Monitoring Multinationals in Scotland: Some Preliminary Evidence on Appraising Corporate Behaviour

NEIL HOOD University of Strathdyde, Glnsgow, UK

DAVID STEWART Paisley College of Teehwlogy, UK

STEPHEN YOUNG University of Strathdyde, Glasgow, UK

This paper considers the important question of the screening and monitoring of multinational companies in host countries. Using data relating to US multinational alliliates in Scotland, the article applies the teehnigoes of cluster analysis and dir ' * 1 analysis to see whether any overall patterns emerge which might allow predictions on the future role and prospea of the PfGliates. The results provide some interesting pointers, with the distinction between cost centre and profit centre control systems being perhaps potentially most useful as a means of identifying groops of multinational a5liates which are worthy of more detailed investigation.

INTRODUCTION

In recent years there has been a growing interest in establishing criteria by which the benefits and costs of foreign direct investment might be evaluated by a host country. Invariably, the aggregate level of analysis in such exercises does not readily generate information about the behaviour of individual mul- tinational (MNE) affiliates. And yet it is often at this level that any host nation would wish to under- take a monitoring exercise.

This paper focuses upon the firm-level monitor- ing issue from a Scottish perspective. To date there are no formal procedures for reviewing the ac- tivities of multinational affiliates located in Scot- land, although, as the present authors have argued elsewhere, there is clear justification for undertak- ing such work.' For example, where a multinational company has a variety of affiliates in neighbouring European Community (EC) countries, Scotland has a clear interest in the relative development of the parent's corporate policy for the whole region. This interest is twofold, first, that of trying to direct the new investment from established expanding MNEs to Scotland rather than to some other European affiliate, and second, to try to identify companies at risk and the adverse effects on Scotland which may be associated with corporate rationalization pro- grammes. Adequate warning of such changes

through systematic monitoring, will, at least, facili- tate an active as opposed to a reactive response.

Even if the principle of monitoring is accepted, the actual method of monitoring remains an open question. From a resource point of view, it is clearly impossible to undertake regular in-depth interviews and assessments of all foreign firms in Scotland - at both parent and affiliate levels - no matter how desirable this may be. Rather, it would be possible only to appraise a limited sample of firms on an in-depth basis in any particular period. The impor- tant questions are then to decide upon criteria which would be used to select the firms for continu- ing study and to establish some broader procedure for maintaining an information flow and early warn- ing system relating to the total stock of foreign companies.

It is in relation to both of these questions that the present preliminary paper is directed. It emerges from the Hood and Young study for the Scottish Economic Planning Department (SEPD) into the European development strategies of US-owned manufacturing companies in Scotland.* This study was based on a sample of 55 US affiliates; the data collected related to the period 1971 - 1976 with forecasts through to the end of 1982. The principal objective of this article is to explore a number of the characteristics of the affiliates which emerged from published and interview data in order to iden- tify whether these offer any guidelines for the

CCC-0143-6570/82/OOO3-0164$03.50

164 MANAGERIAL AND DECISION ECONOMICS, VOL. 3, NO. 3, 1982 @ Wiley Heyden Ltd, 1982

monitoring process. The emphasis is on applying well developed statistical methodology to this data in order to establish a base for further investigation of emerging relationships.

PA'ITERNS OF US CORPORATE ACTrVlTY IN SCOTLAND

Before presenting the statistical material it is neces- sary to outline a somewhat generalized model of the expansion strategies of US corporations in Europe as these have affected Scotland, thereby setting the material in this section in perspective. A substantial number of the US entrants of the 1950s and 1960s had little direct investment experience and no other manufacturing plants in Europe at the time of entry to Scotland. As these firms developed, plants were systematically established throughout Europe, generally manufacturing a range of pro- ducts for the individual country markets. In this formative phase of development, affiliates were, thus, generally characterized by a national market and product responsibility and minimum inter-plant production links. The 1970s saw a trend towards a different form of Europe strategy. Motivated by the extension of the EC, loss of technological advan- tage in some sectors and more rapid technical change in others, recession conditions and excess capacity, the trend was towards a much greater degree of affiliate integration. This frequently in- volved changes in plant roles so that country affiliates would each have responsibility for only part of the overall corporate product range, but their market responsibilities were extended to cover Europe as a whole. In some cases this process was paralleled by rationalization and sometimes divest- ment in Europe.

