the various tiesare extremely important to their success. An ANCOVA that controls for age, sector, andsubsidiary role in examining the role of these ties is reported in Table 4. Comparisons weremade for chaebols and non-chaebols, younger (less than 20 years) and older firms, andproduction and market-oriented firms. Table 4 reveals that the significance of the INTRA-POS regression variable above may in part be explained by the importance of strong culturalties between the U.S.-based subsidiaries and parent companies in the form of blood, school,and regional ties, with non-chaebols in particular recording a relatively high mean of 5.2.Extra-firm cultural and political relations are also ranked somewhat highly, that is, 4.0 andabove, and these include subsidiary (4.1) and parent compan (4.9) relationships withKorean trade and business associations as well as parent companies’ relationship withKorean government agencies (4.5). The first two of these extra-firm relationships are alsosignificantly more important for non-chaebols than chaebols (F = 3.2 and F = 6.69, respec-tively). State–corporate extra-firm alliance is still perceived to be fairly strong among thefirms, a finding that supports other studies (see Lee 1989; Siegel 2004). School and regionalties, in particular, form a common bridge between high-level managers and governmentofficials.

Similar to non-chaebols, younger firms also gave a greater weight to intra-firm relationsregarding parent–subsidiary control (4.7) as well as parent company’s relationship withKorean trade/business associations (4.0), although the F-statistics indicate that only thelatter factor is significantly different from older firms (2.5). Both production (4.1) andmarket-oriented (4.6) subsidiaries attach relatively similar means to the importance ofintra-firm relationships with their parent companies. None of the other cultural or politicalrelationships are important. It would seem from Table 4 that whether in terms of chaebolstatus, firm age, or subsidiary role, Korean subsidiary relationships with their parentcompanies are consistently ranked as important. Such culturally embedded internal net-works would seem to influence a subsidiary’s ability to exploit locally derived competitiveadvantage in the U.S. Hence, any improvement in its structural position is most likely tocome from intra-firm relationship adjustments with parent firms.

Earlier in Table 2, extra-firm relations were not seen to be important in influencinglocational choices. But Table 4 demonstrates that extra-firm relations matter in the contextof an institutional infrastructure that supports nationally embedded political and cultural


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relationships. One possible explanation for the latter findings may be that the benefits ofextra-firm relationships have less to do with contributing to locational advantages and moreto do with the creating investment opportunities (Siegel 2004).

Overall, the analysis in this section indicates that firm–place relationships amongU.S.-based subsidiaries largely favor national and home over place characteristics ininternational operations in determining network power configurations among Koreanfirms. Parent–subsidiary control that is consistent with a tall hierarchy in managementand social governance appears to be the most pervasive mechanism for maintainingnetwork norms.

ConclusionThe study here suggests that locational decisions in the U.S. predominantly reflect

inter-firm relations with American customers and suppliers, and that such relationsconstitute stronger motivations among non-chaebol than chaebol firms. Intra-firm rela-tions are significant to the extent that parent companies’ knowledge of various U.S.places also influences locational decisions. This is true for both chaebol and non-chaebolfirms. The durable role of the parent firm in Korea also manifests itself in internationalactivities in the U.S. To build location-specific advantages, Korean subsidiaries must bereleased from strong control from the center and be given greater autonomy to pursuenew knowledge and markets in the U.S. In the Korean context, however, such autonomyis more likely to come from an improvement in its position within the company’s overallintra-firm relational structure than through inter- or extra-firm network reconfigurations.Location in a U.S. cluster and interactions with U.S. customers and suppliers do notsignificantly contribute to increased subsidiary autonomy despite in the literature claimthat they constitute a source of competitive advantage arising from distant parent firms’relative lower levels of access to such cluster-driven innovations and inter-firm networkcapital.

The strength of Korean intra-firm networks may be explained by historical socialpractices that emphasize blood, school, and regional ties in company management. At theextra-firm level, such intra-firm ties are strengthened by participating in trade and businessassociations and by forging government–corporate relationships. These ties in turn simul-taneously promote and maintain network norms, including authority and hierarchicalorganizational structures. While cultural relations are known to promote social proximityand reciprocity that enhance quality information exchanges, in the Korean case, it isunclear how such reciprocity norms might be supported when the networks are engagedoutside of their home context.

