R&D and Foreign Subsidiary Performance at or Below the Technology Frontier.

VerfasserBelderbos, Rene

1 Introduction

Traditionally, the technological advantages of multinational enterprises (MNEs) are developed at home, where most of the R&D activities are concentrated (e.g., Berry, 2014), and then transferred to foreign subsidiaries. Subsidiaries conduct R&D to assimilate and adapt home based technological assets to the characteristics of their local market (Kuemmerle, 1997, 1999). Once successfully integrated, parent firm know-how helps subsidiaries to establish a competitive advantage in the local market (Buckley & Casson, 1976; Caves, 1996; Delios & Beamish, 2001; Dunning, 1993; Fang et al., 2007, 2013; Hymer, 1976; Martin & Salomon, 2003; Un, 2011) compensating for possible 'liabilities of foreignness' that arise from unfamiliar business environments (Zaheer, 1995).

At the same time, however, knowledge production has become increasingly globalized, with research hubs emerging around the world (Alkemade et al., 2015; Furman et al., 2002; Liu & Chen, 2012; OECD, 2016). R&D performed by MNEs' local subsidiaries gains more prominence and subsidiaries gain more important R&D mandates, as firms seek to gain access to the valuable tacit and advanced knowledge present in host countries (Berry, 2006; Cantwell & Janne, 1999; Castellani et al., 2017; Driffield et al., 2016; Singh, 2007; Song & Shin, 2008). Conducting R&D in subsidiaries in host countries at the global technology frontier may have distinct advantages over R&D conducted by the MNE at home or elsewhere in the MNE's network.

It follows that R&D investments by the subsidiary, on the one hand, and R&D investments and knowledge transfer by the MNE, on the other hand, will have differential importance in the subsidiary depending on the relative advanced nature of the environment for innovation in the host economy, with subsidiaries taking on different roles in terms of knowledge exploitation or knowledge sourcing and augmentation (Papanastassiou et al., 2019, p. 646). Surprisingly, extant research has not examined the joint consequences of these two sources of technology development and innovation for subsidiaries in detail. The literature has primarily focused only on the effects of R&D and the knowledge stock of the parent firm on subsidiaries (e.g., Almeida & Phene, 2004; Delios & Beamish, 2001; Fang et al., 2007, 2013; Phene & Almeida, 2008) or on the effect of overseas R&D and internationalization on parent MNE performance (Belderbos et al., 2015; Castellani et al., 2017; Driffield et al., 2016; Kafouros et al., 2008). Yet MNEs have to decide on the allocation of R&D investments at home and abroad, and preferably such allocation results in synergies between these R&D activities to enhance the competitiveness of foreign subsidiaries.

In this paper, we contribute an analysis of the joint and interactive effects of subsidiary R&D and R&D conducted by the MNE for the subsidiary on subsidiary performance. We start from the notion that innovation and subsidiary performance rely on frontier knowledge and technologies that need to be applied to local contexts, and that subsidiaries that are better able to integrate these different types of knowledge will exhibit greater performance (e.g., Belderbos et al., 2015; Michailova & Zhan, 2015; Scott-Kennel & Giroud, 2015; Un & Rodriguez,

2018). We argue that R&D conducted for the subsidiary in the MNE network and subsidiary R&D can reinforce each other's impact on subsidiary performance, as R&D conducted in a subsidiary allows it to build up the necessary capabilities to effectively apply the know-how and expertise of the MNE and the results of R&D conducted for the subsidiary in the wider MNE network, and to combine local knowledge with MNE knowledge. In addition, we argue that it is crucial to make a distinction between subsidiaries active in an industry in which the host country is at the global technology frontier and subsidiaries in industries in which the host country is lagging behind (Garcia-Sanchez et al., 2017; Salomon & Jin, 2008; Smith, 2014). We develop hypotheses on how subsidiaries benefit differently from their own R&D investments, R&D conducted by the MNE for the subsidiary, and their interactive effect, due to differences in the local host country environment. We confirm that local subsidiary R&D is more effective if the host country is at the technology frontier, while R&D by the MNE is more effective if the host country is behind the frontier. Only in the latter case, both types of R&D reinforce each other's effect on the performance of the affiliate.

