Vertical Differentiation: Centralization versus Decentralization

Vertical differentiation refers to where the authority to make decisions stands in the

hierarchy of an MNE. How decision-making is distributed in the hierarchy raises the question

of centralization versus decentralization of decision-making authority.

Centralization is the degree to which high-level managers, usually above the country level,

make important decisions and pass them down to lower levels for implementation. Centralized

decision making is usually associated with a home replication or global strategy (most decisions

are made at the corporate headquarters). Decentralized decision making is associated with a

multidomestic strategy (more decisions are made at the subsidiary’s level). A combination of

centralized and decentralized decision making is associated with a transnational strategy.