Lastly, embedded relational Korean firm extra-firm relationships are of modest signifi-cance to the success of subsidiary operations in the U.S., particularly among younger firmsand non-chaebols. Consistent with prevailing research on Korean firm organizationalstructure and extra-firm arrangements, subsidiaries in the U.S. perceive both theirs as wellas parent firms’ ties to the various Korean government agencies, and trade and businessassociations to be relatively important to the success of their operations in the U.S.


APPENDIX OPERATIONALIZATION AND MEASUREMENT OF REGRESSION

VARIABLES

Variable Operationalization Measurement

AUTONOMY How much planning and decisionmaking autonomy does yourcompany have from HQ withregard to: (i) Personnel,Production planning, (ii) Inventoryand quality control, (iii) Costcontrol, (iv) Interpreting broadcorporate guidelines, (v)Information sharing, and (vi)Obtaining financing

7-point likert scale (1 = No autonomyat all and 7 = Completeautonomy).AUTONOMY is based on factorscores obtained through aprincipal components analysis onthe six autonomy dimensions

MP Total World Wide Sales US dollars (millions)INTRAPOS To what extent do you agree or

disagree with the followingstatements? (i) This subsidiarymust perform effectively for ourgroup to achieve its goals; (ii) Thissubsidiary must performeffectively for our parent toachieve its goals; (iii) Thissubsidiary must performeffectively for our othersubsidiaries to achieve their goals.

7-point Likert scale (1 = Verystrongly disagree, 7 = Verystrongly agree)INTRAPOS is based on factorscores obtained through aprincipal components analysis onthe three intra-firm dimensions

INTERPOS To what extent do you agree ordisagree with the followingstatements? (i) Our business withany given customer firm isaffected by our relationship(s) withour other customer firms; (ii) Ourbusiness with any given customerfirm is affected by their othercustomer firm relationships; Ourbusiness with any given customerfirm is affected by ourrelationship(s) with our supplierfirms; (iii) Our relationships withour supplier firms are affected bytheir relationships with their othercustomer firms; (iv) Ourrelationships with our suppliersimpact their relationships withtheir suppliers.

7-point Likert scale (1 = Verystrongly disagree and 7 = Verystrongly agree)INTERPOS is based on factorscores obtained through aprincipal components analysis onthe four inter-firm dimensions.


NOTES1. Data on inward FDI flows to the U.S. may be accessed in http://www.bea.doc.gov/bea/di/

di1fdibal.htm

2. Martin and Sunley (2003) note that a cluster could span multiple spatial scales from city to country

to regional levels. Using employment to calculate cluster location quotients may also be misleading

since a cluster could be identified on the basis of one large firm.

3. For a detailed discussion of Porter’s “Cluster Mapping Project,” its methodology, and the identi-

fication of clusters, see http://data.isc.hbs.edu/isc/cmp_overview.jsp.

4. To determine if a Korean subsidiary is located in a U.S.-based industrial cluster (e.g., the auto

cluster in Detroit, Michigan), specific product information supplied by survey respondents was

matched to corresponding clusters identified by Porter (http://data.isc.hbs.edu/isc/index.jsp), for

example, Korean auto firms in the Detroit auto cluster. We organized our search for applicable

clusters 1) by cluster and 2) by metropolitan area, the smallest scale of analysis that allows for

possible spatial overlap. This made it possible to identify subsidiary locations within Porter’s

clusters. This search was augmented by cross-referencing the zip codes using U.S. Census Software,

Dragon Software, and Imacination Software (available at http://zip.langenberg.com/) of all indi-

vidual subsidiary locations against all zip codes for cities in applicable clusters located in the same

state and/or sometimes in adjoining states.

5. A relatively large literature exists that documents the role of East Asian, including Korean, firms as

original equipment and original design manufacturers to foreign multinational corporations (cf.

Hobday 1995; Lee and Lim 2001; Mathews and Cho 2000). Original equipment and original design

manufacturing require manufacturing firms to produce and/or develop products for sale under a

partner firm’s brand name for a fixed period of time. Provision is made for original design

manufacturers to pursue their own product design.

6. Direct customers and suppliers refer to first tier customers and suppliers where immediate sales and

transactions are involved without the mediation of an external party or firm. Indirect suppliers and

customers on the other hand include the suppliers and customers of first tier firms; hence, the

transaction is often mediated through another firm.

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Documents

Firm Networks and Korean Subsidiaries in the United States