The role of headquarters-subsidiary geographic distance in strategic decisions by spatially disaggregated headquarters

Abstract

Various studies have explored how headquarters (HQ)–subsidiary geographic distance affects HQ decisions about subsidiaries, arguing that such distance causes some strategic options to be selected over others to limit ex post communication costs. These studies have implicitly assumed that a multinational’s HQ is spatially concentrated, even though multinationals have increasingly disaggregated their HQ internationally. We examine how such HQ disaggregation changes the role that HQ–subsidiary geographic distance plays in HQ decisions about subsidiaries. We argue that HQ disaggregation yields multiple HQ–subsidiary geographic distances, all of which are a likely source of ex post communication costs, and hence are likely to co-determine HQ decisions about subsidiaries. We discuss several approaches for dealing with these multiple distances, and recommend that the first-best approach be adopted by future studies to avoid the biased geographic distance effects possibly present in prior studies.