From a Scottish viewpoint, these developments have been of major importance. While the net effect was not wholly negative, a number of long established MNE affiliates in, for example, the mechanical engineering sector recorded substantial reductions in employment or were closed. It was in an attempt to explore some of the underlying pro- cesses and identify some early warning signs that this present research was undertaken.

METHODS OF GROWING FOREIGN FIRMS AND THE MONlTORING PROCESS

In attempting to establish criteria which might assist in differentiating between companies, it would be fairly straightforward to use measures such as age of plant, level of employment, industry-type and so forth. Rut there is no particular reason why any of thcse measures per se would assist in identifying companies with good expansion prospects or firms at risk. What is required is some other type of measure or some composite measure which might permit more meaningful groupings of affiliates.

Typology of Sample Affiliates

At the first stage in this process, a cluster analysis technique was employed using 13 variables (Ap- pendix 1 gives details of the variables included in the analysis and Appendix 2 describes the cluster analysis technique). The objective was to examine whether there were any overall patterns emerging from the available data on the affiliates which would allow predictions on their future role and prospects. The cluster analysis technique is used at the stage of pre-hypothesis formulation and there- fore the variables incorporated into the analysis

NEIL HOOD is Professor of Business Policy at the University of Strathclyde. He graduated in economics at both undergraduate and postgraduate level from the University of Glasgow. He holds a number of advisory posts for national and international agencies on various aspects of the operations of multinational enterprises -topics on which he has published widely in several books and a number of articles.

Address: Strathcylde Business School, University of Strathclyde, Glasgow G4 OGE, UK.

DAVID STEWART is Senior Lecturer in Statistics at Paisley College and is currently Visiting Professor at Memorial University. He graduated in mathematics from the University of Strathclyde and subsequently in statistics and operational research from City University. He is director of a small market research company and has published a number of articles in this field.

Address: Faculty of Business Administration, Memorial University, St Johns, Newfound- land, Canada.

STEPHEN YOUNG is Senior Lecturer in Business Policy and International Business at the University of Strathclyde. He graduated in economics from the University of Liverpool and, as a postgraduate, in marketing from the University of Newcastle. As well as holding a number of advisory appointments in international business, he has with Professor Hood coauthored a considerable number of books and articles in this field. These include Chrysler UK: Corporation in Transition and The Economics of Multinational Enterprise.

Address: Strathclyde Business School, University of Strathclyde, Glasgow G4 OGE, UK. ~ _ _ _ _ _ _ _ ~~ ~ ~

MANAGERIAL AND DECISION ECONOMICS, VOL. 3, NO. 3, 1982 165

were those available in the study, rather than those derived from specific hypotheses concerning possi- ble impact on performance. Moreover, not all of the variables which might be desirable as inputs into such an exercise at affiliate level were availa- ble. As a word of caution it should also be stressed that the cluster analysis technique will not always create groupings of totally cognate affiliates and so the affiliate clusters should be viewed carefully.

Table 1 indicates that the data can be partitioned into six groups and highlights the important differ- ences amongst the clusters. Looking very broadly at these clusters, the first two are either parts of small

Table 1. Important Differences among Clusters

Cluster

Lowest percent of intra-group sales (7)’ Scottish affiliate has become less important in relation to overall European operations during 1971- 1976 (8); but is expected to become more important in years 1977-1982 (10). Poorer performance than other European affiliates -where relevant (11).

Parent has few other European plants (5). Where applicable, Scot- tish affiliates performed worse than other European subsidiaries (1 11, but this was not due to higher operating costs (12). Good record on target attainment (13).

High score on management func- tion index - due to presence of R & D and marketing functions (4). Scottish affiliates have become more important in relation to over- all European operations during 1971-1978 (8). Similar performance to that of other European affiliates (11). High relative operating costs (12). Poor record on target attain- ment (13).

Numerous other European affiliates (5). No intra-group sales (7). No change in importance in relation to other European operations during 1971-1976 (8). No difference in re- lative operating costs (12). Poorest record on target attainment (13).

Highest percent intra-group sales (7). Better performance than other European affiliates (1 1). Lower operating costs than other Euro- pean affiliates (12).

