Date post: | 08-Apr-2018 |
Category: |
Documents |
Upload: | medythecool007 |
View: | 220 times |
Download: | 0 times |
8/7/2019 Innovation MNEvsLocal 100920
http://slidepdf.com/reader/full/innovation-mnevslocal-100920 1/40
1
THE ADVANTAGE OF FOREIGNNESS IN INNOVATION
C. Annique UN
University of South Carolina, Moore School of Business
Sonoco International Business Department
1705 College Street, Columbia, SC 29208 USA
Tel.: 1-803-777-0315, Fax: 1-803-777-3609, [email protected]
Earlier draft of accepted paper for publication at Strategic Management Journal
I thank the Associate Editor Will Mitchell, two anonymous referees, Bjorn Ambos, Alvaro Cuervo-
Cazurra, Yasemin Kor, Kendall Roth, Kat Wilson, and participants of seminars at the Academy of International
Business annual meeting, the Academy of Management annual meeting, and the European International Business
Academy annual meeting for useful suggestions for improvement. The paper received the Copenhagen Prize 2009
for the best paper written by a young scholar in International Business at the European International Business
Academy annual meeting. Funding from the Center for International Business Education and Research and from the
Riegel & Emory Human Resource Research Center, both at the University of South Carolina, is gratefully
acknowledged. All errors are mine.
8/7/2019 Innovation MNEvsLocal 100920
http://slidepdf.com/reader/full/innovation-mnevslocal-100920 2/40
2
THE ADVANTAGE OF FOREIGNNESS IN INNOVATION
I analyze differences in the innovativeness of subsidiaries of foreign multinational enterprises
(MNEs) in comparison to domestic firms competing in the same country. In contrast to studies
that have argued that subsidiaries of foreign MNEs suffer disadvantages in comparison to
domestic firms, I argue that subsidiaries of foreign MNEs enjoy an advantage of foreignness in
innovation, that is, they are more innovative than domestic firms. To explain this I present two
arguments: the subsidy argument and the incentive argument. The subsidy argument proposes
that subsidiaries of foreign MNEs are subsidized in their innovation effort by the MNE, which
results in subsidiaries having more product innovations than domestic firms just because they
belong to a foreign MNE. The incentive argument posits that subsidiaries of foreign MNEs are
subject to unique converging pressures, one at the MNE level in the corporate factor market and
another at the host-country level in the consumer market; these pressures provide an incentive to
use the different manner in which subsidiaries of foreign MNEs manage their employees,
originally intended for better integration with the MNE, to become more successful at
transforming their own research and development investments into product innovations.
Key words: innovation, competitive advantage, R&D, multinational companies, domestic firms
8/7/2019 Innovation MNEvsLocal 100920
http://slidepdf.com/reader/full/innovation-mnevslocal-100920 3/40
3
INTRODUCTION
This study analyzes differences in the innovativeness of subsidiaries of foreign
multinational enterprises (MNEs) in comparison to domestic companies competing in the same
country. Innovation is key for a firm‟s advantage (Christensen and Bower, 1996; Helfat, 2000;
Leiponen, 2008; Leiponen and Helfat, 2010; Teece, Pisano, and Shuen, 1997) because the firm‟s
ability to introduce new products is critical for achieving profitability, market share, market
value, and survival (Banbury and Mitchell, 1995; Cottrell and Nault, 2004; Nerkar and Roberts,
2004). However, despite its importance, we do not know whether there are differences in
innovativeness between subsidiaries of foreign MNEs and domestic companies in the same
country because no empirical tests have been conducted. Understanding such differences is
important to be able to provide managers of each type of firm some guidance regarding their
innovativeness and competitive ability.
More importantly for research, there appear to be two conflicting answers to the question.
On the one hand, a growing body of research that explicitly compares and tests differences
between subsidiaries of foreign MNEs and domestic firms operating in the same country has
argued that subsidiaries of foreign MNEs are at a disadvantage over domestic firms. These
studies propose that subsidiaries of foreign MNEs suffer from a cost of doing business abroad
(Hymer, 1976) or a liability of foreignness (Zaheer, 1995) and, as a result, have lower
profitability, efficiency, and survival than domestic firms (e.g., Miller and Parkhe, 2002; Zaheer,
1995; Zaheer and Mosakowski, 1997; for a review see Cuervo-Cazurra, Maloney and
Manrakhan, 2007). However, this research has not analyzed differences in their innovativeness.
On the other hand, studies of innovation in MNEs assume that subsidiaries of foreign MNEs
have a technological advantage over domestic firms competing in the same country because they
8/7/2019 Innovation MNEvsLocal 100920
http://slidepdf.com/reader/full/innovation-mnevslocal-100920 4/40
4
receive knowledge and technology from the MNE (Bartlett and Ghoshal, 1989; Buckley and
Casson, 1976; Hymer, 1976; Vernon, 1966). Unfortunately, this line of research has not directly
tested this argument. Instead, it has compared innovativeness among research and development
(R&D) laboratories in the MNE, or among different types of subsidiaries (e.g., Frost, Birkinshaw
and Ensign, 2002; Mudambi, Mudambi and Navarra, 2007; Phene and Almeida, 2008).
Therefore, in this paper I contribute to the literature by linking studies of technology
strategy (e.g. Helfat, 1997, Henderson, 1993; Leiponen, 2005; Tripsas, 1997) with ideas from the
application of neo-institutional theory to the study of the MNE (e.g. Kostova and Roth, 2002;
Kostova and Zaheer, 1999; Westney, 1993) in order to propose that subsidiaries of foreign
MNEs have an advantage of foreignness in innovation – that is, they are more innovative than
domestic firms competing in the same country – and explain this by presenting the subsidy
argument and the incentive argument. The subsidy argument proposes that subsidiaries of foreign
MNEs are subsidized in their innovation effort by the MNE. This results in subsidiaries
introducing more product innovations than domestic firms just because they belong to a foreign
MNE; this is an extension of previous arguments. The incentive argument posits that subsidiaries
of foreign MNEs face two sets of unique converging competitive pressures – one at the MNE
level in the corporate factor market and another at the host-country level in the consumer market.
These pressures provide an incentive to use the different manner in which subsidiaries of foreign
MNEs manage their employees, originally conceived for better integration with the MNE, to
become more successful at transforming their own R&D investments into product innovations;
this is a novel idea.
The results of the analysis of a sample of manufacturing firms operating in Spain in
1990-2002 are in line with these arguments. The results indicate that subsidiaries of foreign
8/7/2019 Innovation MNEvsLocal 100920
http://slidepdf.com/reader/full/innovation-mnevslocal-100920 5/40
5
MNEs are more likely to introduce product innovations than domestic firms, as suggested by the
subsidy argument. The results also indicate that R&D investments done by subsidiaries of
foreign MNEs are more likely to result in product innovations, as suggested by the incentive
argument.
These arguments and findings contribute to two streams of research. First, the ideas
extend the application of neo-institutional theory to the study of the MNE. They build on the idea
that a subsidiary of an MNE is subject to pressures from the MNE and from the local
environment. However, in contrast to previous arguments, I argue that these pressures exert
converging rather than diverging influences on the subsidiary‟s behavior. I explain why, at least
in the area of innovation, subsidiaries of foreign MNEs play an active role in differentiating from
rather than imitating domestic firms and other subsidiaries of the MNE. This idea challenges the
isomorphic argument that characterizes neo-institutional theory and highlights how individual
agency can play a role in neo-institutional theory.
Second, they extend studies of technology strategy, in particular analyses of innovation in
the MNE, by directly comparing the innovativeness of subsidiaries of foreign MNEs and
domestic companies operating in the same country, rather than comparing the innovativeness
among subsidiaries of MNEs as previous studies do. The paper proposes that subsidiaries of
foreign MNEs enjoy an advantage of foreignness in innovation, which is explained not only by
the previously-discussed but untested subsidy argument, but also by the incentive argument
introduced here. The incentive argument highlights strategic actions taken by subsidiaries of
foreign MNEs that domestic firms would find difficult or costly to imitate.
The remainder of the paper is organized as follows. In the next section, I briefly
summarize the two research streams upon which I build and then link them to explain why I
8/7/2019 Innovation MNEvsLocal 100920
http://slidepdf.com/reader/full/innovation-mnevslocal-100920 6/40
6
argue that MNE subsidiaries have an advantage of foreignness in innovation. In doing so, I
present two testable hypotheses, one based on the subsidy argument discussed in previous
research and another based on the incentive argument introduced here. I then present the research
design and describe the results of the analyses. I conclude the paper by summarizing the
contributions to theory and practice and suggestions for future research.
THEORETICAL DEVELOPMENT
To explain differences in the innovativeness of subsidiaries of foreign MNEs in
comparison to domestic companies competing in the same country, I integrate two theoretical
streams that have been running mostly in parallel: neo-institutional explanations of the behavior
of subsidiaries of foreign MNEs and technology strategy explanations of innovation. I link the
two lines of research because their viewpoints complement each other in answering the research
question.
