CENTERS OF EXCELLENCE IN MULTINATIONAL CORPORATIONS

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1004 T. S. Frost, J. M. Birkinshaw and P. C. Ensigndeveloping the instrument, the research team meton four occasions. The first meeting defined theobjective of the questionnaire. Subsequent meetingswere used to more carefully define the coreconstructs and then the wording of specific items.We also made use of existing scales from previousstudies. Finally, after the second iteration of thesurvey instrument we pilot tested it using a numberof executives from one multinational company.The net result was a carefully crafted instrumentthat had been subjected to three rounds of revision,pilot testing, and the opinions of eight researchersworkinginthefield.This study focuses on Canada, which is in manyways an ideal context in which to explore thecenter of excellence concept. First, the Canadianeconomy is characterized by a high level of foreignownership of industry, a feature that has longdistinguished it from other advanced industrialnations. In addition to obvious advantages in termsof convenience, this feature of the Canadian economymakes it likely that the center of excellencephenomenon is more evolved in Canada than inmany other countries. Findings from the Canadianexperience are thus likely to presage experiencein other countries where FDI has more recentlybecome a major part of the institutional landscape.Second, the 1989 Free Trade Agreement betweenCanada and the United States resulted in a considerableamount of restructuring of foreign-ownedactivities in Canada, with some being terminated ortransferred to other locations and others receivinggreater investment. We believe that this restructuringprocess has led many foreign firms operating inCanada to articulate explicitly their goals and rationalefor developing (or not developing) centersof excellence within their Canadian subsidiaries.Again, this suggests that the Canadian experienceis likely to be on the leading edge of developmentselsewhere. And finally, because Canada is adeveloped country with many advanced factors ofproduction, it provides a good location for exploringthe linkage between the characteristics of thehost country and the development by foreign subsidiariesof the kind of value-creating capabilitiesthat are central to our understanding of the centerof excellence phenomenon.We developed a list of 780 foreign-owned(greater than 50% of equity) companies in Canadawith annual sales of greater than $25 million.The mailing list was developed using wellestablishedsources such as the Financial Post1000, The Globe and Mail 500, and variousonline directories. Although some companiesdeliberately exclude themselves from such listings,our research suggests that this mailing list includesmore than 90 percent of the population.To give the study additional focus, the780 foreign-owned companies were drawn fromCanada’s manufacturing sector. Service sectorfirms were thus excluded from the sampling frame.This choice was driven by both practical andmethodological considerations. On the practicalside, the focus on manufacturing firms reducedconsiderably the cost of administering the survey.Two methodological considerations influencedour decision to focus on the manufacturingsector. First, because the center of excellence‘phenomenon’ is still not well understood, webelieved that it was important to pay primaryattention to matters of internal validity rather thanexternal validity. Many researchers have notedimportant differences between manufacturing andservice sector multinationals—differences that webelieve are likely to impact the processes by whichcenters of excellence emerge and are subsequentlyleveraged by the firm. Combining both sectorsin the same study risked a marginal gain ingeneralizability for a potential serious cost in termsof internal validity. Second, because our definitionof a center of excellence is cast at the subunitlevel (i.e., at the level of a function or activity), webelieved it would be wise to focus initial researchattention on two primary activities—R&D andmanufacturing—where centers of excellenceappear particularly likely to emerge. For servicesector firms, it is much less clear (in termsof activities) where centers of excellence arelikely to develop.The questionnaire was mailed to the CEOs of the780 foreign-owned firms in late 1997. In decidingupon the CEO as our target respondent, wefaced both theoretical and practical issues. Onthe one hand, our conceptualization of a centerof excellence pushed us to consider respondentsat lower levels in the subsidiary, ideallymore than one per organization. We ruled out thisapproach primarily for practical reasons relatingto the difficulty of obtaining the necessary contactinformation, and cost. Instead, we chose a singlerespondent—the CEO—but structured our instrumentsuch that key questions were very explicitlyfocused around functional areas, i.e., belowCopyright © 2002 John Wiley & Sons, Ltd. Strat. Mgmt. J., 23: 997–1018 (2002)