High percent intra-group sales (7). Scottish affiliates have become more important in relation to over- all European operations during 1971-1976 (8). Much higher relative operating costs (12).

Numberof Coot Profit affiliates c e n t m centres

14

18

8

5

5

5

55

6

13

2

5

4

3

33

8

5

6

-

1

2

22

a Figures in parentheses refer to the appropriate variables as described in Appendix 1.

European networks or the sole European manufac- turing operation; while the remaining four, all of which are too small for any detailed conclusions to be based on them, generally consist of affiliates which are part of large European plant networks. As the Table shows, where there were other plants, the performance of the Scottish affiliate was rated as being relatively poor. While Clusters 1 and 2 have been loosely grouped together for preliminary analysis, a closer look shows a clear difference between them using the cost-profit centre dichotomy. Cluster 2, where there are more Euro- pean affiliates, has a substantially higher proportion of cost centre^.^

In order to examine the policy impact of this analysis, Table 2 is presented. Tentatively, it is possible to produce a ‘strategic typology’, from which certain predictions on likely developments within each group may be made. From this, some suggestions are presented concerning the required host government response.

Clusters 1 and 2 both generally consist of com- panies which offer some reasonable prospects of short to medium term growth, either because they are ‘reinvestment prospects’ or because they are ‘early developers’, the latter being as yet at the early stage of direct manufacture in Europe. As Table 1 has shown some of them have had prob- lems and hence there remains a need for host government vigilance. Cluster 3 (‘transitionals’) includes some ‘higher status’ affiliates - as rep- resented by the existence of R & D and marketing functions at the facilities - together with several companies at transitional stages in their European strategy (two having excess capacity and have since been closed). For these Cluster 3 companies close monitoring of technology and relative plant perfor- mance would be recommended. The sue of the remaining three clusters inhibits much comment. They do share certain common characteristics as ‘network members’ but the general expectations for Cluster 4 are poorer than for 5 and 6. They are also distinguished, as Table 2 shows, by the degree of integration with other group plants in Europe. In both cases, there is a requirement for government awareness of internal group developments affecting the Scottish plants.

Since the data underlying this analysis was col- lected in 1977 - 1978, it has been possible to review these findings in the light of actual experience within the Scottish affiliates. Taking an overview of the sample, groups 1 and 2 have certainly produced better employment results than the others, even taking the recession conditions into account. Of the other clusters, the performance of number 3 has been very mixed, since apart from the two closures noted, several of the others have suffered badly in the recession. Conversely, certain firms in this group have expanded employment, with projects planned in the 1977-1978 period coming on- stream. A similarly mixed pattern has emerged for

166 MANAGERIAL AND DECISION ECONOMICS, VOL. 3, NO. 3, 1982

Table 2. Potential Policy Implications of the Affiliate Cluster Analysis Strategic

Cluster WpolOGY Prediction Required host countly response

1 Reinvestment Cautious optimism Observe group network develop- prospects ments in Europe

2 Early developers Good prospects of Attempt to induce high share (low integration) investment and of further European

growth development 3 Transitionals Very mixed - Close monitoring of both

cost centres are technology developments high risk

4 Network members Uncertain; highly Close monitoring of internal and relative plant performance

(low integration) dependent on group allocation system of parent product allocations

5 and 6 Network members Generally reasonable Monitoring of internal cost (high integration) prospects, but vari- movements in European plants

ations in operating costs important levels

and of relative investment

Clusters 4, 5 and 6, with no apparent employment benefit accruing either from high or low integration between the Scottish operation and other group plants elsewhere in Europe. In total therefore, the two largest clusters identified (Clusters 1 and 2) would seem to be useful for predictive purposes, the others less so.