Neo-institutional Theory, Subsidiaries of MNEs, and Isomorphic Pressures
Neo-institutional theory has been used to explain the competing pressures faced by
subsidiaries of foreign MNEs. The theory focuses on firms‟ achievement of legitimacy and how
firms deal with three sets of isomorphic pressures (regulatory, normative, and cognitive) that
drive them to imitate each other (Scott, 1995). A subsidiary of a foreign MNE faces two sets of
isomorphic pressures which exert diverging influences (Kostova and Roth, 2002; Kostova and
Zaheer, 1999; Westney, 1993). On the one hand, the host country where the subsidiary operates
pressures it to imitate domestic companies and conform to the conditions of the host
environment. On the other hand, the parent MNE pressures the subsidiary to imitate and conform
to other subsidiaries in the MNE. As a result of the divergence of these pressures, subsidiaries of
foreign MNEs imitate the behaviors of either domestic firms or other subsidiaries in the MNE.
8/7/2019 Innovation MNEvsLocal 100920
http://slidepdf.com/reader/full/innovation-mnevslocal-100920 7/40
7
However, this approach has limitations in its explanation of innovation by firms. It is
focused on explaining how firms imitate an innovator, but not why a firm innovates in the first
place. The theoretical mechanisms are designed to explain isomorphism and diffusion of
practices that increase firms‟ similarity, because the theory‟s core research question is why
organizations tend to be similar (Poole and Van de Ven, 2004). The traditional explanation of
innovation in this theory is that a firm finds itself under a different set of environmental
conditions and has to innovate to achieve consistency with the environment. Once this firm
innovates, other companies imitate such innovations, conforming to the isomorphic pressures to
achieve legitimacy. However, this literature has not compared differences in innovativeness of
subsidiaries of foreign MNEs and domestic firms competing in the same country.
Technology Strategy, Competitive Pressures, and Innovation
The technology strategy literature focuses on identifying the determinants of innovation.
Its key arguments were laid down by Joseph Schumpeter, who proposed the idea of creative
destruction, whereby innovations by new firms will result in the replacement of incumbent
companies (Schumpeter, 1942). This threat of replacement drives incumbent firms to innovate to
ensure their future (Greve, 2003; Tripsas, 1997). Thus, in essence, competitive pressures force
firms to innovate.
However, this line of research has not tested differences in innovation between
subsidiaries of foreign MNEs and domestic firms competing in the same country. Most of the
studies on innovation do not make this distinction, instead focusing on the firm and industry
characteristics that lead firms to innovate (see reviews in Fagerberg, Mowery, and Nelson,
2005). A subset of the literature on innovation in MNEs has focused on innovation in the parent
MNE and its subsidiaries, comparing MNE subsidiaries to one another (e.g., Frost et al., 2002;
8/7/2019 Innovation MNEvsLocal 100920
http://slidepdf.com/reader/full/innovation-mnevslocal-100920 8/40
8
Phene and Almeida, 2008). Related research has argued that the foreign MNE enters the country
because it has a perceived technological advantage over domestic firms (Buckley and Casson,
1976; Vernon, 1966; Zhao, 2006), but has not tested this assertion.
Innovativeness of Subsidiaries of Foreign MNEs in Comparison to Domestic Firms: The
Advantage of Foreignness in Innovation
I propose that subsidiaries of foreign MNEs have an advantage of foreignness in
innovation and explain this with two arguments, the subsidy argument and the incentive
argument. I briefly review the first argument because it has been hinted at in previous literature
and explain in detail the second one because it is new.
However, before discussing the arguments I need to establish some theoretical
boundaries. First, the paper analyzes innovativeness in the form of new products as done in other
research (e.g., Banbury and Mitchell, 1995; Helfat and Raubitschek, 2000; Katila and Ahuja,
2002; Nerkar and Roberts, 2004). The study is not designed to analyze other forms of
innovativeness such as operations, organizational or marketing innovations, or other strategic
actions such as cost efficiencies or marketing campaigns. These actions are important in
contributing to a firm‟s performance and could be done in parallel to product innovation (Ettlie
and Reza, 1992). Second, the study explains the innovativeness of manufacturing firms. It is not
designed to explain the innovativeness of service firms, which follow a different innovation
process (Dougherty, 2004; Leiponen, 2008). It is also not designed to explain the innovativeness
of R&D firms, which differ in their innovativeness because they specialize in undertaking R&D
investments to create new ideas that can then be used by other companies to sell new products
(Ambos and Schlegelmilch, 2007; Cantwell and Mudambi, 2005; Frost et al., 2002). Third, the
paper analyzes differences in the innovativeness of subsidiaries of foreign MNEs and domestic
8/7/2019 Innovation MNEvsLocal 100920
http://slidepdf.com/reader/full/innovation-mnevslocal-100920 9/40
9
firms competing in the same country. Therefore, it will analyze actions that subsidiaries of
foreign MNEs can take and that domestic companies would find difficult or costly to imitate. It
will not discuss actions that both types of companies can take, such as investing more in R&D or
establishing R&D collaborations. Fourth, the study explains differences in innovativeness of
established subsidiaries of foreign MNEs and domestic firms. It is not designed to explain
differences in innovativeness of subsidiaries of foreign MNEs that have just entered the host
country, because these are likely to innovate only through the transfer of innovations from the
MNE. Once subsidiaries of foreign MNEs are established in the host country, they develop local
capabilities and can create their own innovations (Bartlett and Ghoshal, 1986; Birkinshaw and
Hood, 1998; see Enright and Subramanian, 2007, and Dimitratos et al., 2009 for reviews of
subsidiary types and evolution). Fifth, the study compares two types of firms, subsidiaries of
foreign MNEs and domestic firms. It does not discuss differences among the types of
subsidiaries of foreign MNEs or the roles they play in the MNE (e.g., Bartlett and Ghoshal,
1986; Ferdows, 1997) and how these affect their innovativeness.
Subsidy argument: Advantage of foreignness in innovation through the transfer of
product innovations from other parts of the MNE. The subsidy argument indicates that
subsidiaries of foreign MNEs are more innovative than domestic firms because they receive
product innovations from the MNE; thus, their innovations are subsidized by the MNE.
Subsidiaries of foreign MNEs benefit from being part of the MNE because they can
receive technology and innovations developed elsewhere in the MNE. Initial discussions of the
existence of MNEs proposed that subsidiaries of foreign MNEs have to enjoy some superiority
over domestic firms; otherwise, the MNE would not enter the country (e.g., Buckley and Casson,
1976; Hymer, 1976; Vernon, 1966). More recent research has refined these arguments,
8/7/2019 Innovation MNEvsLocal 100920
http://slidepdf.com/reader/full/innovation-mnevslocal-100920 10/40
10
explaining how MNEs achieve an advantage in creating and transferring knowledge and
innovations across countries. One stream of research proposes that some subsidiaries of MNEs
focus on developing innovations that other subsidiaries and the parent MNE can use. For
example, Kuemmerle (1997) proposes that MNEs have dispersed their R&D centers across the
world to undertake research or development of new products that are later transferred to other
subsidiaries. Ferdows (1997) suggests that some manufacturing plants of the MNEs can become
lead factories that generate innovations for themselves as well as for other factories. Birkinshaw
(2001) discusses how some subsidiaries can develop the initiative to become centers of
excellence and provide innovations to other subsidiaries. Vereecke, Van Dierdonck, and De
Meyer (2006) propose that certain plants can act as centers of excellence, providing knowledge
and expertise to other plants. Another stream of research analyzes the mechanisms that enable
the MNE to transfer these innovations and other knowledge among subsidiaries in the MNE. For
example, Bartlett and Ghoshal (1989) and Ghoshal and Bartlett (1990) propose methods to
organize the MNE and manage people in order to facilitate the transfer of knowledge among
subsidiaries. Kogut and Zander (1993) explain the conditions that enable MNEs to become better
than markets at transferring knowledge across countries.
Extending this line of thinking to the research question analyzed in this paper, I suggest
that a subsidiary of a foreign MNE is more innovative than a domestic firm competing in the
same country because it is subsidized in its innovation effort. Other subsidiaries in the MNE,
especially specialized R&D subsidiaries that focus on generating innovations, create new
products that are transferred to the subsidiary of the foreign MNE in the host country. Thus, this
subsidiary is able to introduce new products in the host country without needing to undertake its
own R&D to generate them. In this sense, the subsidiary is being subsidized in its product
8/7/2019 Innovation MNEvsLocal 100920
http://slidepdf.com/reader/full/innovation-mnevslocal-100920 11/40
11
innovations because the costs of developing the new products are borne by other subsidiaries of
the MNE. As a result, the subsidiary of the MNE can become more innovative than a domestic
firm just by being part of a foreign MNE; in the extreme, it could introduce new products in the
host country without undertaking any R&D investment on its own, relying instead on R&D
investment undertaken elsewhere in the MNE.
