Influencing foreign subsidiary decisions through headquarter performance measurement systems

Purpose – This paper aims to investigate the ability of performance measurement systems (PMS) that were implemented by headquarters at foreign subsidiaries to influence decisions made by the subsidiary. This is important because PMS are important control mechanisms in the relationship between headquarters and subsidiaries within multinational firms. Design/methodology/approach – Acknowledging that controlling foreign subsidiaries is particularly challenging when they are geographically distant to headquarters, the authors collect survey‐based data from Chinese subsidiaries of multinational firms. They develop several hypotheses which are tested on a sample of 148 subsidiaries using multiple regression analysis. Findings – The results suggest that the influence of headquarter‐designed PMS on subsidiary decisions is higher when the compensation of subsidiary management is linked to PMS, when additional formal control is enforced, when PMS are affected by external events, when PMS are comprehensive, and when subsidiaries are embedded into the local business environment. Also, the authors find a negative interaction effect between comprehensive PMS and the extent to which PMS are affected by external events on the decision‐influence of PMS. Research limitations/implications – Limitations arise from the study setting in China. As management accounting research originates from and has mostly focused on Western countries, it remains somewhat unclear whether the constructs and instruments used in this study are fully transferable to China, despite the statistical and conceptual remedies that were applied. Originality/value – The study offers new insights into the role of PMS in multinational companies. It extends earlier research by offering empirical evidence from one of the most important emerging economies. As such, the results are relevant for almost every global firm using PMS to control foreign subsidiaries.