The paper is linked to more recent research on the differentiated MNC and the focus of the paper is the role of subsidiaries in MNCs and especially the impact of the subsidiaries external business environment on its role in the corporation. It is tested whether the subsidiary’s external business environment has a direct (information bridgehead) as well as an indirect (competence distributor) impact on the subsidiary’s possibility to influence the competence development in the whole MNC.
The first, direct, role has to do with the subsidiaries’ position in different business contexts, which can be more or less valuable as sources of information and inspiration for other MNC units, concerning for instance information about new customers, product innovations or new technologies. The subsidiary can play an important role as a bridgehead between these contexts and the rest of the MNC. The second role has to do with the subsidiary’s ability to absorb and use external knowledge for its own capability development and competence and the extent to which this competence, in its turn, can be transferred to other MNC units. In this case the competencies are subsidiary-specific and the possibilities to use them in other MNC contexts differ.
Our results indicate that the possibility to play the role of a bridgehead in the MNC is easier than to play a role through distributing competence to other MNC units. The results seem to show that the bridgehead role is strengthened if the subsidiary consider the network important for its own competence development. A reasonable assumption is that in such situations the subsidiary’s ability to interpret valuable information held by other network actors and to transfer it to the rest of the MNC increases.
Introduction
Today the dominant picture of the MNC both in business and in academia shows a dynamic network of more or less specialized subsidiaries linked to each other in multiple, complex patterns. It is generally argued that the new picture reflects the response of the MNCs to increasing global competition and rapid technological development, and a consequent shift in focus from exploitation of firm-specific advantages (Hymer, 1960; Buckley and Casson, 1976; Caves, 1982; Hennart, 1982) to global accumulation and dissemination of knowledge within MNCs (Cantwell, 1991; Kogut, 1993; Malnight, 1996).
An important element in the new picture is that some subsidiaries are specialized in certain skills, capabilities or fields of operations of importance for the whole corporation and are assigned a more strategic role than other subsidiaries. This implies that they also have a wider responsibility concerning the competence development within the MNC. In the literature a variety of terms are used to characterize such subsidiaries; world product mandate (Crookell and Caliendo, 1980; Poynter and Rugman, 1982; Etemad and Dulude, 1986), strategic leader (Bartlett and Ghoshal, 1989), centre of competence (Sölvell, Zander and Porter, 1991), strategic centre (Lorenzoni and Baden-Fuller, 1995), global innovator or integrated player (Gupta and Govindrajan, 1991), centre of excellence (Forsgren and Pedersen, 1998; Fratocchi and Holm, 1998) and strategic centre of excellence (Surlemont, 1994). The proliferation of terms indicates the confusion in the literature, probably due to the fact that research in the field is still in its early stages. In the following we call them centres of excellence (CoEs).
We suggest that the MNC CoEs are units, frequently subsidiaries, that have gained a more strategic role than others, implying that they have a wider responsibility concerning the competence development of the MNC. This points at the reasons both for developing MNC CoEs in business and for research about the centres. One important reason is that the centres can be expected to have a critical role in corporate learning. Another is that they have substantial influence on corporate strategic behaviour. Those reasons provide the starting-point and rationale for our discussion of the development of CoEs.
The dictionary says that the word ‘excellent’ characterizes ‘something in which a person or thing excels’; ‘anything highly laudable, meritorious, or virtuous in persons, or valuable and esteemed in thing’ (Webster’s, 1979, p. 636). The dictionary continues, ‘unusually good of its kind; remarkable for good qualities; of great worth; superior...’. This indicates that an MNC CoE gains its strategic role due to its superiority in a field. However, a centre is a ‘point of concentration or dispersion, nucleus, source’ (Concise Oxford Dictionary, 1964, p. 194). Thus, a CoE is something more than a unit of excellence, it is a concentration of excellence in the MNC and a source of excellence for the whole or a larger part of the MNC in its efforts to gain excellency. This means that a subsidiary may be a unit of excellence, an excellent unit, but in order to become a CoE it must have significance for other MNC units as well.