Domestic firms would find it difficult and costly to imitate this source of innovation
advantage. MNEs use external mechanisms such as the patent system and internal mechanisms
such as systemic complexity and causal ambiguity to actively protect their technologies and
innovations from imitation (Frost and Zhou, 2005; Levin, Cohen and Mowery, 1985; Zhao,
2006). To replicate this innovation advantage, domestic firms would have to become MNEs
themselves and establish multiple operations abroad to generate product innovations that are then
transferred back to the firm, but becoming an MNE is very costly and difficult to undertake
(Cuervo-Cazurra et al., 2007).
In sum, the subsidy argument proposes that subsidiaries of foreign MNEs are more
innovative than domestic firms just because they are part of the MNE. They are subsidized in
their innovation efforts because they receive product innovations developed by other subsidiaries
of the MNE located in other countries. These arguments, which extend previous arguments that
had not been empirically tested, support the following hypothesis:
Hypothesis 1. Among firms competing in the same country, subsidiaries of foreign MNEs have
more product innovations than domestic firms.
Incentive argument: Advantage of foreignness in innovation through the management
of personnel to achieve higher success in transforming R&D investments into product
innovations. The incentive argument I introduce in this paper proposes that subsidiaries of
8/7/2019 Innovation MNEvsLocal 100920
http://slidepdf.com/reader/full/innovation-mnevslocal-100920 12/40
12
foreign MNEs are more innovative than domestic firms because they are subject to unique
converging pressures that drive them to use the way in which they manage personnel, originally
intended for better integration with the MNE, to become more successful at transforming their
own R&D investments into innovations; in other words, subsidiaries of foreign MNEs have a
unique incentive to innovate.
Subsidiaries of foreign MNEs face two sets of pressures that domestic firms operating in
the same country do not face. One set of pressures is at the MNE level in the corporate factor
market, in which they face competition from other subsidiaries in the MNE for headquarters‟
support. Another set of pressures is at the host-country level in the consumer market, in which
they face discrimination by consumers. In contrast to previous neo-institutional arguments that
have argued for a divergence of the effects of these two sets of pressures that result in
subsidiaries of foreign MNEs either imitating domestic competitors or other subsidiaries in the
MNE (Kostova and Zaheer, 1999), I argue that in the realm of innovation they exert converging
influences that drive subsidiaries of foreign MNEs to focus on innovation to differentiate
themselves from both domestic competitors and other subsidiaries in the MNE.
First, a subsidiary of a foreign MNE is in competition with other subsidiaries within the
MNE for support from the parent; this competition drives it to innovate. Although MNEs
manage their subsidiaries differently depending on the strategy and coordination of operations
they follow (Bartlett and Ghoshal, 1989), subsidiaries tend to be in competition with each other
for support from the parent MNE because they fulfill different roles in the network of operations
(Bartlett and Ghoshal, 1986; Ghoshal and Bartlett, 1990). The parent MNE may accept poor
performance at the beginning of operations in the foreign market, but over time it expects the
subsidiary to develop its capabilities, meet its mandate, and perform (Birkinshaw, 1996;
8/7/2019 Innovation MNEvsLocal 100920
http://slidepdf.com/reader/full/innovation-mnevslocal-100920 13/40
13
Ferdows, 1997). Based on the level of capabilities, the subsidiary can keep its current charter to
operate, gain a new one, or lose it to another subsidiary (Birkinshaw and Hood, 1998). A
subsidiary that contributes to the MNE‟s overall competitiveness rises in importance within the
MNE and receives additional resources and status, while another subsidiary that does not
contribute gets reduced recognition and support (Bouquet and Birkinshaw, 2008; Frost et al.,
2002; Vereecke et al., 2006) and may be even closed (Benito, 1997). Thus, to deal with this
pressure within the MNE and become better than other subsidiaries, the subsidiary of the foreign
MNE can focus on innovating and introducing new products. New products can easily improve
the subsidiary's relative position in the network of subsidiaries within the MNE because these
new products can be used in other countries, contributing to the overall competitiveness of the
MNE, thus making the subsidiary that generates the new products relatively more valuable than
others. At the same time, this focus on product innovation in response to pressures within the
MNE results in the subsidiary of the foreign MNE becoming not only more innovative than other
subsidiaries in the MNE, but also more innovative than domestic firms, which are not subject to
such pressures.
Second, subsidiaries of foreign MNEs face pressures in the host country that domestic
firms do not face in the form of customer discrimination of foreign products; these pressures
drive subsidiaries of foreign MNEs to innovate their products to compensate for the
discrimination. Although all firms in the host country face pressures to innovate for fear of being
replaced by competitors (Ceccagnoli, 2009; Christensen and Bower, 1996; Schumpeter, 1942;
Tripsas, 1997), subsidiaries of foreign MNEs face additional pressures that domestic competitors
do not encounter because consumers tend to be biased against foreign products (Bilkey and Nes,
1982; Jaffe and Nebenzahl, 2001; Verlegh, 2007). Negative feelings towards foreign products
8/7/2019 Innovation MNEvsLocal 100920
http://slidepdf.com/reader/full/innovation-mnevslocal-100920 14/40
14
can arise because consumers consider it wrong, almost immoral, to buy foreign products (Shimp
and Sharma, 1987), have animosity toward a country (Shoham et al., 2006), or think products
from certain countries are inferior regardless of their actual quality (Elliott and Cameron, 1994).
Moreover, domestic firms can build on consumers‟ nationalism and reinforce their biases against
purchasing products from foreign firms (Shoham et al., 2006). One way the subsidiary of the
foreign MNE can overcome such discrimination is by innovating its products and providing
customers with more innovative products than those offered by domestic competitors. Such
innovative products can compensate for the negative feelings against foreign products by
providing better quality-price relationships than products offered by domestic firms. To convince
customers, the subsidiary can highlight the innovation superiority with marketing campaigns to
reduce negative perceptions about being foreign (Suzuki, 1980). Thus, this discrimination creates
in the subsidiary of the foreign MNE an additional incentive to focus on innovation1.
To respond to these pressures and innovate, the subsidiary of the foreign MNE can use
the different way in which it already manages its employees to become more successful than
domestic firms in transforming R&D investments into product innovations. Subsidiaries of
foreign MNEs and domestic firms share many management practices, for example, vacation time
or minimum wages that complies with customs and labor laws in the host country. However,
subsidiaries of foreign MNEs use some different management practices because they need to
facilitate the integration of their employees with other parts of the MNE (Nohria and Ghoshal,
1
These two arguments depend on two assumptions. The first assumption is that the parent MNE rewardsinnovation in subsidiaries. This tends to hold for subsidiaries operating in developed countries, because the parent
MNE may expect them to generate innovations to meet the needs of more sophisticated consumers there and also
serve as sources of innovations for other subsidiaries (Bartlett and Ghoshal, 1989). The second assumption is that
host-country consumers discriminate against foreign products. This also tends to hold for subsidiaries operating in
developed countries. Consumer bias against foreign products there tends to be based more strongly on consumer
ethnocentrism and national identification (Verlegh, 2007). The two assumptions may hold less well in developing
countries. The parent MNE may consider the subsidiary there not up to par with subsidiaries in developed countries,
and consumers there may prefer foreign products from the developed countries over domestic ones because they are
viewed as technologically superior.
8/7/2019 Innovation MNEvsLocal 100920
http://slidepdf.com/reader/full/innovation-mnevslocal-100920 15/40
15
1997; Fey and Furu, 2008). These different management practices, although not initially
implemented to achieve innovation, are nevertheless useful for it because they provide
employees with the mindsets needed for integrating knowledge from different sources that
facilitates innovation. Two sets of such management practices are particularly useful for
achieving higher success in transforming R&D into product innovations: the selection of
employees with an understanding of foreign knowledge, and the development of employees to
have foreign knowledge and challenge local assumptions.
First, the subsidiary of the foreign MNE tends to select employees that have a better
appreciation and understanding of foreign knowledge; this is also useful for product innovations.
Since the employees are working for a foreign MNE, the subsidiary selects them based on their
existing ability to work for a foreign MNE and openness to foreign ideas and knowledge about
foreign countries (Hsieh, Lavoie and Samek, 1999; Kedia and Mukherji, 1999). Employees that
have foreign language abilities can more easily communicate with headquarters and other
subsidiaries (Buckley et al., 2005). Those that are more open to foreign ideas can more easily
adapt to management systems and practices that have been developed in another country (Hsieh
et al., 1999). This method of selecting employees with the openness and ability to work in the
MNE can help the subsidiary of the foreign MNE achieve higher success in its innovation effort
because the employees have better mindsets toward acquiring and integrating diverse knowledge.
They are more aware of the existence and importance of differences in sources of knowledge and
have the attitude that good ideas can come from many alternative places beyond the local
environment. Thus, in response to the pressures and associated incentives to innovate, employees
of subsidiaries of foreign MNEs can more easily search widely for unconventional ideas that can
be useful for transforming R&D investments into innovative products.
