International Diversification and MNE Innovativeness: A Contingency Perspective of Foreign Subsidiary Portfolio Characteristics.

Date01 Diciembre 2021
AuthorMihalache, Mashiho

1 Introduction

International business research increasingly acknowledges that by going abroad firms can not only exploit their current capabilities, but also can develop new capabilities (Jha et al., 2018; Kuemmerle, 1999; Lin, 2020). While foreign locations are potential sources of new technical, market, and functional knowledge as well as other resources for innovation (e.g., Cano-Kollmann et al., 2016; da Silva Lopes et al., 2019; Michailova & Mustaffa, 2012), not all organizations can successfully leverage these opportunities. Since foreign locations have different factor and demand characteristics (Feinberg & Gupta, 2004), different international footprints will provide different opportunities for innovation.

However, while internationalization creates opportunities for stimulating innovation, realizing these opportunities is not straight forward. This can be seen in the contradictory arguments and findings of previous research that link more extensive and diverse foreign operations to more innovation due to a more diverse knowledge and resource base (Narula & Zanfei, 2005; Nieto & Rodriguez, 2011; Tojeiro-Rivero & Moreno, 2019), to less innovation since the heavier reliance on foreign knowledge can hallow out organizations and overburden managerial attention (Bahl et al., 2021; Chen & Lin, 2018), or to nonlinear relationships where the negative effects manifest at high levels of internationalization (Chen et al., 2012; Mihalache et al., 2012). We argue that this unclarity is due to at least two reasons. First, previous research that tried to understand MNE innovativeness focuses on the geographical diversification of only R&D subsidiaries (cf., Vrontis & Christofi, 2019). But innovation is not only about foreign R&D as recent research shows that other types of subsidiaries significantly contribute to innovation. For instance, sales and marketing subsidiaries challenge the MNE to develop new products and services as they encounter customers with different preferences (Azar & Drogendijk, 2014; Govindarajan & Ramamurti, 2011; Holm & Sharma, 2006; Huang & Li, 2019; Immelt et al., 2009) and provide complementary assets to research activities (Lampert et al., 2019). Also, manufacturing subsidiaries give feedback on current processes and products that enables new technologies to be developed (Gupta & Govindarajan, 2000) and provide knowledge that, when combined with knowledge in other parts of the organization, can help MNEs to innovate (Berry, 2014). Moreover, innovation is not only about knowledge, but also about other types of resources associated with internationalization such as access to cheaper labor and financing (Mihalache et al., 2012). Thus, the mixed ideas and findings in the literature regarding geographical diversification may be due to previous research's omission of non-R&D activities that MNEs perform across their global network of subsidiaries and that provide important resources for innovation.

The second reason for the unclarity regarding the influence of geographical diversification on MNE innovation is because of a lack of attention to the interplay between geographical diversification and other characteristics of MNEs' subsidiary portfolio. Since previous research on MNE innovation captures internationalization predominantly by considering a single type of foreign activity--focusing either on subsidiaries with a research (e.g., Lahiri, 2010; Penner-Hahn & Shaver, 2005) or sales (e.g., Bahl et al., 2021; Wu et al., 2016) mandate--the interplay between different characteristics of the entire subsidiary portfolio has been overlooked. This can be particularly limiting in our understanding of innovation as MNEs' knowledge stock is an accumulation of knowledge from all of its foreign subsidiaries and depends on their inter-relationship (Meyer et al., 2020). Thus, the mixed findings and arguments of previous research can be attributed to the omission of the fact that knowledge often resides in invisible communities of practice that cross the physical boundaries of a particular subsidiary (Mudambi & Swift, 2011). Therefore, our study raises the question: How does geographical diversification affect MNE innovativeness and how does this relationship depend on other characteristics of the MNEs' international subsidiary portfolio?