The existence of CoEs in MNCs raises a number of research issues. The purpose of this paper is to discuss some of those issues. We start by reviewing the literature discussing basic conditions for knowledge and capability creation in firms, and consequently, for development of CoEs at the subsidiary level. This discussion points at the critical role of interaction with the environment in competence development. Against that background the following section discuss the roles of the interaction with specific business counterparts in developing a distinctive competence of the subsidiary. In the subsequent section, we combine four hypotheses, discussed, into a model specifying the relations that influence the development of subsidiaries into CoEs within MNCs. The model demonstrates some basic problems facing MNC management when developing a strategy in which subsidiaries gain roles as CoEs.
Knowledge and Capability Creation
Firm learning is the process by which firms as collectives learn through interaction with their environment (Cyert and March, 1963). An organization learns ‘….if, through processing of information, the range of its potential behaviour is changed’ (Huber, 1991, p. 89). In this learning and knowledge accumulation process, employees within organizations are of primary interest, because they interact with the environment. They interpret environmental phenomena, responses and processes and update their assumptions and understanding of cause-effect relationship. This may change their response to the environment.
Learning starts with a detection of a misfit between a firm’s supply of goods and services and the demand by the environment. Individual employees interact with counterparts in the environment and interpret the needs and demands of actors or business partners in the environment. These could be customers, who need ‘specialized’ products or services, or public agencies that impose special conditions. A misfit is uncovered as individuals interpret stimuli emanating from the environment. The initial reaction to this misfit is caused by a desire to solve an existing problem. Being individual based this contains an important tacit dimension.
Although the process starts with individuals, this is not sufficient. Organizational learning is contingent upon the ability of the subsidiary to institutionalize or routinize individual based knowledge and capability. Institutionalization is a source of consistency in behaviour of firms. Through this institutionalization process individual specific knowledge is stored in the memory of the firm and made available or distributed to other members of the organization. Polyani (1962) states that it is a ‘well known fact that the aims of a skilful performance is achieved by the observance of a set of rules which are not known as such to the person following them.’ (p. 49).
As this process to institutionalize knowledge proceeds at each stage there is ‘noise’. This happens, as the different and contradictory knowledge of the different individuals has to be ‘enmeshed’ and synthesized into a coherent single one. In this messing process new knowledge is created and old knowledge is modified. The process creates shared beliefs in the firm and a common platform is formed. In initial stages little common ground exists, as the process is individually based. Gradually, as institutionalization occurs, a common platform based on specific firm-based routines develops.
Institutionalization of individual-based knowledge into organizational knowledge requires active interaction among individuals. Management in a subsidiary can facilitate this through actively creating links between individuals in the firm. Organizational arrangements such as face-to-face interaction, developing teams and task forces, and departmentalization encourage interaction among individuals in firms (Galbraith, 1973). These arrangements create new knowledge, increase connections and accelerate knowledge distribution in organizations, and transform person specific knowledge into non-person specific knowledge. The process of knowledge distribution and new knowledge creation is non-linear. It is contingent on specific happenings in the surrounding environment and network of connections among firms.
The reasoning above leads to the conclusion that for a subsidiary to develop specific competence individual knowledge created through interaction with its environment has to be institutionalized. The institutionalization of individual based knowledge into organizational knowledge implies that the knowledge becomes stored in routines, processes and decision procedures of the subsidiary. The organizational knowledge is subsidiary-specific and therefore different from the knowledge and capability possessed by other subsidiaries in the same MNC.
The evolution of specific competence is based on the assumption that specialization is preferable. As in the case of nations, and firms, specialization by subsidiaries reflects the superior knowledge and resources of a subsidiary within MNCs. The crucial issue is that the subsidiary, over time, has developed a package of knowledge and capability that allows it to take advantage of its institutionalized superior knowledge and resources.
The differences between a subsidiary and other units in the firm are not first of all due to existence of different tangible and intangible resources, but to differences in the capability to make use of these resources (Penrose, 1959; Cohen and Levinthal, 1990; Barney, 1991; Lane and Lubatkin, 1998). Making use of knowledge stored in the memory of a firm requires routines and procedures to recall this knowledge. But, the recall routines are imperfect and involve ‘noise’. A perfect ‘recall’ is made difficult as old knowledge is ‘destroyed’ or over-shadowed by more recent knowledge.