8/7/2019 Innovation MNEvsLocal 100920
http://slidepdf.com/reader/full/innovation-mnevslocal-100920 16/40
16
Second, the subsidiary of the foreign MNE tends to develop employees to learn about
foreign ideas and knowledge, which is also useful for innovation. Exchanges of personnel across
subsidiaries help subsidiaries of foreign MNEs build relationships with each other (Nohria and
Ghoshal, 1997). As part of the development process of new employees in the MNE, they are
rotated through subsidiaries in several countries to learn about the various operations in the MNE
(Kedia and Mukherji, 1999). Employees are also given work experiences in the country of the
parent company as well as in other subsidiaries‟ countries (Hsieh et al., 1999), and are involved
in the product development process of other subsidiaries (Hansen, 1999; Subramaniam and
Venkatraman, 2001). These same development practices are useful for innovating products. They
result in employees having direct access to new ideas and concepts from other countries,
becoming more curious about and open to new and useful ideas, and being more mentally ready
to look for and accept novel insights from unfamiliar sources, all of which is useful for
innovation. Moreover, to be able to understand the knowledge transferred from other parts of the
MNE, the subsidiary of the foreign MNE develops employees to challenge the assumptions of
the local environment (Simonin and Ozsomer, 2009; Vance and Paik, 2005); which is useful for
innovating products. By decontextualizing knowledge from its environment, employees of the
subsidiary of the foreign MNE can understand the capabilities of the subsidiary and its
competitive advantage separate from the conditions of its country of origin and the local
conditions. These employees will question how and why things are done in the country, realizing
opportunities for new products that employees of domestic firms will not be able to do because
they take for granted the conditions of the local environment. Thus, such development of
employees can help the subsidiary of the foreign MNE become more successful than domestic
firms in transforming R&D investments into innovations.
8/7/2019 Innovation MNEvsLocal 100920
http://slidepdf.com/reader/full/innovation-mnevslocal-100920 17/40
17
It is costly and difficult for domestic competitors to imitate these management practices.
Domestic firms select and develop their employees differently from subsidiaries of foreign
MNEs because they do not need to connect their firms with a parent MNE and other subsidiaries
abroad. Although domestic competitors could select and develop their employees to integrate
knowledge from different sources and question assumptions, such selection and development of
employees would be costly because it requires the domestic firm to undertake a specific
investment for innovation. In contrast, the subsidiary of the foreign MNE selects and develops its
employees in this way as part of the management practices it uses to facilitate integration with
other parts of the MNE. Additionally, it is difficult for domestic firms to imitate the management
practices of subsidiaries of foreign MNEs. The establishment of a different employee
management system may clash with the established employee management system and the
organizational reality of the domestic company, creating tensions and problems in its operations.
Moreover, questioning the assumptions of the local environment requires employees to have a
point of comparison. After all, assumptions are taken for granted and not challenged until the
employees face conditions under which such assumptions are put into question. Such a point of
comparison is missing for most domestic companies whose main market and point of reference is
the home country.
In sum, the incentive argument posits that subsidiaries of foreign MNEs are more
successful at transforming their own R&D investments into innovations than domestic firms
competing in the same country. The unique converging pressures subsidiaries of foreign MNEs
face provide them with an additional incentive to innovate, while the way they manage their
employees, originally intended for better integration with the MNE, enable them to achieve
8/7/2019 Innovation MNEvsLocal 100920
http://slidepdf.com/reader/full/innovation-mnevslocal-100920 18/40
18
higher success in transforming R&D investments into innovation. These arguments can be
summarized in the following hypothesis:
Hypothesis 2. Among firms competing in the same country, R&D investments of subsidiaries of
foreign MNEs have a higher positive impact on product innovations than R&D investments of
domestic firms.
RESEARCH DESIGN
Sample
I test the hypotheses on a sample of manufacturing firms operating in Spain. Data come
from a survey of manufacturing firms operating in the country and were collected by the SEPI
Foundation in collaboration with the Ministry of Industry, Tourism and Commerce. The survey
asks about the strategies and operations of manufacturing firm operating in Spain. The database
has been used in other studies to analyze diversification (e.g., Merino and Rodriguez, 1997),
internationalization (e.g., Salomon and Shaver, 2005), and R&D investment (e.g., Cuervo-
Cazurra and Un, 2007). However, it has not been used to analyze differences in the
innovativeness of subsidiaries of foreign MNEs and domestic firms.
Complete data are available for 761 firms over a period of 13 years, from 1990 to 2002.
All firms operate in manufacturing industries, in codes 15 through 37 of the CNAE, the Spanish
equivalent of the SIC classification. These include food, beverages, textiles, leather, shoes,
apparel, wood, paper, construction materials, chemicals, plastics, metallurgy, machinery,
computers, electronic products, automobiles, other transportation equipment, and precision
instruments. This sample is representative of the underlying population of firms in
manufacturing industries in the country. The sample includes firms dispersed throughout the
country and includes small, medium-sized, and large firms. Subsidiaries of foreign MNEs and
8/7/2019 Innovation MNEvsLocal 100920
http://slidepdf.com/reader/full/innovation-mnevslocal-100920 19/40
19
domestic companies are present in all industries except leather manufacturing, where all firms in
the sample are domestic companies. As a robustness check I ran analyses excluding firms in the
leather industry from the sample and found that the results support similar conclusions to the
ones presented below.
Restricting the analysis to manufacturing firms in Spain helps me evaluate the hypotheses
and reduces the influence of the differing innovative behavior of R&D facilities and service
firms. The sample does not include firms that focus exclusively on R&D because the SEPI
Foundation only samples manufacturing firms. R&D laboratories of MNEs are highly
specialized subsidiaries whose nature and behavior differs from that of other subsidiaries
(Cantwell and Mudambi, 2005; Frost et al., 2002). Domestic R&D laboratories also differ in
behavior from manufacturing firms because their focus is generating innovation, not producing
for the market. At the same time, it is not fully clear how R&D laboratories would bias the
results. R&D subsidiaries would have higher levels of R&D investments but at the same time
higher numbers of product innovations; the objectives of these subsidiaries is to invest in R&D
to generate innovations. Moreover, R&D subsidiaries tend to be very few in numbers in
comparison to the overall population of firms (Belderbos, 2003) and thus are unlikely to affect
the general trends found. To ensure this, I ran robustness tests in which I deleted outliers in R&D
investments from the sample and found that the results of such analyses support the same
conclusions found with the results presented below. For the same reason, I do not include service
firms, whose development of innovative capabilities is typically done at the same time as the
undertaking of activities (Dougherty, 2004). Again, it is not fully clear how service firms would
bias the results, because these companies have fewer formal investments in R&D but also fewer
product innovations because many of their innovations are process innovations.
8/7/2019 Innovation MNEvsLocal 100920
http://slidepdf.com/reader/full/innovation-mnevslocal-100920 20/40
20
Spain is a suitable location for conducting the empirical test. Although it is a developed
country, it is neither at the forefront of technological development nor at the bottom (OECD,
2009). Thus, subsidiaries of foreign MNEs can still benefit from technologies developed
elsewhere, and at the same time can benefit from developing new products in Spain; this
provides a natural laboratory for testing the hypotheses. If the country analyzed is at the forefront
of technological development, subsidiaries of foreign MNEs may not be able to benefit from the
transfer of innovations and instead may have to focus on R&D investments to develop
innovations for the market. If the country analyzed is at the bottom of technological
development, subsidiaries of foreign MNEs may be able to rely on their parent companies for
innovation and not need to develop their own product innovations to become more innovative
than domestic firms.
Variables and Measures
Table 1 summarizes the variables and measures used in this study. The dependent
variable is the number of new products introduced by the firm in Spain in the year. This is
measured by a question that asks managers to answer whether during the year their firm has
introduced product innovations in the market, defined as completely new products or product
that have changes so significant as to make them different from the ones that were produced
before, and if this was the case to indicate the number of products. Measuring firm
innovativeness in terms of new products has been used in other studies (e.g., Banbury and
Mitchell, 1995; Cottrell and Nault, 2004; Katila and Ahuja, 2002; Nerkar and Roberts, 2004;
Subramaniam and Venkatraman, 2001). This measure is particularly appropriate in this paper
because the main purpose of manufacturing firms is to make and sell products as they compete
with each other primarily on this basis (Cottrell and Nault, 2004; Nerkar and Roberts, 2004). The
8/7/2019 Innovation MNEvsLocal 100920
http://slidepdf.com/reader/full/innovation-mnevslocal-100920 21/40
21
number of new products, as well as all other measures, is at the level of the firm operating in
Spain, that is, a subsidiary of a foreign MNE or a domestic firm. This ensures agreement in level
of analysis between theory and empirical analysis and enables the comparison of the behavior of
subsidiaries of foreign MNEs and domestic firms.
To test Hypothesis 1, which proposes that subsidiaries of foreign MNEs are more
innovative than domestic firms just because they are part of the MNE, I created a variable called
“subsidiary of foreign MNE.” This variable is measured with an indicator that takes a value of 1
if the firm has a foreign company as owner of some or all of its stock and 0 otherwise. In using
this measure I follow previous literature on the liability of foreignness such as Mezias (2002)
who analyzes how being a subsidiary of a foreign MNE results in differences in the number of
labor lawsuits in the United States, Elango (2009) who analyzes how being a subsidiary of a
foreign MNE results in differences in performance among insurance firms also operating in the
United States, and Lu and Hwang (2010) who analyze how being a subsidiary of a foreign MNE
results in differences in deal sources among venture capital firms operating in Singapore. This
literature uses an indicator of whether the firm is a subsidiary of a foreign MNE or not in
multivariate analyses that test for differences in the behavior of subsidiaries of foreign MNEs
and domestic firms competing in the same country2.