No claim is made for this cluster approach other than as part of a screening process for the examina- tion of affiliate prospects in the host country. Suita- bly refined, this technique could make some con- tribution, although a good deal more work is re- quired. For instance, specific formulation of hypotheses would be essential to avoid dangers of random clusters and false conclusions.

profit centres. As Table 3a shows, the first of these is the relative timing of the establishment of the Scottish plant. The Scottish plants which were oper- ated as cost centres at the time of the survey were facilities which were among the first European manufacturing operations of the parent corpora- tion. Closely allied to this is the second variable, namely age of affiliate. Cost centre control tends to be in longer established affiliates-in fact they are on average twice as old as the profit centre sub- sidiaries. As implied previously, this is associated with a higher incidence of integrated strategies in MNEs which have been longer established in Europe. The third variable emerging in Table 3a represents an index of the strategic management

STAGES OF DEVELOPMENT AND

CENTRES/PROFIT CENTRES CONTROL SYSTEMS - COST

In the earlier Hood & Young study, tentative sug- gestions were made that some differentiation could be made between foreign affiliates in Scotland on the basis of whether or not the firms were control- led as profit centres or cost centres. The suggestion, if substantiated, that poorer performance was as- sociated with cost centre operations and that this form of control was related to the growing integra- tion of corporate plant systems is again important from a monitoring perspective. The simple cross- classifications developed in the SEPD study did not, however, facilitate a clear-cut distinction between the companies, and to test the implicit hypothesis above, the technique of discriminant analysis was employed.

In an attempt to explain the differences between the two groups of affiliates, a number of variables were introduced into the discriminant analysis (a complete list is given in Appendix 3). The results of this analysis are presented in Table 3, where it becomes clear that a number of factors emerge as being significant in discriminating between cost and

Table 3a. Discriminant Analysis Based on the Dichotomy: Cost/Profit Centre"

Means Variable Wilks' Cost Profn

lambda centre Centre enteredb Stage

1 Year of establishment of Scottish afflliate relative to others in Europe (ESTA) 0.7921 0.25 0.71

(AGE) 0.6058 23.08 11.81

functions (INDEX) 0.4947 7.50 10.48

affiliate (EMPLOY) 0.4820 1370.88 493.94

2 Age of Scottish affiliate

3 Index of management

4 Employment in Scottish

Table 3b. 'Hits and Misses' Results' Predicted group

Actual group Cost Centre Profit Centre Totals

Cost centre 22 (92) 2 (8) 24 Profit centre 3 (10) 28 (90) 31

"The standardized discriminant function coeffi- cients have been excluded from this Table for purposes of clarity. The Table showing these coefficients is in Appendix 3.

bThe variable names are given in parentheses. The full list of variables is provided in Appendix 1.

"The figures in parentheses are actual group percentages. The overall percentage of 'Hits' was 91%.

MANAGERIAL AND DECISION ECONOMICS, VOL. 3, NO. 3, 1982 167

functions at affiliate level. The index is weighted to recognize the presence of higher status functions such as R & D and marketing. The results demon- strate that profit centres tend to have both more marketing and more R & D activity. In contrast, cost centres are rarely associated with the presence of either of these, their principal functional role being as production units. The results here do not directly indicate that strategic management activity such as R & D tends to be lost as profit centres become cost centres, but there is a strong implica- tion of this from other findings of the survey. The final item of note in Table 3a is the level of employ- ment in affiliates, cost centres being on average three times as large as profit centres. The predictive ability of the discriminant analysis based on these four key variables is high (Table 3b), with only five (9%) of the sample affiliates being wrongly pre- dicted.

The implication of these results is that in cost centre systems there is a greater need for host government interest in relative plant performance as between Scottish and other European locations, in relative employment trends and in strategic change as regards product and market roles. Knowledge of the existence of cost centres and their underlying features may provide an early warning of potential problems emerging from indifferent local perfor- mance. It is accepted that there are other ways of evaluating strategic change within affiliates, such as relative investment plans. Such information would have to be used (where available) to supplement the type of analysis on control mechanisms suggested here.

STAGES OF DEVELOPMENT AND

AND MULTIPLANT OPERATIONS

This section pursues a related question, of interest to Scotland, namely that of whether the prospects for Scottish affiliates which are the sole European production bases for US MNEs are greater or less than for Scottish affiliates which are part of wider European plant networks. It might be expected that the single plant would have more substantial growth potential since its activities relate to the entire European market. Equally it could have a wider range of strategic functions to fulfill its role in servicing this market. On the other hand, the affiliate which is part of multiplant operations in Europe would be able to draw on wider resources and could be part of a more advanced and inte- grated product strategy towards the region.