The asymmetry among the various subsidiaries within the same MNC arise from asymmetry in their knowledge and capacity base as well as the asymmetry in the recall capacity. These capability differences may be either independent of or only weakly related to such firm characteristics as industry or size. The capabilities are based on the routines and procedures that associate and interconnect the various aspects of the subsidiary (Madhok, 1997). These inter-subsidiary asymmetries in capabilities arise as routines, structures, and procedures in subsidiaries vary in effectiveness in transforming knowledge and creating new knowledge by combining and recombining existing knowledge. Rules, processes, and routines are important as they are the basic fabric characterizing knowledge (Siegler, 1983). These also make the knowledge impersonal and possible to communicate to the other members in the organization. (Jelinek, 1991; Fiol and Lyles, 1985; Srivastava, 1983). The reason is that the codifiability of the different types of firms’ assets varies (Makhija and Ganesh, 1997).
The general conclusion from this review is that superior competence is an outcome of a time-consuming process in which the individuals of the firm, based on the firm’s existing capability, interact with each other and with the environment of the firm. Subsidiary excellence is a consequence of complex interaction processes over time, in which superior knowledge is created, based on the subsidiary capabilities – that is routines, structures and procedures - for knowledge development.
Based on the discussion above we can formulate the following hypotheses:
Hypothesis 1: Subsidiary competence is positively related to the subsidiary’s capability for knowledge development.
The unique and critical competences in a subsidiary allows it to exert influence on otrher parts and activities in the MNC (Pfeffer 1978, Pfeffer and Salancik, 1978). Such a subsidiary develops as a resource centre for the rest of the MNC. Moreover, substitutes supplying "the same" competencies are lacking. Consequently, we formulate the following hypothesis:
Hypothesis 2: Subsidiary impact on MNC competence development is positively related to the subsidiary’s own level of competence.
A basic feature is also that organizational learning is a result of interaction with the environment. This conclusion form the background of the following discussions of subsidiary development of specialized competence with regard to the interaction with specific business counterparts which is considered as business context embeddedness.
Business context embeddedness
Studies of firms in business markets, have shown that firms usually are engaged in close relationships with a limited set of important customers, suppliers and other cooperation partners, for instance research units (Turnbull and Valla, 1986; Håkansson, 1989; Ford, 1997). This set of important business partners constitutes the firm’s business context which is also the base for the firm’s development (Snehota, 1991).
Empirical studies of such business relationships have demonstrated that exchange in those relationships is not only a matter of selling and buying. It comprises extensive information exchanges involving many managers on several organizational levels of the firms as well as managers with different fields of expertise and responsibility. Thus, such information exchanges may concern production, engineering, product development, research, quality, logistics, finance in addition to the selling and purchasing usually associated with business exchanges (Håkansson, 1982; Cunningham and Homse, 1986; Hallén, 1986).
Development of such relationships seems to start with ordinary arm’s length market relations in which one of the parties takes the initiative to developing the relationship by committing resources to business with the specific counterpart (Ford, 1997). To the extent that the other party responds the interaction evolves sequentially in a stream of exchange episodes and the parties incrementally develop business with each other (Anderson and Weitz, 1992). In this process they also adapt their production, logistic, development and administrative activities in order to bring about a better match between the firms (Hallén, Johanson and Seyed-Mohamed, 1991). Instances of such close interfirm adaptation of activities between business partners include just-in-time exchange (Frazier, Spekman and O’Neal, 1988), joint product development (von Hippel, 1988; Lundvall, 1985) and total quality management (Westphal, Gulati and Shortell, 1997).
Such interfirm adaptations may be discrete changes in products, processes and routines but they may also be continuous modifications in the current activities. Altogether they are manifestations of mutual learning processes by which the firms develop knowledge about how to create value for each other (Blankenburg-Holm, Eriksson and Johanson, 1996). In these processes the firms not only learn about each other’s needs and capabilities, thereby raising their capabilities, but also create new knowledge (Dahlqvist, 1998), which can be generalized to other relationships and situations (Andersson and Johanson, 1997).