To test Hypothesis 2, which argues that subsidiaries of foreign MNEs are more
innovative than domestic firms because they are more successful in converting their own R&D
investments into product innovations, I use the interaction between the indicator of being a
2 An alternative method to identify a liability of foreignness is the test of differences in means between a
group of subsidiaries of foreign MNEs and a group of domestic firms, such as differences in mean performance
(Zaheer, 1995), mean exit (Zaheer and Mosakowski, 1997; Kronborg and Thomsen, 2009), or mean efficiency
(Miller and Parkhe, 2002). However, this approach has a major limitation in that it does not allow to control for
other factors that may explain differences in behavior beyond foreignness, unless one uses a matched sample as
Kronborg and Thomsen (2009) do.
8/7/2019 Innovation MNEvsLocal 100920
http://slidepdf.com/reader/full/innovation-mnevslocal-100920 22/40
22
subsidiary of a foreign MNE and the variable R&D investments. The variable “R&D
investments” is measured as the ratio of total expenditures in R&D to sales, multiplied by one
thousand. This measure of R&D investment follows other studies of R&D investment as a
determinant of innovative capabilities of subsidiaries of foreign MNEs (e.g., Belderbos, 2003;
Cantwell and Mudambi, 2005) and of firms in general (e.g., Cohen, Levin and Mowery, 1987;
Greve, 2003). I use per thousand rather than percentage to increases the magnitude of the
coefficients, making them easier to interpret; this does alter their statistical significance. There
are no differences in how domestic firms and subsidiaries of foreign MNEs report their R&D
expenditures.
*** Insert Table 1 about here ***
I control for other determinants of product innovation that are commonly discussed in the
literature. I group these controls under several headings that reflect alternative explanations.
First, I control for firm resources because a firm‟s resource bundle affects its innovation.
Thus, I control for the amount invested in R&D. This captures the impact that R&D investments
have on innovation independent of the type of firm that undertakes the R&D (Greve, 2003;
Helfat, 1997; Leiponen, 2005). Moreover, I control for the employees‟ skills because companies
with more skilled employees may be able to achieve higher levels of innovation (Leiponen,
2005). Following previous studies, employee skill level is measured by the percentage of
employees with a university or technical college degree. Additionally, I control for firm size
because larger firms are likely to have more complementary resources that support innovation
(Greve, 2003; Katila and Ahuja, 2002; Schumpeter, 1942). Size is measured using the value of
total sales in millions of euros.
8/7/2019 Innovation MNEvsLocal 100920
http://slidepdf.com/reader/full/innovation-mnevslocal-100920 23/40
23
Second, I control for the type of firm because different types of domestic firms have
access to different knowledge sources that may affect innovation. Therefore, I control for
whether or not the domestic firm is a division of another domestic company because such firm
may receive technologies from the parent firm that make them more innovative (Galunic and
Eisenhardt, 2001). Division of domestic firms is measured using an indicator that takes a value
of 1 if the domestic firm has another domestic company as owner of some or all of the stock and
does not have a foreign firm as an owner of stock, and 0 if it does not, that is, if it is an
independent domestic firm. Additionally, I control for whether the domestic firm is an MNE with
operations outside Spain because by being an MNE it may benefit from access to foreign
technology that facilitates innovation (Subramanian and Venkatraman, 2001). I measure this
with an indicator that takes a value of 1 if the firm has employees outside Spain and does not
have a foreign firm as owner of its stock.
Third, I control for firm scope because the presence of a firm in different industries or
locations provides it with knowledge that affects innovation. Therefore, I control for the level of
diversification of the firm because diversified firms may develop the ability to integrate
knowledge from different industries and thus become more innovative (Garcia-Vega, 2006). I
measure the degree of diversification with an indicator that the main business line represents less
than 70% of sales (Rumelt, 1974); unfortunately, to ensure firm anonymity the database does not
have more precise measures of diversification. Moreover, I control for the number of production
and non-production facilities of the firm because a company with more facilities may be able to
access a wider variety of knowledge (Contractor, Kundu and Hsu, 2003). I use the term facility
to refer to operations of the firm that are geographically separate but belong to the same
company; these can be production facilities of the firm such as manufacturing plants as well as
8/7/2019 Innovation MNEvsLocal 100920
http://slidepdf.com/reader/full/innovation-mnevslocal-100920 24/40
24
non-production facilities such as administrative offices, design centers, or sales offices.
Additionally, I control for the facilities of the firm outside Spain because such facilities may
enable the firm to obtain a wide variety of knowledge and innovations (Bartlett and Ghoshal,
1989). I measure this with an indicator of the number of firms outside Spain in which the firm
has a share of stock. I lack more precise indicators of the characteristics of the facilities in Spain
or abroad.
Fourth, I control for competition because this affects innovation; higher competition
drives firms to innovate (Schumpeter, 1942). I measure the degree of competition indirectly with
two measures: an indicator of the number of competitors, and an indicator of the percentage of
the industry controlled by the largest four firms. Moreover, I control for the geography of the
competitive market because this affect innovation (Crevoisier, 2004). Firms operating in smaller
competitive markets may be shielded from competitive pressures and thus be less likely to
innovate. I measure this with indicators of the geography of the competitive market (provincial,
regional, Spanish, foreign, or Spain and foreign). Additionally, I control for industry because
other industry characteristics such as appropriability and technological opportunities influence
innovative effort (Levin, Cohen and Mowery, 1985). I include an indicator for each industry at
the two-digit CNAE level, the Spanish equivalent of the SIC codes.
Fifth, I control for other influences on innovation. Therefore, I control for year using an
indicator for the year of study because annual effects may affect the rate of innovation.
Moreover, I control for other unobserved firm characteristics with a random effects model. A
fixed effect model is not appropriate because time-invariant variables and firms with no
innovations in the period would drop out of the analyses.
Methods of Analysis
8/7/2019 Innovation MNEvsLocal 100920
http://slidepdf.com/reader/full/innovation-mnevslocal-100920 25/40
25
Since the dependent variable is the number of product innovations introduced in the year,
I use a negative binomial model, which is appropriate for count data with an overdispersion of
zeroes. I lag the independent and control variables one year because there is a lag of at least one
year between investments made for innovations and their market introductions (e.g., Grupp et al.,
1990; Katila and Ahuja, 2002). The model used is the following:
Number of product innovations introduced it = β 0 + β 1 * Subsidiary of foreign MNE it-1 + β 2 *
Subsidiary of foreign MNE it-1 * R&D investment it-1 + β 3 * R&D investment it-1 + β 4 * Skilled
employees it-1 + β 5 * Division of domestic firm it-1 + β 6 * Domestic MNE it-1 + β 7 * Size it-1 +
β 8 * Diversification it-1 + β 9 * Number of production facilities in Spain it-1 + β 10 * Number of
non-production facilities in Spain it-1 + β 11 * Number of firms controlled abroad it-1 + β 12 *
Number of competitors it-1 + β 13 * Concentration of competition it-1 + β 14 * Provincial market it-1
+ β 15 * Regional market it-1 + β 16 * Spanish market it-1+ β 17 * Foreign market it-1+ β 18 *
Spanish and foreign market it-1+ β j * Industry j + β k * Year k + ε
To test Hypothesis 1, the coefficient of interest is β 1. A positive and statistically
significant coefficient would provide support for Hypothesis 1, that a subsidiary of foreign MNE
introduces more product innovations than domestic firms because it is part of a foreign MNE. To
test Hypothesis 2, the coefficient of interest is β 2. A positive and statistically significant
coefficient would provide support for Hypothesis 2, that subsidiaries of foreign MNEs are more
successful at transforming their R&D investment into product innovation introductions than
domestic firms. This identification strategy of Hypothesis 2 relies on a strong assumption of
monotonicity in the subsidy benefits as a subsidiary. Non-monotonic relationships in the
subsidies received by the subsidiary of the foreign MNE may result in higher levels of product
innovation introduced through the interaction coefficient.
8/7/2019 Innovation MNEvsLocal 100920
http://slidepdf.com/reader/full/innovation-mnevslocal-100920 26/40
8/7/2019 Innovation MNEvsLocal 100920
http://slidepdf.com/reader/full/innovation-mnevslocal-100920 27/40
27
parts of the MNE. Thus, previous untested claims about the technological superiority of
subsidiaries of foreign firms (Buckley and Casson, 1976; Vernon, 1966) are supported in the
realm of product innovation.