We test hypotheses on unique and fine-grained longitudinal data on R&D investments of foreign subsidiaries and R&D investments conducted by the MNE for the subsidiary, drawing on a dataset covering a large panel of 1756 foreign subsidiaries based in the Netherlands and active in multiple industries. A rare characteristic of these data is that it allows identifying R&D investments in the MNE network that are conducted specifically for a focal subsidiary. We measure performance as subsidiary productivity. Productivity is the efficiency with which capital and labor inputs are utilized to create firm value. It can be considered a direct function of technological change and innovation driven by R&D investments (Castellani et al., 2017; Driffield & Love, 2007; Griffith et al., 2006; Hall et al., 2012; Smith, 2014), which makes it an appropriate measure in a study focusing on the effects of R&D. We test differential effects of subsidiary and MNE R&D by exploiting variation across industries in the position of the Netherlands as being at, or below, the technology frontier.

Our study contributes to the literature on R&D internationalization by MNEs by showing that both subsidiary and MNE R&D investments have to be taken into account to study subsidiary performance, but that their effects and complementarity crucially depend on the host country's relative technological strength. By highlighting the specific conditions under which complementarities within the MNE's R&D network are likely to occur, we suggest an important potential boundary condition to earlier studies of knowledge complementarities in MNEs focusing on intra-firm licensing and affiliate R&D (Belderbos et al., 2008) and affiliate R&D and parent firm managerial knowledge (Berry, 2015). Our findings also add to the stream of literature investigating the consequences of the host country position in the international technological landscape, which has focused on directions of international knowledge flows (e.g., Cantwell & Janne, 1999; Singh, 2007), parent firm performance (Belderbos et al., 2015) and exports (Salomon & Jin, 2008; Smith, 2014), but has not examined foreign subsidiary performance. Our study answers to the call by Papanastassiou et al. (2019, p. 648) to examine the heterogeneous relationship between R&D configurations of MNEs and the geography of innovation.

2 Background and Hypotheses

The expansion and success of MNEs into new geographic markets often rests on the possession of specific 'ownership advantages' which give MNEs a competitive edge over local rival firms (Buckley & Casson, 1976; Caves, 1996; Dunning, 1993; Hymer, 1976; Teece et al., 1997). According to the knowledge-based view of the firm, knowledge that is rare, and difficult to imitate is central to the formation of these competitive advantages (Grant, 1996). Firms accumulate knowledge, especially technological knowledge, by investing resources in R&D activities. Through R&D efforts, firms developed intangible proprietary assets in the form of new products, improved production processes and acquired technical expertise, and as such can enhance value creation and productivity.

Among all MNEs' value-chain activities, R&D remains the last to be internationalized substantially (Belderbos et al., 2013; Berry, 2014) with an appreciable share of R&D activities still conducted in the home country of the firm. Firms tend to maintain R&D centralized to maximize economies of scale and scope that characterize technology production at the firm level (Edler et al., 2002; Hewitt, 1980), while minimizing the risk of knowledge leakages to foreign competitors (Alcacer & Zhao, 2012; Singh, 2007).

The way MNEs generate value from knowledge has been traditionally viewed as a unidirectional process: Home base R&D was creating the knowledge assets that were then transferred to foreign subsidiaries and exploited in new geographic markets (Buckley & Casson, 1976). Subsidiaries conducted R&D to adapt processes and product to local market and manufacturing circumstances, in what is coined 'home base exploiting R&D' (Kuemmerle, 1997) or 'asset exploiting R&D' (Papanastassiou et al., 2019). The performance of foreign operations was ultimately dependent on knowledge developed at home. By successfully acquiring parent firm knowledge-based competitive advantages, newly established subsidiaries were able to overcome potential liabilities of foreignness occurring from operating a business in a new and unfamiliar environment (Zaheer, 1995).

In the last two decades, however, knowledge has become increasingly global: Technological specialized clusters and centers of excellence have emerged around the world across multiple industries (Furman et al., 2002). Consequently, the persistence of home country technological dominance is less evident. Knowledgebased competences and expertise drawn exclusively from R&D activities at home are no longer be sufficient to sustain the competitive advantage of MNEs' foreign operations in particular if they operate in technologically advanced countries. The conventional process of MNE's value creation from knowledge is increasingly inverted as MNEs are able to improve processes and develop new products by sourcing knowledge from abroad via 'reverse knowledge transfer' (Ambos et al., 2006; Driffield et al., 2016; Frost & Zhou, 2005; Hakanson & Nobel, 2000; Rabbiosi, 2011; Un & Cuervo-Cazurra, 2008)...

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