Moreover, when firms are engaged in more than one such close relationship they also have the opportunity to coordinate activities across relationships thereby further enhancing their capability for their business partners. Thus, a set of closely coordinated relationships is a vehicle for internal knowledge development. Therefore, the following hypothesis can be formulated:
Hypothesis 3: Subsidiary capability for knowledge creation is positively related to the subsidiary’s embeddedness in a network of business relationships.
Further, as argued by Gupta and Govindarajan (1992) and Bartlett and Ghoshal (1989), foreign subsidiary knowledge and other kinds of resources can be utilized within the larger MNC. Kogut and Zander (1993) also show that the MNC organization is essential for the international distribution of subsidiary knowledge. Moreover, in line with the case of Hypothesis 2, external embeddedness also allows the subsidiary to influence other parts of the MNC, since demanding external relationships can be regarded as a critical resource-basis which the subsidiary has control over by being a linking bridgehead. The more impact these relationships have on competence development, the more critical the resource-basis of the subsidiary and the more influence it can exercise on the MNC’s decisions of internal distribution and direction of resources.
Hypothesis 4: Subsidiary impact on MNC competence development is positively related to the subsidiary’s embeddedness in a network of demanding business relationships.
The four hypotheses above can be combined in the following model.
DATA AND METHOD
In the following section a short description of the data collection is presented. We then describe the methods of analysis, in which the choice of indicators is discussed in relation to the four constructs of the proposed model. In order to test the hypotheses formulated, we first construct a measurement model using the LISREL technique, securing construct and discriminant validity. Secondly, we test causal relationships and present the resultant structural model. This model is then used to verify possible relationships between the four construcs and thereby testing the hypotheses.
Data Collection
This study is based on data from Swedish, Finnish and Danish subsidiaries within MNCs with foreign mother companies.
For the data gathering in the three countries, respectively, a questionnaire was sent out in a two-step procedure to subsidiary managers. The first resulted in 650 answers. To reduce the level of missing values and to clarify obvious misunderstandings, contact was established with specific respondents. In the second step, the questionnaire was redistributed to those subsidiaries that had not yet answered, a procedure which resulted in a further 428 replies. The total original sample contains 1078 observations and the average level of missing values for individual questions is low, that is, about three per cent.
Within the sample, subsidiary activities vary in number and magnitude. One issue was to focus on subsidiaries relevant to the constructs within the hypothesized model. This meant that we made a sub-sample, focusing so–called complete subsidiaries, that is, complete in the sense that they do carry out technological activities, i.e. production and development and that they do make business with customers and suppliers. This meant that subsidiaries included in the sub-sample must conduct production, development, sales and purchasing, and those ones only with single activities such as sales or basic research were excluded. This procedure resulted in a sample of 501 observations. Notice that, the subsidiaries could very well conduct other activities, just as long as they did carry out the four focused ones.
Constructs and Indicators
Four constructs are included in the hypothesized model shown in Figure 1, which means that observable indicators will be selected for each and every one. The first construct is labelled External Network Impact on Subsidiary Competence Development (ENI) and measures the subsidiary mmanager’s perception of the impact of specific business relationships on the subsidiary competence development. According to von Hippel (1988) and Lundvall (1985) much technical competence derives from sales contacts in external business relationships. Three relationships were chosen to indicate this; the degree of impact of an external specific customer, an external specific supplier and an external R&D organization. The second construct, Subsidiary Capability for Competence Development (SUBCAP), is a matter of the conditions within the subsidiary organization that drive competence development. Two indicators have been adopted, the first measuring the subsidiary managers’ estimation of competence development as being driven by conditions within the subsidiary organizations. Another aspect has to do with the subsidiary being able to tap knowledge from various markets (Gupta and Govindarajan 1992, Kogut and Zander 1993) by being established with own organization units at different country markets. Thus, the second indicator measures the number of sales units that the subsidiary has developed at foreign country markets. The third construct, Subsidiary Competence (SUBCOMP), is indicated by the subsidiary manager’s estimation of the level of competence held by the subsidiary in development of products and processes and in production of goods and services. Fourth, the construct Subsidiary Impact on MNC competence development (MNCCOMP), is correspondingly measured by the subsidiary manager’s estimation of the subsidiary’s impact on the MNC’s development (of products and processes) and production (of goods and services).
