On the Rationales of Corporate Headquarters

This paper addresses the rationales of corporate headquarters (CHQ). In organizational economics, the role of the CHQ is mostly seen to be limited to monitoring and incentive issues. However it has also long been recognized that the CHQ may assist in exploiting economies of scope and other synergies and in building up internal capital markets—that is to say, it may ‘create the positive’ rather than merely ‘avoid the negative’. This paper links up with the ‘positive’ view of the CHQ. but expands substantially on it. Starting from the capabilities view of the firm, I suggest that an important part of the rationales of the CHQ lies in its ability to (i) peiform ‘knowledge-direction’ (i.e. use, blend and direct the initial knowledge endowments of input owners) and (ii) exploit the flexibility of incomplete contracts, particularly with respect to growing capabilities through coordinated organizational learning. While these functions of the CHQ are recognized within the business history and strategy literature, they are neglected within the literature on organizational economics. The novelty of the paper lies in giving an economically oriented treatment of these value creating capabilities of the CHQ.