The results also support Hypothesis 2. The coefficient of the interaction term between the
variables „subsidiary‟ and „R&D investment‟ is positive and statistically significant. Interpreting
the results of Model 3c in terms of economic significance reveals that an increase of 1 percent of
R&D investment over sales by a subsidiary generates 0.04 new products more than a domestic
firm would achieve, everything else being equal, taking into account that R&D investment over
sales was measured as a per thousand rather than per cent. These results suggest that subsidiaries
are more successful in transforming their R&D investments into innovations than domestic
firms. These findings support the incentive argument, introduced in this paper, that competitive
pressures from domestic producers in the consumer market and from other subsidiaries in the
MNE in the corporate factor market drive subsidiaries to focus on innovation and use the
different manner in which they manage their employees to achieve higher success in the
transformation of their R&D investments into new products.
*** Insert Table 3 about here ***
The test of differences in model fit indicates that the inclusion of the interaction effect
results in a significant improvement over the baseline model (Model 3c), whereas the inclusion
of the direct effect is only a marginal improvement (Model 3b). From this analysis one can
conclude that the main driver of differences in innovation between subsidiaries of foreign MNEs
and domestic firms, in this sample, comes from the innovation effort of the subsidiaries rather
than the innovation transferred from the MNE. Figure 1 illustrates the effects. This is likely a
reflection of one of the boundaries of the analysis discussed, that is, the level of development of
8/7/2019 Innovation MNEvsLocal 100920
http://slidepdf.com/reader/full/innovation-mnevslocal-100920 28/40
28
the country. As Spain is a developed country, the number of foreign products that can be
considered innovative are relatively limited, while the technological infrastructure of the country
is relatively well developed and thus subsidiaries of foreign MNEs can use it to become highly
innovative.
*** Insert Figure 1 here ***
These findings are important. Manufacturing subsidiaries of foreign MNEs are not
merely passive recipients of innovations from other parts of the MNE, as previous research
appeared to suggest, but are active innovators on their own merit, and are actually more
successful innovators than domestic firms. Moreover, in contrast to previous studies that argue
that subsidiaries of foreign MNEs face diverging pressures and have to imitate the behaviors of
either local competitors or other subsidiaries in the MNE to achieve legitimacy (e.g., Kostova
and Roth, 2002; Kostova and Zaheer, 1999; Westney, 1993; Zaheer, 1995), this paper finds
support for the idea that, in the realm of innovation, these pressures exert converging influences,
driving subsidiaries of foreign MNEs to differentiate themselves from both the domestic firms
and other subsidiaries in the MNE.
CONCLUSIONS
This study explains differences in the innovativeness of subsidiaries of foreign MNEs in
comparison to domestic companies competing in the same country. In contrast to some literature
that argues that subsidiaries of foreign MNEs are at a disadvantage in comparison to domestic
firms, I argue that subsidiaries of foreign MNEs have an advantage of foreignness in innovation,
which I explain using two arguments: the subsidy argument proposes that subsidiaries of foreign
MNEs receive innovations from other parts of the MNE, while the incentive argument posits that
8/7/2019 Innovation MNEvsLocal 100920
http://slidepdf.com/reader/full/innovation-mnevslocal-100920 29/40
8/7/2019 Innovation MNEvsLocal 100920
http://slidepdf.com/reader/full/innovation-mnevslocal-100920 30/40
30
but not tested (e.g. Buckley and Casson, 1976; Vernon, 1966; Zhao, 2006), but also active
developers, reacting to distinct pressures and using the different manner in which they manage
employees to become more successful in their innovation efforts. Thus, future studies of
innovation in MNEs need to focus on separating these effects on the innovativeness of
subsidiaries.
Second, these arguments add depth to the idea that innovation is primarily driven by
competitive pressures (Greve, 2003; Helfat and Raubitschek, 2000; Tripsas, 1997). The
arguments presented here explain that pressures for firms to innovate vary depending on the type
of firm. In addition to the competitive pressures that subsidiaries of foreign MNEs and domestic
firms share, subsidiaries of foreign MNEs face unique pressures that induced them to focus more
on innovation. Thus, future studies of the impact of competition on innovation need to take into
account the existence of pressures that are unique to certain types of firms.
Third, the arguments add depth to the idea that R&D investments have a positive
relationship with innovations (e.g., Cohen and Levinthal, 1989; Greve, 2003; Helfat, 1997) by
explaining that the relationship between R&D investments and innovations varies across firms.
Whereas there is a general positive impact of R&D investments on innovation, this impact varies
across types of firms. The management practices that subsidiaries of foreign MNEs use to
integrate and coordinate with other parts of the MNE enable them to be more successful at
transforming their R&D investments into innovation. Thus, future studies of R&D investments
need to take into account how different management systems, even when they are not created
with innovation in mind, can better support success in R&D efforts.
Managers of subsidiaries of foreign MNEs can benefit from the arguments presented in
this study. In contrast to the idea that subsidiaries of foreign firms suffer from a liability of
8/7/2019 Innovation MNEvsLocal 100920
http://slidepdf.com/reader/full/innovation-mnevslocal-100920 31/40
31
foreignness that puts them at a disadvantage in comparison to domestic firms, the study argues
that subsidiaries of foreign firms enjoy an advantage of foreignness in innovation. This
advantage of foreignness is not only the result of passively receiving innovations from other
parts of the MNE, as previous studies suggest, but also the result of actively undertaking R&D
investment to generate innovations. To accomplish this, managers need to invest in R&D and
also build on the management practices established to facilitate the integration of the subsidiary
with the rest of the MNE. These practices are useful not only for integrating the subsidiary, but
also for achieving higher success in the transformation of R&D investments into innovation than
domestic firms. Thus, reticence about developing employees through work experiences in other
countries or through language or cultural training should be cast aside. Although such
development may not appear to have a direct return on the subsidiary and instead may appear to
merely facilitate control from headquarters, it can actually have an indirect return in the form of
achieving higher success in innovation in the subsidiary. Such innovation would help the
subsidiary compete not only against domestic companies in the host country, but also against
other subsidiaries for support and charters from the parent company.
Despite the strength of the research design, the analyses have some limitations which
future studies can address. First, I do not directly measure the mechanisms discussed, evaluate
the degree of innovativeness of the products, separate innovations received from the parent firm
and innovations developed by the subsidiary, assess the degree of competitive pressures in
consumer and corporate factor markets, or measure differences in the types of subsidiaries.
Instead, I assume that I capture these influences indirectly with the variables and controls and
thus can generalize beyond the specific sample. Second, the arguments can be generalized to
other countries with similar levels of development. I view the assumptions underlying the
8/7/2019 Innovation MNEvsLocal 100920
http://slidepdf.com/reader/full/innovation-mnevslocal-100920 32/40
32
incentive argument as holding in Spain given that it is a developed country with relatively good
technological development. Hence, innovations coming from Spain may be more likely accepted
by the parent MNE, while consumers in Spain may not always prefer goods produced abroad.
These assumptions and argument are likely to hold in other developed countries. They may not
generalize well to developing countries because parent MNEs may not accept innovations
coming from developing countries, or consumers in developing countries may prefer goods from
developed countries. Nevertheless, in developing countries the subsidy argument may become
more relevant as domestic firms may not be able to match the innovativeness of products
transferred from developed countries. Third, the arguments assume that innovations can be
transferred and used across countries, which tends to be the case for most firms. However,
innovations in culturally-sensitive products tend to transfer poorly across countries. In such cases
the subsidy argument may have more limited applicability but the incentive argument may
become more relevant.
In sum, the study contributes to a better understanding of differences between
subsidiaries of foreign MNEs and domestic firms competing in the same country, arguing and
explaining that subsidiaries of foreign MNEs have an advantage of foreignness in innovation that
is the result of not only being part of an MNE but of the subsidiary‟s ability to generate its own
innovations. This is an important insight that is useful not only for studies of technology and of
the MNE, but also for managers. Future studies can follow this lead and go deeper into
understanding other advantages and disadvantages that subsidiaries of MNEs have in comparison
to domestic firms.
8/7/2019 Innovation MNEvsLocal 100920
http://slidepdf.com/reader/full/innovation-mnevslocal-100920 33/40
33
REFERENCES
Ambos B, Schlegelmilch BB. 2007. Innovation and control in the multinational firm: Acomparison of political and contingency approaches. Strategic Management Journal,
28(5): 473-486.
Banbury CM, Mitchell W. 1995. The effect of introducing important incremental innovations on
market share and business survival. Strategic Management Journal, 16(summer): 161-182.
Bartlett CA, Ghoshal S. 1986. Tap your subsidiaries for global reach. Harvard Business Review
64: 87 – 94.Bartlett CA, Ghoshal S. 1989. Managing across borders: The transnational solution. Boston,
MA: Harvard Business School Press.
Belderbos R. 2003. Entry mode, organizational learning, and R&D in foreign affiliates: Evidencefrom Japanese firms. Strategic Management Journal, 24(3): 235-359.
Benito GRG. 1997. Divestment of foreign production operations. Applied Economics 29(10):
1365-1377
Bilkey WJ, Nes E. 1982. Country-of-origin effects on products evaluations. Journal of
International Business Studies 13(1): 89-99.Birkinshaw J, Hood N. 1998. Multinational subsidiary development: Capability evolution and
charter change in foreign-owned subsidiary companies. Academy of Management Review,
23: 773-795.