In the questionnaire all questions were answered by subsidiary top managers and the indicators of the four theoretical constructs were measured on a seven-point scale ranging from 1, meaning low (or not at all), to 7, meaning very strong (or very high). One exception was the number of sales units at foreign markets of the subsidiary which was measured by the exact number.
The sample includes all kinds of subsidiary companies within the service and manufacturing industries. The figures show that subsidiaries’ on average have 388 employees, with a minimum of four and a maximum of 9300. The turnover has an average of USD 87 Million, with a minimum of 0.1 and a maximum of 2330. Table 1 shows some descriptive statistics on the measured indicators of the four constructs.
Table1 Descriptive Statistics
ENI |
SUBCAP |
SUBCOMP |
MNCCOMP |
||||||
Subsidiaries (N=488-499) |
Cus-tomer |
Supplier |
R&D |
Foreign sales units |
Internal con-ditions |
Deve-lopment |
Pro-duction |
Deve-lopment |
Pro-duction |
Average |
4,5 |
2,9 |
2,2 |
2,0 |
5,5 |
5,3 |
5,9 |
3,2 |
2,9 |
Minimum |
1 |
1 |
1 |
0 |
1 |
1 |
1 |
1 |
1 |
Maximum |
7 |
7 |
7 |
80 |
7 |
7 |
7 |
7 |
7 |
S.D. |
1,78 |
1,68 |
1,50 |
6,26 |
1,44 |
1,29 |
1,02 |
1,65 |
1,57 |
Share of values >=6 |
36,1% |
8,0% |
3,7% |
--- |
60,5% |
48,5% |
72,3% |
9,3% |
5,0% |
Share of values = 0 |
--- |
--- |
--- |
65,9% |
--- |
--- |
--- |
--- |
The table shows descriptive figures of the indicators of the four constructs in figure 1. First, the indicators of SUBCAP, i) number of foreign sales units of the subsidiary and ii) the subsidiary internal conditions for competence development, reveals that the average subsidiary has two such foreign sales units, with the highest value of 80 and lowest is 0. In fact, as many as 65,9 percent of the subsidiaries have their whole organization located in the same country and have for that reason has no foreign sales units at all. On the seven-point scale, the number of subsidiaries referring to internal subsidiary conditions for competence development is quite high. The average is 5,50 which is confirmed by that as many as 60,5 percent claim a value of six or seven at the seven-point scale. Second, for the three indicators of ENI, a seven-point scale has also been used. Highest impact has the specific external customer with an average of 4.50. The distribution of answers show that 36,1 percent claim a value of six or higher. The specific external supplier has a somewhat lower value with an average of 2.9 while the external R&D unit has an average of 2.2. A lower share, 8,0 and 3,7 percent, respectively, of the subsidiaries claim a value of six or higher for these. Third, the respective SUBCOMP indicators, development and production have averages on 5,2 and 5,9 with 48,5 and 72,3 percent being value six or seven. Finally, the MNCCOMP indicators, development and production, have averages of 3,2 and 2,9 respectively with 9,3 and 5,0 percent of the values being six or seven. An interpretation of the two latter constructs is that many subsidiaries claim a relatively high competence in development and production but a substantial share of these has a rather limited impact on the competence development for the whole MNC, with regard to development and production.
Method of Analysis
To analyze causal relations between the four constructs, we used the structural modeling technique called LISREL (Jöreskog and Sörbom, 1993). LISREL is a multivariate technique suitable for estimating causal models that involve multiple independent and dependent constructs. Our analysis was conducted in a two step procedure. The first step is to run the observable indicators used for measuring the four constructs in a so-called measurement model to assess the convergent validity, by creating homogenous constructs. Convergent validity is assessed by how well a construct represents its indicators, which is estimated by a test for t-values, factor-loadings and R2-values between the construct and each indicator. T-values should be higher than 1.96 (5 per cent level) and R2-values should be higher than 0.20, thus significantly explaining at least 20 per cent of the variation of the observable indicator. The procedure also involves a test for discriminant validity, which is a matter of ensuring that constructs are empirically separate from each other. Discriminant validity is confirmed by the fact that two constructs do not measure the same indicators. For example, if more than one construct has high factor loadings and significant t-values in relation to one or several observable indicators, the discriminant validity is negatively affected.