For the purposes of exploring differences, the data were divided into three groups: first, the ‘sole’ affiliate where the Scottish operation is the only manufacturing base within Europe; second, the ‘multiplant (1)’ affiliate which is one of a network within Europe, but in which the Scottish operation

CONTROL MECHANISMS - SOLE PLANTS

was the first European manufacturing base; and third, the ‘multiplant (2)’ affiliates, where Scotland was not the parent’s first European production base. There were respectively 19, five and 31 affiliates in these groups. The size of these cells calls for caution in the interpretation of the results, although the prob- ability of successful classification is quite high (0.8 1).

The data available for each affiliate can be re- garded as forming a multivariate profile for that affiliate. By viewing the information in this way, it is possible to conduct a three group discriminant and classification analysis to determine whether differ- ences exist amongst the three groups identified above and whether these differences can be ex- plained. The variables used in this analysis are pre- sented in Appendix 1 and the results of a three group stepwise discriminant analysis applied to the data are given in Table 4.

There are two dimensions of separation amongst the groups, which can be viewed as two contrasts (see the standardized discriminant function coeffi- cients in Appendix 3). The first discriminant func- tion is a contrast formed by comparing the charac- teristics of the affiliates relating to size (both em- ployment in the Scottish affiliate and the number of additional European affiliates of the MNEs - EMPLOY and EUROPL) and those pertaining to importance (past and future importance of Scottish affiliate-IMPAFF and F’UT). A high negative score on this ‘size-importance’ scale indicates that the affiliate is a very important component in the parent’s European operation. The second discri- minant function which is effective in separating the three groups is a contrast formed from characteris- tics relating to the future importance of the Scottish affiliate (FUT) and those referring to the existing

Table 4a. Discriminant Analysis’ Stage Variable enteredb Willo’ lambda

1

2 Employment in Scottish affiliate

3 Number of additional European

4 Future importance of Scottish

Past importance of Scottish affiliate (IMPAFF) 0.6416

(EMPLOY) 0.5016

affiliates of MNE (EUROPL) 0.4696

affiliate (FUT) 0.4379

Table 4b. ‘Hits and Misses’ Results’ Predicted aroup

ACtUSl QmUp Sole Multiplam(1) Multiplant 12) Totals

Sole 16 (84) 1 (5) 2 (11) 19

Multiplant (2) 3 (10) 25 (81) 3 (9) 31 Multiplant (1) 1 (20) 0 (0) 4 (80) 5

a The standardized discriminant function coefficients are

bThe variable names are given in parentheses. The full

Figures in parentheses are actual group percentages.

shown in Appendix 3.

list of variables is provided in Appendix 1.

The overall percentage of ’Hits’ was 81%.

168 MANAGERIAL AND DECISION ECONOMICS, VOL. 3, NO. 3, 1982

Function 2 FUTURE IMPORTANCE

Sale affiliates Multiplant (2 ) affiliates

IMPORTANCE

Multiplant affiliatesx

( I ’ I STATUS

Figure 1. Graphical representation of the differences between the sole and multiplant (1 and 2) groups of affiliates.

status both of the affiliate and of its parent network (IMPAFF, EMPLOY and EUROPL). A high posi- tive score on this ‘future importance -existing status’ scale would indicate that an affiliate would be likely to become substantially more important over the ensuing five years.

In order to explore the implications of these findings. Fig. 1 is provided as a graphical illustration of the nature of the differences which were found to exist between the sole, multiplant (1) and multi- plant (2) groups. The sole affiliates are shown to have a high negative score on the ‘size-importance’ scale and are distinguished both by their high current and future importance within the European operations of their parent. This is in itself not surprising given that as far as current activity is concerned they represent the only manufacturing operations and that as regards future importance, they are proba- bly still operating below optimum plant size and are therefore liable to be expanded. Nor does the bul- lishness implied here necessarily ensure future em- ployment prospects, although it is a positively en- couraging sign for policy makers. At this level of study, it is not possible to examine in detail the threshold where the diminution in the role played by the plant begins to affect investment and em- ployment, although this type of analysis could, as part of a more sophisticated monitoring system, be refined to handle such questions.

