Subsidiary Embeddedness and Competence Development in MNCs A Multi-Level Analysis

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 extemal 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 intemal units of an MNC and the negative impacts that might occur if a subsidiary's business network is too embedded.