Birkinshaw J. 1996. How multinational subsidiary mandates are gained and lost. Journal of
International Business Studies, 27(3): 467-495.
Birkinshaw J. 2001. Unleash Innovation in Foreign Subsidiaries. Harvard Business Review
79(March): 131-137.
Bouquet C, Birkinshaw J. 2008. Weight versus voice: how foreign subsidiaries gain attention
from corporate headquarters. Academy of Management Journal, 51(3): 577-601.Buckley PJ, Carter MJ, Clegg J, Hut T. 2005. Language and social knowledge in foreign-
knowledge transfer to China. International Studies of Management & Organization, 35:
47-65.
Buckley PJ, Casson M. 1976. The Future of the Multinational Enterprise. London: Holmes andMeier.
Cantwell J, Mudambi R. 2005. MNE competence-creating subsidiary mandates. Strategic
Management Journal, 26(12): 1109-1128.Ceccagnoli M. 2009. Appropriability, preemption, and firm performance. Strategic Management
Journal, 30(1): 81-98.
Christensen CM, Bower JL. 1996. Customer power, strategic investment, and the failure of leading firms. Strategic Management Journal, 17(3): 197-218.
Cohen WM, Levin RC, Mowery DC. 1987. Firm size and R&D intensity: A re-examination.
Journal of Industrial Economics, 35: 543-63.
Cohen WM, Levinthal DA. 1989. Innovation and learning: The two faces of R&D. Economic
Journal, 99: 569-596.
Contractor FJ, Kundu SK, Hsu CC. 2003. A three-stage theory of international expansion: The
link between multinationality and performance in the service sector. Journal of
International Business Studies, 34: 5 – 19.Cottrell T, Nault BA. 2004. Product variety and firm survival in the microcomputer software
industry. Strategic Management Journal, 25(10): 1005-1025.
8/7/2019 Innovation MNEvsLocal 100920
http://slidepdf.com/reader/full/innovation-mnevslocal-100920 34/40
34
Crevoisier O. 2004. The innovative milieus approach: Toward a territorialized understanding of
the economy? Economic Geography 80: 367-379Cuervo-Cazurra A, Maloney M, Manrakhan S. 2007. Causes of the difficulties in
internationalization. Journal of International Business Studies, 38: 709-725.
Cuervo-Cazurra A, Un CA. 2007. Regional economic integration and R&D investment.
Research Policy, 36: 227-246.Dimitratos P, Liouka I, Ross D, Young S. 2009. The multinational enterprise and subsidiary
evolution: Scotland since 1945. Business History, 51(3): 401-425.
Dougherty D. 2004. Organizing practices in services: capturing practice-based knowledge forinnovation. Strategic Organization, 2(1): 35-64.
Elango B. 2009. Minimizing effects of liability of foreignness: Response strategies of foreign
firms in the United States. Journal of World Business 44(1): 51-62Elliott GR, Cameron RC. 1994. Consumer perception of product quality and the country-of-
origin effect. Journal of International Marketing, 2(2): 49-62.
Enright MJ, Subramanian V. 2007. An organizing framework for MNC subsidiary typologies.
Management International Review, 47(6). 895-924.
Ettlie JE, Reza EM. 1992. Organizational integration and process innovation. Academy of Management Journal, 35: 795-827.
Fagerberg J, Mowery DC, Nelson RR. (Eds.). 2005. The Oxford Handbook of Innovation. NewYork: Oxford University Press.
Ferdows K. 1997. Making the most of foreign factories. Harvard Business Review, 75(2): 73-88.
Fey CF, Furu P. 2008. Top management incentive compensation and knowledge sharing in
multinational corporations. Strategic Management Journal, 29(12): 1301-1323.Frost TS, Birkinshaw JM, Ensign, PC. 2002. Centers of excellence in multinational corporations.
Strategic Management Journal, 23: 997-1118.
Frost TS, Zhou C. 2005. R&D co-practice and 'reverse' knowledge integration in multinationalfirms. Journal of International Business Studies, 36(6): 676-687.
Galunic DC, Eisenhardt KM. 2001. Architectural innovation and modular corporate forms.
Academy of Management Journal, 44: 1229-1249.
Garcia-Vega M. 2006. Does technological diversification promote innovation?: An empiricalanalysis for European firms. Research Policy, 35: 230-246.
Ghoshal S, Bartlett CA. 1990. The multinational corporation as an interorganizational network.
Academy of Management Review, 15: 626-625.Greene WH. 2000. Econometric analysis (4th ed.). Upper Saddle River, NJ: Prentice-Hall.
Greve HR. 2003. A behavioral theory of R&D expenditures and innovations: Evidence from
shipbuilding. Academy of Management Journal, 46(6): 685-702.Grupp H, Schwitalla B, Schmoch U, Granberg A. 1990. Developing industrial robot technology
in Sweden, West Germany, Japan, and the U.S.A. In J. Sigurdson (Ed.), Measuring the
dynamics of technological change. London: Pinter Publishers.
Hansen MT. 1999. The search-transfer problem: The role of weak ties in sharing knowledgeacross organization subunits. Administrative Science Quarterly, 44: 82-111.
Helfat CE, Raubitschek RS. 2000. Product sequencing: Co-evolution of knowledge, capabilities
and products. Strategic Management Journal, 21(10/11): 961-979.
Helfat CE. 1997. Know-how and asset complementarity and dynamic capability accumulation:The case of R&D. Strategic Management Journal, 18: 339-360.
8/7/2019 Innovation MNEvsLocal 100920
http://slidepdf.com/reader/full/innovation-mnevslocal-100920 35/40
35
Helfat CE. 2000. Guest editor's introduction to the special issue: The evolution of firm
capabilities. Strategic management Journal, 21(Summer Special Issue): 955-959.Henderson R. 1993. Underinvestment and incompetence as responses to radical innovation:
evidence from the photolithographic alignment equipment industry. RAND Journal of
Economics, 24(2): 248-270.
Hsieh T, Lavoie J, Samek RAP. 1999. Think global, hire local. McKinsey Quarterly, 4: 92-101.Hymer SH. 1976. The International Operations of National Firms: A Study of Foreign Direct
Investment. Cambridge, MA: MIT Press.
Jaffe ED, Nebenzahl ID. 2001. National Image and Competitive Advantage: The Theory and
Practice of Country-of-Origin Effect . Copenhagen Business School Press: Copenhagen.
Katila R, Ahuja G. 2002. Something old, something new: A longitudinal study of search
behavior and new product introduction. Academy of Management Journal, 45: 1183-1194.
Kedia BL, Mukherji A. 1999. Global managers: Developing a mindset for global
competitiveness. Journal of World Business, 34(3): 230-251.
Kogut B, Zander U. 1993. Knowledge of the firm and the evolutionary theory of the
multinational corporation. Journal of International Business Studies, 24: 625-645.Kostova T, Roth K. 2002. Adoption of an organizational practice by subsidiaries of multinational
corporations: Institutional and relational effects. Academy of Management Journal, 45(1):215-233.
Kostova T, Zaheer S. 1999. Organizational legitimacy under conditions of complexity: The case
of the multinational enterprise. Academy of Management Review, 24(1): 64-81.
Kronborg D, Thomsen S. 2009. Foreign ownership and long-term survival. Strategic
Management Journal, 30(2): 207-219.
Kuemmerle W. 1997. Building effective R&D capabilities abroad. Harvard Business Review, 75:
61-70.Leiponen A, Helfat CE. 2010. Innovation objectives, knowledge sources, and the benefits of
breadth. Strategic Management Journal, 31(2): 224-236.
Leiponen A. 2005. Skills and innovation. International Journal of Industrial Organization, 23:
303-323.Leiponen A. 2008. Control of intellectual assets in client relationships: implications for
innovation. Strategic Management Journal, 29(13): 1371-1394.
Levin RC, Cohen WM, Mowery DC. 1985. R&D appropriability, opportunity, and marketstructure: New evidence on some Schumpeterian hypotheses. American Economic
Review, 75(2 (Papers and Proceedings 1984)): 20-24.
Lu Q, Hwang P. 2010. The impact of liability of foreignness on international venture capitalfirms in Singapore. Asia Pacific Journal of Management 27(1): 81-97
Merino F, Rodríguez DR. 1997. A consistent analysis of diversification decisions with non-
observable firm effects. Strategic Management Journal, 18: 733-743.
Mezias, JM. 2002. Identifying liabilities of foreignness and strategies to minimize their effects:The case of labor lawsuit judgments in the United States. Strategic Management Journal,
23(3): 229-244.
Miller SR, Parkhe A. 2002. Is there a liability of foreignness in global banking? An empirical
test of banks' X-efficiency. Strategic Management Journal 23(1): 55-75
8/7/2019 Innovation MNEvsLocal 100920
http://slidepdf.com/reader/full/innovation-mnevslocal-100920 36/40
8/7/2019 Innovation MNEvsLocal 100920
http://slidepdf.com/reader/full/innovation-mnevslocal-100920 37/40
37
Verlegh PW. 2007. Home country bias in product evaluation: the complementary roles of
economic and socio-psychological motives. Journal of International Business Studies,
38: 361-373.