The Measurement Model Test
In the first step we inserted the indicators together with the four constructs, testing the validity in a measurement model. The construct validity was good for all constructs, but the discriminant validity was not, that is, two constructs were not significantly separated, indicating that they are not different constructs. The problem was that the two indicators; development and production, which were used both at the subsidiary level (SUBCOMP) and at the MNC level (MNCCOMP) had significant error co-variances, i.e. development related to development and production related to production. Thus there seems to be an activity-based correlation, indicating development and production in general, which is not captured within the present model. However, this is limited to concern the error covariance between these two indicators and as the statistics reveal no further discriminant problems, neither between latent constructs or between latent constructs and indicators, the analyses was continued. Further, The correlation matrix of constructs in the measurement model (see Appendix) also shows that they are not close to one and therefore indicate having discriminant validity) Therefore, in a next step we set the error covariance between development at the subsidiary and MNC level free. The same was done for production. This resulted in a significant measurement model with a Chi2(Df = 21) of 31.97 and a P-value of 0.059.
Table 2 depicts factor loadings, t-values and R2 values for all indicators. The construct ENI is valid with t-values of 9.24, 11.0 and 12.57 respectively, and with R2-values of 0.24, 0.34 and 0.48. The second construct, SUBCAP, is valid through t-values at 2.62 and 4.53, and R2-values of 0.031 and 0.23. It should be observed that the value of 0.031 is low, meaning that the variation of the number of foreign sales units of the subsidiary is not highly explained by the variation of the SUBCAP variable, although significant. The third construct, SUBCOMP, is valid through t-values of 4.06 and 4.44, and R2 -values of 0.56 and 0.37. Forth, the construct MNCCOMP is valid through t-values of 14.79 and 15.08, and with R2 values of 0.74 and 0.69.
Table 2. Construct and Indicators
Constructs and Indicators |
Abbreviation |
Factor loading |
T-value |
R2-value |
ENI Impact of external customer Impact of external supplier Impact of external R&D unit |
Cus Sup R&D |
0.49 0.59 0.69 |
9.24 11.00 12.57 |
0.24 0.34 0.48 |
SUBCAP Subsidiary foreign sales units. Subsidiary internal conditions |
ForSa SubCon |
0.18 0.48 |
2.62 4.53 |
0.031 0.23 |
SUBCOMP Subsidiary development (of products and processes). Subsidiary production (of goods and services). |
Dev
Prod |
0.75
0.61 |
4.06
4.44 |
0.56
0.37 |
MNCCOMP MNC development (of products and processes). MNC production (of goods and services). |
Dev
Prod |
0.87
0.83 |
14.79
15.08 |
0.74
0.69 |
Once convergent validity and discriminant validity are ascertained, the next step is to form the structural model by specifying the causal relations in accordance with the hypotheses presented in Figure 1. Observe that the validation of a structural model is not only a matter of individual relations between constructs, but also a matter of validating the entire model. If a single relation is insignificant, it can be related to the specific hypothesis formulated and the hypothesis can interpreted as falsified. In a next step the structural model will be tested. Such an analysis proceeds through several iterations, with the model being successively fine-tuned to be a more coherent representation of the empirical data. In the following analysis, t-values, factor-loadings and R2-values represent tests of single causal relations between the constructs in the model. Chi-squares and degrees of freedom and a probability estimate (p-value) assess the validation of the entire structural model, which is a test of a non-significant distance between the data and the model. These are the key statistical measures used in LISREL (Jöreskog and Sörbom, 1993). The p-value should be higher than 0.05 for significance at the 5 per cent level.
