Subsidiary embeddedness and competence development in MNCs — A multi-level analysis - .Statistical Data Included - )

Abstract

Recent research on the competitive advantage of multinational corporations (MNC) has emphasized the importance of the ability of subsidiaries to assimilate new knowledge from their external environment. Such an ability is important for the individual subsidiary's own performance as well as for the possibility it affords the MNC to combine and use resources from different parts of the corporate system.

This paper explores the nature of business embeddedness at the subsidiary level and its role at the corporate level. It is suggested that the subsidiaries' embeddedness in a network of business actors can explain why certain subsidiaries demonstrate higher achievements than others, both in terms of their market performance and regarding their importance for competence development within the MNC. It is argued that the closer a subsidiary's external business relationships with suppliers and customers the easier it will be to assimilate new knowledge from outside, the more it will be able to innovate and therefore the more it will be able to advance its performance in the local market. Further, because embeddedness influences the innovative capacity of subsidiaries, it is also claimed to be a decisive factor in explaining which subsidiaries will contribute to competence development at the corporate level.

Hypotheses concerning the relationships between a subsidiary's external technical embeddedness, market performance and the subsidiary's importance for competence development at the level of the MNC are formulated and tested in a LISREL model. Data is used from 97 subsidiaries belonging to 20 global divisions of 13 Swedish multinational corporations. The results indicate that a subsidiary's external technical embeddedness can be a strong predictor of both its own expected market performance and its role as a provider of competence to other MNC units.

The paper concludes with a discussion about the role that a subsidiary can play as a bridgehead between external and internal units of an MNC and the negative impacts that might occur if a subsidiary's business network is too embedded.

Descriptors: subsidiary embeddedness, absorptive capacity, subsidiary market performance, MNC competence development

Introduction

The competitive strength of a multinational corporation (MNC) depends on many factors, such as production costs, managerial competence, R&D investments, etc. However, research has shown that the ability of the different subsidiaries of an MNC to assimilate new knowledge from their local business environments can also constitute a crucial advantage (Ghoshal 1986; Ghoshal and Nobria 1989; Cantwell 1990; Ghoshal and Bartlett 1990; Gupta and Govindarajan 1991; Rosenzweig and Singh 1991; Almeida 1996; Birkinshaw and Morrison 1996; Dunning 1996; Malnight 1996; Taggart 1998). There are two ways in which the assimilation of new (local) knowledge by subsidiaries influence the competitive strength of the MNC as a whole. First, it strengthens the competitive advantages and performances of subsidiaries in their own market places (Powell et al. 1996; Bierly and Chakrabarti 1996), and thus, indirectly, the competitive strength of the whole corporation. Second, by transferring externally acquired knowledge from one subsidia ry to other corporate units, the competence of the whole MNC is upgraded (Zander and Kogut 1995; Szulanski 1995, 1996).

The processes behind competence development within an MNC are located at three different levels. The first is the business relationship level. This focuses on the extent to which interactions between the subsidiary and individual customers, suppliers and other business counterparts serve as sources of new knowledge for the subsidiary. The second level -- the subsidiary itself -- is concerned with how the subsidiary manages not only to assimilate knowledge from the environment but also to commercialize it to achieve increased market performance. At the third level -- the corporation -- competence is transferred within the corporation, from one subsidiary to other units, thereby upgrading the competence of the whole MNC.

The three levels are interrelated. The transfer of knowledge between subsidiaries is dependent on the ability of the individual subsidiary to assimilate and commercialize new knowledge. The characteristics of the individual business relationships pursued by the subsidiary is a decisive factor.

Based on the concept of absorptive capacity (Cohen and Levinthal 1990; Lane and Lubatkin 1998; Van den Bosch et al. 1999; Hansen 1999), this paper focuses on the interplay between the three levels. More specifically, the purpose of this paper is to explore how relationships with specific customers and suppliers influence the subsidiary's market performance and its involvement in the transfer of competence within the MNC. In the next section, the concept of embeddedness is introduced and its importance for the subsidiary's absorptive capacity is discussed. Then hypotheses are formulated concerning the relationship between embeddedness, the subsidiary' s expected market performance and the importance of the subsidiary for competence development within the whole MNC. The hypotheses are tested empirically in a LISREL model by applying data from Swedish multinationals. A final section discusses the results from the empirical testing and possible tracks for future research about embeddedness, absorptive capacity an d competence development in MNCs.