Centers of Excellence in Multinational Corporations 1005the overall organizational level. As discussed earlier,this functional level focus is consistent withour conceptual approach and with our observationsfrom the field about where and how centersof excellence develop. The specific choice ofthe CEO as our target respondent follows traditionalpractice and was intended to ensure that therespondent had a sufficient breadth of knowledgeabout all of the major facets of the organization,its activities, and environment.Following the recommendations on survey protocolcontained in Dillman (1978), we followed upon our first mailing with a reminder letter. Afterthis follow-up, a total of 99 questionnaires werereturned in usable form, giving us a response rateof 13 percent. This is not as high a response rate aswe would have liked, but it is well within the normalrange for surveys of multinational subsidiaries(Harzing, 1997).Data and measuresThe data used in this study came primarily from thequestionnaire. 4 Most items were measured using1–7 Likert-type scales. Some, such as the numberof employees and the percentage of foreign sales,were measured using actual values. In addition, weconducted field interviews in five subsidiary companies.The data collected during these interviewswere used to formulate the theoretical frameworkand, subsequently, to help make sense of the resultswhen they did not always correspond to our predictions.Centers of excellenceRecall that our definition of the term is composedof three main elements: strong capabilities, formalrecognition, and greater-than-unit level contribution.Our survey contained questions designed tooperationalize all three elements. First, we askedrespondents to indicate their organization’s competencelevel in (1) research, (2) development, and(3) manufacturing using a 7-point scale, where1 was defined as ‘weak competence’ and 7 wasdefined as ‘very strong competence.’ 5 We chose a4 The complete questionnaire can be downloaded in PDF formatfrom the lead author’s home page: http://live1.ivey.uwo.ca/faculty/TonyFrost.html.5 Note that we chose to use an absolute scale, not a relative scale,in operationalizing strong capabilities. This was driven by ourscore of 4 as our cut-off point for defining strongcompetence. This seemed to us a reasonable levelas a first approximation, and the distribution ofresponses bore this out. However, as discussedbelow, we experimented with alternative cut-pointsas a way of assessing the robustness of our results.Second, for each activity we asked respondents toindicate whether ‘Our competence is formally recognizedby the headquarters’ (1 = yes, 0 = no).Finally, we asked the respondents to provide anindication of the extent to which their capabilitiesimpact other units. Our fieldwork suggested thatthe impact on other units can take many potentialforms, and that there is not a uniform hierarchy ofimportance. Thus we chose to frame our questionon impact in purposively broad terms. For each ofthe three functional activities, we asked: ‘To whatextent are the subsidiary’s distinctive competencesin [Research, Development, Manufacturing] of usefor other units in the Corporation?’ As above, weused a 7-point scale, where 1 indicated ‘No use forother units at all’ and 7 indicated ‘Very useful forother units’.In summary, we operationalized a center ofexcellence as a dichotomous variable based onrespondents’ answers to all three of the questionsnoted above. Only those units that met all threecriteria were classified as centers of excellencefor the purposes of our subsequent analysis. Thedichotomous nature of our variable seems to usto capture the essence of the center of excellenceconstruct as used in practice, although we recognizethat it may also be valid to conceptualize themin terms of degree, i.e., as a continuous variable.With this in mind we explored several alternativeoperationalization strategies as a way of checkingthe robustness of our initial findings. We discussthese and other interventions in a separate sectionfollowing the main presentation of results.qualitative work, which suggested that managers think simultaneouslyabout their unit’s capabilities in relative (to other unitswithin the firm and other firms) and absolute terms. Especiallyin manufacturing activities, it is apparent that many managerswould characterize their capabilities as being very strong in absoluteterms, but essentially on a par with local competitors andmany other units within the firm. Merck’s Canadian subsidiaryhas world-class capabilities in the manufacture of ethical pharmaceuticals—butsimilar to several other units within Merckand, indeed, similar to the operations of many of the world’sleading pharmaceutical firms. Our concern was that if we focusedthe question around comparative or relative ability, we wouldmiss many centers of excellence that have this kind of profile,i.e., multiple centers with similar capabilities worldwide.Copyright © 2002 John Wiley & Sons, Ltd. Strat. Mgmt. J., 23: 997–1018 (2002)
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CENTERS OF EXCELLENCE IN MULTINATIONAL CORPORATIONS

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