RESULTS
For the model under consideration here, the first step was to test the causal relationships between the four constructs as hypothesized in figure 1. First, hypotheses 1, 2, 3, and 4 were tested simultaneously. The resulting statistics revealed a significant positive path between all hypothesized relations except SUBCOMP and MNCCOMP (Hyp. 2), that had a factor loading of –0.03 and t-value of –0.47. The overall model was significant (CHi2(df21) =31.97, p= .059). Next, due to the insignificant result of Hyp. 2, an adjustment of the causal paths was made, omitting the causal path from SUBCOMP to MNCCOMP. Thus, in a second test we tested hypotheses 1, 3, 4 but not hypothesis 2, were tested. The statistical output resulted in a significant structural model with CHi2(df22) =32.19, p= .074. The resulting model is therefore based on three relationships. The first is a positive path from SUBCAP to SUBCOMP with a factor loading of 0.71 and t-value of 2.26. This supports hypothesis 1. Second, there is a significant positive path from ENI to SUBCAP with a factor loading of 0.24 and t-value of 2.79, thus supporting hypothesis 3. Third, the tests resulted in a strong positive path between ENI and MNCCOMP, with a factor loading of 0.52 and a t-value of 7.49. This result supports hypothesis 4.
Therefore, hypotheses 1, 3 and 4 are confirmed (see figure 2), while hypothesis 2 is rejected. This result demonstrates that the impact of external network embeddedness on subsidiary competence development is affecting the subsidiary’s capability for competence development. The more demanding business relationships, i.e. customers, suppliers and R&D units, are at various locations, the greater capability for competence development in the subsidiary. In the same line, greater capability for competence development positively affects the level of subsidiary competence.
However, the level subsidiary competence is not affecting subsidiary impact on MNC competence development as hypothesized. This can probably be explained by the problems related to transfer of knowledge from the subsidiary to the other MNC units (e.g. context-specificity and lacking goal congruence), because the competence in the subsidiary over time becomes relatively subsidiary-specific.
The support of hypothesis 4 indicates that subsidiary’s embeddedness in a network of demanding business relationships has a positive effect on the subsidiary impact on MNC competence development. Therefore, it is not the subsidiary competence as such that creates the way for subsidiary impact on MNC competence development, but it is rather when the subsidiary act as a bridgehead to its network of demanding business relationships.
Conclusion
The focus of the paper is the role of subsidiaries in MNCs and especially the impact of the subsidiaries external business environment on its role as a centre of excellence in the corporation. It was hypothesized that the subsidiary’s external business environment has a direct as well as an indirect impact on the subsidiary’s possibility to influence the competence development in the whole MNC. First, the subsidiary’s environment can have a direct impact, due to the fact that the subsidiary can function as an information link between capabilities that reside in the subsidiary’s business environment and other MNC units’ need for these capabilities. This is reflected in Hypothesis 4. However, it was also assumed that the importance of the subsidiary’s environment is mediated through its positive impact on the subsidiary’s ability to develop its own competence and, as a consequence, on other MNC units’ competence development. This indirect link is reflected in Hypotheses 1-3.
It is important to understand the difference between these two roles as centre of excellence in the multinational corporation. The first, direct, role has to do with the subsidiaries’ position in different business contexts, which can be more or less valuable as sources of information and inspiration for other MNC units, concerning for instance information about new customers, product innovations or new technologies. The subsidiary can play an important role as a bridgehead between these contexts and the rest of the MNC. The second role has to do with the subsidiary’s ability to absorb and use external knowledge for its own capability development and competence and the extent to which this competence, in its turn, can be transferred to other MNC units. In this case the competences are subsidiary-specific and the possibilities to use them in other MNC contexts differ.
Our results indicate that this distinction is relevant for our understanding of the possibility for the subsidiary to be a centre of excellence. In general, the possibility to play the role of a bridgehead in the MNC is easier than to play a role through distributing competence to other MNC units. The results seem to show that the bridgehead role is strenghened if the subsidiary consider the network important for its own competence development. A reasonable assumption is that in such situations the subsidiary’s ability to interpret valuable information held by other network actors and to transfer it to the rest of the MNC increases. Therefore Hypothesis 4 is supported. However, even if the external network seems to be important for the development of the subsidiary’s own competence, this competence does not automatically lead to a centre of excellence role. Hypothesis 2 is not supported.
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