The headquarters and foreign subsidiaries relationship: A game theory approach

The headquarters and foreign subsidiaries relationship: A game theory approach. Purpose: The main goal of this chapter is to demonstrate that game theory can serve as a framework that helps to understand strategic interactions between headquarters (HQ) and foreign subsidiaries (FS) within multinational enterprises (MNEs), particularly in the context of strategy formulation and sustainability-related decision-making. Design/methodology/approach: Drawing on a literature review in international business (IB) and advanced microeconomics, the author adopts a theoretical approach by using a strategic game model to analyse decision-making related to the implementation of sustainability strategies within MNEs. The game highlights both conflicts of interest and the potential benefits of cooperation between the HQ and FS. Findings: An analysis of the Prisoner’s Dilemma, used as an analytical framework, indicates that even when internal, short-term conflicts of interest occur, HQ and FS should cooperate and strive for global rationality in the long term. This framework helps to understand and support strategic decision-making in MNEs, illustrating HQ and FS’s dilemma in prioritising short-term financial gains and long-term sustainable goals. Originality and value: This chapter addresses how game theory can be applied to analyse the strategic decisions within MNEs, especially in the sustainability context. The findings presented in this chapter may prove valuable for Environmental, Social, Governance (ESG) managers seeking to foster internal collaboration, as well as for policymakers aiming to design regulations that support cooperative and sustainable business practices within MNEs.