As examination of the multiplant (2) affiliates shows (Fig. 1) that they are distinguished from the other groups by their employment size and by the size of their parents’ network, rather than by any of the other variables. In other words, the more sub- jective variables have ceased to be of significance in this group. This is quite consistent with the findings in the previous section, given that most of these are cost centres within integrating (or integrated) Euro- pean systems, where the accent is upon plant con- tribution to total group performance. This particu- lar category is of considerable importance not only because of its relative size within the sample, but because it is the most likely group to be attracted, given the slowdown of inward direct investment in Europe. First time entrants to Europe are still present, but in smaller numbers. Therefore, even bearing in mind the very preliminary conclusions of

this study, the multiplant (2) group requires further examination. The activities of the Scottish affiliates need to be considered relative to performance, in- vestment, employment and value added in sister European plants. For data reasons, this is not an easy exercise, but it is necessary in order to get closer to being able to predict the future of such operations in any given economy.

Little should be said about the final group of multiplant (1) affiliates in view of the sample size. It is sufficient to note from Fig. 1 that those which were established in Scotland as the first European manufacturing base of their parent corporation are distinguished by their existing status rather than by their expected future importance. In effect these are plants where there is a diminishing expectation of expansion and growth at their initial European port of entry. This observation should be regarded cauti- ously since it may be that the Scottish economy has already benefited substantially from having had the initial presence of these companies and that it would still benefit from being a port of entry to small, rapidly expanding, high technology MNEs in the future.

Before finally leaving this section it should be noted that the evidence in Table 4 gives some indication of the effectiveness of the discriminant procedure adopted as judged by its ability to pre- dict the current group for an affiliate. By that measure it is shown to be effective. However, it is important not to be over-impressed by this: for any distinct set of cases it would be feasible to produce discriminant functions which allocated them with one hundred percent accuracy to specified groups.

CONCLUSIONS

The purpose of this paper has been to investigate some issues relevant to the monitoring of MNE affiliates in Scotland. There is no suggestion that the type of analysis outlined here would provide a complete early warning system of either positive or negative trends affecting the affiliates. What has been shown is that it may be possible to use fairly readily available information on affiliates as at least a first step in the monitoring process. By these and other means it should be feasible to identify groups of multinational affiliates which are worthy of closer attention and more detailed investigation both at parent and affiliate levels. This type of approach should be seen as an adjunct to other types of desk research on MNE affiliates in a host country such as Scotland, including parent and affiliate accounting information, newspaper and magazine reports from both host and home countries and other types of market information.

The type of approach used here could be ex- tended much further. The cluster analysis must, for example, be regarded as very tentative, but with the proper formulation of research hypotheses it could

MANAGERIAL AND DECISION ECONOMICS, VOL. 3, NO. 3, 1982 169

become a useful tool. Equally the cost centre/profit centre and solelmultiplant dichotomies should be viewed as onlv two of a number of possibly interest-

Acknowledgement

ing hypotheses which could be tested, all with the aim of giving pointers and directions to monitoring

The authors would like to thank the Scottish Economic Planning Department for allowing the data on US multinational affiliates in Scotland to be analysed as part of the preparation of this . .

multinational firms. paper.

NOTES AND REFERENCES

The case for monitoring inward direct investment in Britain is made in: N. Hood and S. Young, British policy and inward direct investment. Journal of World Trade Law 15(3), 231-250 (1981). N. Hood and S. Young, European development strategies of US owned manufacturing companies located in Scot- land. Report prepared for the Scottish Economic Plan- ning Department, HMSO, Edinburgh (1980). The financial activities of the affiliates in this sample were found to be subject to a variety of budgetary control systems, but executive interviews indicated that these were essentially of two different types - namely cost and profit centres. In cost centres, the emphasis was

on control through input measures, the affiliate being primarily evaluated on the managements’ ability to con- trol costs. As regards profit centres, both input and output were of major relevance in control, and profitabil- ity against predetermined norms.

4. R. M. Cormack, A review of classification. Journal of the Royal Statistical Society (A) 134, 321-367 (1971).

5. E. M. L Beale, Euclidean cluster analysis. Contributed paper to the 37th edition of the lnternational Statistical Institute Bulletin, Proceedings of the Biennial Sessions (1969).