Vernon R. 1966. International investment and international trade in the product cycle. Quarterly
Journal of Economics, 80: 190-207.
Westney DE. 1993. Institutionalization theory and the MNE. In S. Ghoshal and DE Westney(Eds), Organization theory and the multinational corporation: 53-76. New York: St.
Martin‟s Press.
Zaheer S, Mosakowski E. 1997. The dynamics of the liability of foreignness. Strategic
Management Journal, 18: 439-463.
Zaheer S. 1995. Overcoming the liability of foreignness. Academy of Management Journal, 38:
341-363.Zhao M. 2006. Conducting R&D in countries with weak intellectual property rights protection.
Management Science, 52(8): 1185-1199.
8/7/2019 Innovation MNEvsLocal 100920
http://slidepdf.com/reader/full/innovation-mnevslocal-100920 38/40
38
TABLE 1
Variables and measures
Types of
variable
Variables Measures
Dependent
variable
Number of product
innovations
Number of new products introduced in the market in the year
Independent
variables
Subsidiary Bivariate indicator that the firm has a foreign company as owner of
some or all of the stock
R&D investment Total R&D expenditures divided by sales and multiplied by 1,000,
measured at the level of the domestic firm or at the level of the
subsidiary of the foreign MNE, not at the level of the parent firm
Skilled employees Number of employees with a university or technical college degree
divided by total number of employees and multiplied by 100
Size Value of total sales in millions of euros
Domestic MNE Bivariate indicator that the firm has value-added operations outside
Spain and does not have a foreign firm as owner of stock
Division of domestic
firm
Bivariate indicator that the firm has another domestic company as
owner of some or all of the stock and does not have a foreign firm asowner of stock
Domestic production
facilities
Number of geographically separate production facilities in Spain
besides the main facility
Domestic non-
production facilities
Number of geographically separate non-production facilities (e.g.,
sales offices, headquarters, warehouses…) in Spain besides the main
facility
Controls Foreign facilities Number of companies outside Spain in which the firm owns stock
Diversified firm Bivariate indicator that the main business line represents less than 70
percent of sales
Number of competitors Number of competitors in the industry: 1 if less than 10 competitors, 2
if between 10 and 25 competitors, 3 if more than 25 competitors
Concentration of
competition
Percentage of the industry controlled by the largest four firms
Provincial market Bivariate indicator that the geographic area of the competitive market
is the province
Regional market Bivariate indicator that the geographic area of the competitive market
is the region
Spanish market Bivariate indicator that the geographic area of the competitive market
is the Spain
Foreign market Bivariate indicator that the geographic area of the competitive market
is outside Spain
Spanish and foreign
market
Bivariate indicator that the geographic area of the competitive market
is Spain and outside Spain
Industry Bivariate indicators of the industry of the firm‟s main activity at the 2-
digit level
Year Bivariate indicators of the year
8/7/2019 Innovation MNEvsLocal 100920
http://slidepdf.com/reader/full/innovation-mnevslocal-100920 39/40
39
TABLE 2
Descriptive statistics and correlation matrix
Mean Std dev 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
1. Number of product innovations 1.547 5.722 1.000
2. Subsidiary 0.207 0.405 0.047
***
1.000
3. R&D investment 6.792 22.741 0.048
***
0.079
***
1.000
4. Skilled employees 8.491 15.948 0.013 0.126
***
0.149
***
1.000
5. Size 5.074 11.999 0.065
***
0.297
***
0.154
***
0.116
***
1.000
6. Division of domestic firm 0.156 0.363 0.002 -0.220
***
0.089
***
0.045
***
0.147
***
1.000
7. Domestic MNE 0.007 0.081 -0.022
*
-0.042
***
-0.013 -0.012 0.029
**
0.042
***
1.000
9. Domestic production facilities 1.313 1.233 -0.013 0.061
***
0.031
**
0.015 0.194
***
0.034
**
0.069
***
1.000
10. Domestic non-production facilities 1.084 3.842 -0.009 0.073
***
0.020
+
0.022
*
0.108
***
0.040
***
0.035
***
0.273
***
1.000
11. Foreign facilities 0.424 3.099 0.022
*
0.108
***
0.058
***
0.035
***
0.280
***
0.027
**
-0.008 0.013 0.010 1.000
12. Diversified firms 0.532 0.499 -0.044
***
-0.118
***
-0.004 -0.088
***
-0.116
***
-0.024
*
0.023
*
-0.010 -0.028
**
-0.064
***
1.000
13. Number of competitors 3.721 1.791 0.014 0.050
***
0.037
***
0.042
***
0.027
*
0.025
*
-0.002 0.014 0.022
*
0.027
**
-0.048
***
1.000
14. Concentration of competition 32.012 37.156 0.037
***
0.210
***
0.050
***
0.064
***
0.191
***
0.116
***
0.024
*
0.035
***
0.035
***
0.049
***
-0.094
***
0.156
***
1.000
15. Provincial market 0.107 0.309 -0.078
***
-0.158
***
-0.074
***
-0.067
***
-0.120
***
-0.072
***
-0.020
+
-0.019
+
-0.033
**
-0.046
***
0.050
***
-0.040
***
-0.067
***
1.000
16. Regional market 0.118 0.322 -0.037
***
-0.127
***
-0.076
***
-0.037
***
-0.065
***
-0.019
+
0.012 -0.018
+
-0.009 -0.013 -0.016 -0.018
+
0.023
*
-0.126
***
1.000
17. Spanish market 0.425 0.494 0.032
**
-0.001 -0.011 0.020
+
-0.009 0.013 -0.024
+
0.013 0.021
+
-0.003 0.036
**
0.065
***
0.016 -0.297
***
-0.314
***
1.000
18. Foreign market 0.072 0.258 -0.025
*
0.129
***
0.030
**
0.025
*
0.036
***
0.012 -0.023
*
-0.018
+
-0.001 0.043
***
-0.181
***
0.010 -0.014 -0.096
***
-0.102
***
-0.239
***
1.0
19. Spanish and foreign market 0.203 0.402 0.090
***
0.205
***
0.146
***
0.090
***
0.194
***
0.087
***
0.026
*
0.015 0.014 0.045
***
0.005 0.003 0.069
***
-0.174
***
-0.184
***
-0.434
***
-0.1
*
Significance levels: + p < 0.10, * p < 0.05, ** p < 0.01, *** p < 0.001
8/7/2019 Innovation MNEvsLocal 100920
http://slidepdf.com/reader/full/innovation-mnevslocal-100920 40/40
TABLE 3
Results of the analysis of the innovativeness of subsidiaries of foreign MNEs in comparison todomestic companies competing in the same country
Dependent variable: Number of product innovations introduced in the year
Model 3.a Model 3.b Model 3.c
Subsidiary (H1) 0.093* 0.032*(0.046) (0.016)
Subsidiary * R&D investment (H2) 0.004**
(0.002)R&D investment 0.004** 0.004** 0.003**
(0.001) (0.001) (0.001)Skilled employees 0.000 0.000 0.000
(0.001) (0.001) (0.001)Size 0.003+ 0.003+ 0.003+
(0.002) (0.002) (0.002)Division of domestic firm -0.148* -0.111 -0.104
(0.073) (0.080) (0.080)Domestic MNE -1.464+ -1.446+ -1.455+
(0.856) (0.856) (0.857)Domestic production facilities -0.032 -0.033 -0.031
(0.021) (0.021) (0.021)Domestic non-production facilities -0.010+ -0.010+ -0.010+
(0.006) (0.006) (0.006)Foreign facilities -0.002 -0.002 -0.002
(0.010) (0.010) (0.010)Diversified firm 0.326** 0.326** 0.331**
(0.055) (0.055) (0.055)Number of competitors 0.002 0.002 0.002
(0.016) (0.016) (0.016)Concentration of competition 0.003** 0.003** 0.003**
(0.001) (0.001) (0.001)Provincial market
0.013 0.021 0.019(0.193) (0.193) (0.193)Regional market 0.595** 0.599** 0.597**
(0.174) (0.174) (0.174)Spanish market 0.879** 0.875** 0.874**
(0.158) (0.158) (0.158)Foreign market 0.788** 0.774** 0.772**
(0.179) (0.179) (0.179)Spanish and foreign market 1.036** 1.024** 1.025**
(0.163) (0.163) (0.163)Industry indicator Included Included Included
Year indicator Included Included Included
Constant -2.172** -2.168** -2.159**
(0.282) (0.282) (0.282)
Chi 2 433.760 435.470 451.660Log likelihood -9327.790 -9326.409 -9323.762
Chi 2 change likelihood 2.760+ 8.054**
Observations 9132 9132 9132
Number of Firm 761 761 761
Note: Standard errors in parentheses. Industry and year controls were included in the analysis but are not reported here.
Si ifi l l 0 10 * 0 05 ** 0 01