This study contributes to international business research by developing and empirically testing a portfolio perspective of MNE innovativeness that can reconcile the contradictory ideas about the influence of geographical diversification on innovativeness. First, our study shows that considering the entire international footprint is important for understanding how MNEs can leverage international operations to become more innovative. We complement the large body of research on R&D internationalization (for a recent review, see Papanastassiou et al., 2020), by shifting perspective to the MNEs' overall international footprint in order to explore the entire knowledge base of MNEs (Hutzschenreuter & Matt, 2017). In this way, we answer a research call for expanding previous focused conceptualizations to "a conceptualization of international diversification that encompasses the full range of activities that determine the geographic scope of a firm" (Wiersema & Bowen, 2011, p. 152).

Second, our portfolio perspective provides a nuanced understanding of how geographical diversification affects MNEs' innovativeness by proposing that its effect depends on the interplay with other characteristics of the MNE's subsidiary portfolio as these enable or constrain how MNEs can access and use knowledge from foreign locations. Specifically, we consider four characteristics of their international footprint: regional diversification (i.e., the extent to which an MNE tends to concentrate its foreign subsidiaries in a few geographical regions or spread them across regions), institutional distance in their subsidiary portfolio (i.e., the extent to which the subsidiaries tend to be located in countries that are more distant in terms of the perceived corruption), asset diversification (i.e., the extent to which the foreign subsidiaries are operating in different industries than that of the parent firm), and functional mandate breadth (i.e., the extent to which subsidiaries tend to perform multiple activities rather than specializing on a particular function). The portfolio perspective we advance in this study is critical because we show that MNE-level innovation is not only about the capabilities of a particular subsidiary (e.g., Driffield et al., 2016), but that innovation depends on the interplay between locational and organizational elements of the foreign subsidiary portfolio. This advances the underlying logic of internationalization theory, in which locational advantages are combined with organizational capabilities (Rugman et al., 2011a, b). Thus, our study suggests that to stimulate innovativeness, MNEs should make portfolio-level decisions rather than focus on individual subsidiaries.

To test the proposed relationships, we developed a unique longitudinal and multisource dataset of Japanese listed electronics firms and their foreign subsidiaries (266 firms and their 4505 subsidiaries between 2007 and 2015 resulting in 1936 firmyear observations and 28,350 subsidiary-year observations). Our findings suggest that a portfolio perspective provides important insights into MNEs' ability to innovate. Importantly, we find that whether regional geographical diversification within the subsidiary portfolio enhances or dampens MNE innovativeness depends on two other characteristics of the portfolio--institutional distance and asset diversification.

2 Theoretical Foundations

The advances in telecommunication technology and the trade liberalization of the last two decades have led MNEs to increasingly try to leverage locational advantages by performing multiple value chain activities abroad. In line with these developments, we follow Wiersema and Bowen's (2011, p. 155) conceptualization of internationalization as comprising "all foreign aspects of a firm's value chain, from the geographic markets where it sells its products/services to the global locations where it produces its products/services and the geographic locations where its capabilities reside". That is, in addition to the well-studied revenue-seeking internationalization (e.g., Hitt et al., 2006, 2007), MNEs increasingly establish foreign subsidiaries that engage in various value-chain activities such as innovation, manufacturing, administrative and IT support (Lewin & Peeters, 2006; Mihalache & Mihalache, 2020). International business research has mirrored these developments in practice and tried to understand how MNEs can leverage their global footprint.

However, there is a paucity of research focused on understanding how international diversification affects MNE innovation, although research is plentiful in two related topics. First, there is an abundance of research on how international diversification affects MNEs' financial performance, with research proposing various relationships including non-linear ones (Delios & Beamish, 1999; Goerzen & Beamish, 2003; Lu & Beamish, 2004; Nachum, 2004; Qian et al., 2008). Second, there is a well-established line of research on the relationship between the internationalization of R&D and firm innovation (e.g., Hsu et al., 2015; for a recent review, see Vrontis & Christofi, 2019). The lack of research on how international diversification of all foreign activities affects MNE innovativeness leaves an important lacuna in our understanding because other activities besides R&D also contribute to innovation. For instance, manufacturing can enable the development of new technologies through feedback loops (Gupta & Govindarajan, 2000) and sales provides key knowledge on different customer needs as is the case of reverse innovation (Govindarajan & Ramamurti, 2011; Immelt et al., 2009)...

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