6. D. N. Sparks, Euclidean cluster analysis, AS58. Applied Statistics 22, 126-130 (1973).

APPENDIX 1

Variables Included in the Analysis 6 ESTA Relative position of establish- ment of the Scottish affiliate within the European network of the MNE i.e. first established in Europe, second established, etc. Percentage of turnover in Scot- tish affiliate derived from intra- group sales. Executive assessment of the past

Age of the Scottish affiliate in 1 AGE years.

2 EMPLOY Employment in the Scottish affiliate as at 1976.

3 EMPROS Projected changes in employ- ment in the Scottish affiliate to 1982. Details are as follows:

7 INTRA

8 IMPAFF EMPROS Meaning

value (in terms of change in employment)

5 Substantially higher 4 Slightly higher 3 No change 2 Slightly lower 1 Substantially lower

4 INDEX An index of the functional areas of management located at affiliate level in Scotland. The index was constructed by weighting the different manage- ment functions in terms of their assumed importance in respect of decision-making authority, need for highly qualified person- nel, etc. The details are pre- sented below:

(197 1-1976) importance of the Scottish affiliate within the European operations of the MNE.

9 IMP Executive assessment of the 1977 importance of the Scottish affiliate within the European op- erations of the MNE. Executive assessment of the fu- ture (1977-1982) importance of the Scottish affiliate within the European operations of the MNE.

11 EUROPERF Performance of Scottish affiliate in relation to that of other European subsidiaries. A high value indicates that the Scottish affiliate performed much better

10 FUT

Management function smre than its European counterparts. Personnel and training 1 12 OPCOST Level of operating costs of the Promotion 1 Scottish affiliate relative to that Finance Marketing R & D

3 5 5

5 EUROPL The number of additional Euro- pean affiliates of the MNE.

of other European subsidiaries: Operating costs Value

Lower Higher No different

3 2 1

170 MANAGERIAL AND DECISION ECONOMICS, VOL. 3, NO. 3, 1982

13 TARGET Percentage of times during years The first objective group relates, for example, to 1971-1976 that performance age and employment in the Scottish affiliate etc. targets set for Scottish affiliate and the second, more qualitative set of variables is were not achieved. concerned with executives’ assessments and fore-

casts. The subjectivity of the latter responses are readily acknowledged. It will be noted that the variables are of two groups.

APPENDIX 2

Cluster Analysis

The central idea behind the techniques of cluster analysis used in this paper, is that clusters or groups are formed of affiliates ‘near’ to one another or similar to one another in p-dimensional space. A wide variety of measures of nearness are available4 but the one used in this paper is the simple Eucli- dean distance function, 4”. For any p-dimensional vector x, this is defined as

dp2=(X,-C1)2+(X2-C2)2+, . . . , + ( x , , - c ~ ) ~

where x’ = (xl, x2, . . . , x,,) and c‘= ( c ~ , c 2 , . . . , cp) is the centre of the group or cluster. Details of the procedure are presented in Beale’ and an algorithm written in FORTRAN is provided by Sparks.6 Ini- tially the trial cluster centres are supplied and each

profile in the sample is assigned to its nearest centre. New centres are calculated and an iterative procedure is applied to reassign profiles to clusters in order to minimize the overall, within cluster, sum of squares. In particular, if an observation is in the kth cluster it is worthwhile transferring it to the Ith cluster if

n d?<- - l f_* d?,

nk - 1 nl

nl + 1 -.

when nk, nl are the current numbers of observations in clusters k and 1 respectively. A problem with the Euclidean distance function is that it gives particu- larly high weight to extreme values, but this prob- lem is minimized in the present work by standardi- zation of the variables.

APPENDIX 3

Standardized Discriminant Function Coefficients

1. Standardized discriminant function coefficients based on the dichotomy: cost/profit centre - see Table 3

Average discriminant function scores

Variable Coefficient Cost centre Profit centre

ESTA 0.6171 -0.8205 0.6352

AGE -0.3814 EMPLOY -0.3392

INDEX 0.4549

2. Standardized Discriminant Function Coefficients Based on Sole, Multi- plant (1) and Multiplant (2) Groupings - see Table 4

Variable Function 1 Function 2

EUROPL 0.3049 -0.2956 IMPAFF -0.7308 -0.7493 FUT -0.1787 0.6868 EMPLOY 0.41 18 -0.3867

MANAGERIAL AND DECISION ECONOMICS, VOL. 3, NO. 3, 1982 171