Academic journal article Management International Review

Foreign Subsidiaries' Learning from Local Environments: An Empirical Test

Academic journal article Management International Review

Foreign Subsidiaries' Learning from Local Environments: An Empirical Test

Article excerpt

Abstract and Key Results

* This study examines antecedent factors that influence foreign subsidiaries' innovation through learning from local environments, which in turn influences their knowledge contribution back to the headquarters. We argue that subsidiary local embeddedness, subsidiary top management team heterogeneity, and MNC corporate entrepreneurial culture are the key enablers for subsidiaries to learn and innovate in the local environments.

* The findings support that the learning and innovation of U.S.-based subsidiaries are significantly influenced by their local embeddedness, their top management team heterogeneity, and the corporate entrepreneurial culture of their parent company, along with the control variables including subsidiary size and the internationalization of parent company.

Keywords

Organizational Learning, Subsidiary Innovation, Knowledge Flows, Top Management Teams, Local Embeddedness, Corporate Entrepreneurial Culture

Foreign Subsidiaries' Learning from Local Environments: An Empirical Test

A recent stream of literature on MNC learning has suggested that foreign subsidiaries play a very important role by acquiring and creating valuable knowledge locally and by contributing to the knowledge base of the entire MNC (Almeida/ Phene 2004, Birkinshaw/Hood 2001, Cantwell/Piscitello 1999, Frost 2001, Frost/ Birkinshaw/Ensign 2002, Ghoshal/Bartlett 1988, Mahnke/Pedersen/Venzin 2005, Moore, 2001, Zhao/Luo 2005). Learning from local environment is strategically important because valuable knowledge is scattered around the globe (Doz/Santos/ Williamson 2001). Frost (2001, p. 101 ) argues that "a potentially important source of competitive advantage for multinational firms is the capacity of their foreign subsidiaries to generate innovations based on stimuli and resources resident in the heterogeneous host country environments in which they operate." Despite its importance, empirical research on this topic is quite limited. Frost (2001) suggests that research in this area has been quite sporadic and case based as opposed to large sample based. This paper empirically examines this important issue by addressing two key questions: ( 1 ) what factors influence a MNC subsidiary's learning from its local environment? and (2) to what extent does a subsidiary's learning from local environment impact outflow of knowledge to the rest of the MNC?

By building on the perspectives of organizational learning and knowledge (Cohen/ Levinthal 1990), inter-firm networks (Gnyawali/Madhavan 2001, Powell/Koput/ Smith-Doerr 1996), and top management team (Carpenter/Fredrickson 2001, Hambrick/Mason 1984), we suggest that for a subsidiary to learn from its local environmerit, it needs to have a local network of relationships to provide access to local knowledge, and its top management should be able to maintain and nurture a diverse local network and have the capability to acquire and integrate knowledge. Moreover, its parent company should encourage and promote innovation and learning practices through a corporate entrepreneurial culture. The integration of these diverse theoretical perspectives enables us to develop a richer understanding on this important topic.

This paper advances research on strategic management of MNCs and builds a bridge between three streams of research on MNCs: (1) knowledge creation, (2) interfirm network, and (3) subsidiary management. Most research using the knowledge-based view focuses on knowledge transfer process within MNCs (e.g. Gupta/Govindarajan 1991, 2000, Kostova 1999, Zhao/Luo 2005). This perspective generally assumes that knowledge already exists within the MNCs and focuses on transfer only. While scholars such as Ghoshal and Bartlett (1988) discussed how subsidiaries created innovations, they focused on the control factors within MNCs such as socialization and communication. Others have emphasized the importance of local resources for MNC innovation (Almeida 1996, Meyer-Krahmer/Reger 1999, Pearce 1999), but did not examine how learning from local environments occurs, and nor how it contributes to innovation. …

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