Processes Underlying MNE Subsidiary Absorptive Capacity: Evidence from Emerging Markets.

Author:Zeng, Jing

1 Introduction

What drives the ability of MNE subsidiaries to absorb knowledge in emerging markets? To answer this question, most prior literature has focused on the internal corporate embeddedness of MNE subsidiaries (Bouquet and Birkinshaw 2008), accentuating knowledge transfer among subsidiaries and MNE headquarters and peer subsidiary units throughout the world. This focus means that the existing literature offers limited insight into the larger questions of how MNE subsidiaries develop their ability to absorb external knowledge in the local institutional setting in ways that generate competitive advantage. The exceptions are the relatively few studies that have sought to understand subsidiary absorptive capacity by examining how they engage in their own learning and knowledge acquisition processes conditioned by the local environment (e.g., Andersson et al. 2014; Fan et al. 2015; Fang and Zou 2010). The research gap warrants attention given the increasingly significant role played by subsidiaries in MNE innovation (Birkinshaw 1998; Venaik et al. 2005) and the unique and valuable ways in which knowledge is combined and applied to create competitive advantage (Cohen and Levinthal 1990).

Prior research has implicitly assumed the universal beneficial effects of experiential learning and the augmentation of firm-specific advantages by capitalizing on host countries' unique resource endowments and location-specific advantages (e.g., Birkinshaw 1998; Lu and Beamish 2001). However, such research has not uncovered distinct locational effects and how these effects may impact on managerial attitudes to learning at subsidiary level. This understanding is important, as a growing number of IB scholars have argued that MNEs when operating in one type of institutional environment, may draw erroneous inferences and apply incorrectly their knowledge and experience in a different institutional environment, which may actually harm their subsidiaries (e.g., Kim et al. 2015; Volberda and Lewin 2003; Zeng et al. 2013). Many MNEs are attracted by the opportunities and potential economic growth offered from emerging markets such as China, India, Mexico and Brazil (de Soto 2000; Hart and Christensen 2002). However, these markets present extreme cultural, geographical, religious, ethnic and linguistic heterogeneity (Hammond et al. 2007; Webb et al. 2010), which signifies fundamentally new challenges for the field of international strategy for MNEs. Hence, although we know that absorptive capacity represents a key organizational capability, existing knowledge on why variations exist across MNE subsidiaries in emerging markets to engage in localized learning remains not sufficiently understood (Cano-Kollmann et al. 2016; Fan et al. 2015). Therefore, an understanding of the process of how subsidiary managers engage in local leaning and how this learning process interacts with the MNE's path dependent knowledge should capture important unobserved and under-researched effects of subsidiary local learning capabilities. Recently scholars have called for greater understanding of the knowledge connectivity between MNEs and location (e.g., Cano-Kollmann et al. 2016) and suggested the need to account for the active role that subsidiaries play in interaction with the local institutional environment (e.g., Cantwell 2014; Teece 2014). This understanding is theoretically significant in order to provide new insights into the process of the subsidiary's learning capabilities. It is also of great relevance to emerging economies where the institutional environment is radically different from that of developed economies. Although MNEs contribute substantially to host country technological and economic development (Hart and Christensen 2002), they are plagued by high failure rates (Rondinelli and London 2003). Consequently, a greater understanding of how subsidiaries develop and apply absorptive capacity to engage in localized learning is essential (Cantwell 2014). Accordingly, the aim of this paper is to expand and build upon understanding of absorptive capacity by exploring the following central research question: How do individual managers of MNE subsidiaries operating in different and conflicting institutional emerging markets, such as, China, India and Brazil recognize, assimilate and apply external knowledge?

In building our contextualized perspective, we define different and conflicting institutional environments as the host countries that have cultural, geographical, religious, ethnic and linguistic heterogeneity, and have less developed/poor market supporting mechanisms, such as infrastructure, than the MNE home country. In doing so we explore a process-oriented view of absorptive capacity rather than adopting an outcome-driven perspective. Contrary to models dealing with "covariation among dependent and independent variables" (Langley et al. 2013, p. 2) that dominate understanding of absorptive capacity in the IB context, process models attempt to capture the sequence of certain conditions and events in explaining how learning unfolds over time (Langley 1999). Such an approach can provide a holistic understanding of a phenomenon as it captures both external (e.g., environment) and internal (e.g., organizational inertia) aspects in theorizing (Tripsas 2009). Some scholars (e.g., Felin and Hesterly 2007; Nag and Gioia 2012) have also critiqued the predominant approach to the study of knowledge-based capabilities in organizations as overly collective in its treatment and call for empirical investigation of the individual drivers and process of knowledge-based value: Thus opening up the proverbial black box of the firm by explicating the underlying a priori capabilities and knowledge of the individuals involved provides a natural stalling point and micro-foundation for explaining the creation of new value (Felin and Hesterly 2007). Studying absorptive capacity as a temporal process, offers a perspective that is underrepresented in management research but essential to understanding the transformative process by which knowledge become goals, actions, and systemic outcomes.

This study adds to the body of research examining absorptive capacity at the subsidiary level and makes a contribution to the existing literature in two important ways. First, although the IB literature recognizes the importance of the subsidiary in driving the firm's competitive advantage, investigation of the specific processes by which subsidiary managers operating in a radically different host country environment recognize, assimilate and use knowledge at the local level has been limited. We introduce an inductive process model that not only shows that subsidiary managers differ in their beliefs about path dependent knowledge, but also shows how those differences lead to ways in which knowledge was searched, assimilated and used at local level. Second, our analysis indicates different patterns associated with managers' ability to absorb local knowledge. Our data shows that managers differ in their scanning intensity, frequency and scale to absorb new knowledge. Such scanning difference leads to a degree of dialectic interaction with the local informal partners such as customers and local communities. Such dialectic interaction often leads to innovative ways of executing absorbed knowledge. This pattern of actions can be used as a crucial precursor for the ability of the subsidiary to absorb, assimilate and execute local knowledge.

The paper is structured as follows. In the next section, we review the absorptive capacity literature in the international business field. We then set out the research design and method of the study. This is followed by a discussion of the findings. We distil the theoretical insights that emerge from the study and provide a set of propositions related to a theoretical model of the processes underlying MNE subsidiary absorptive capacity. We then provide theoretical and practical implications of the findings, identify the limitations of the study and avenues for future research.

2 Theoretical Background

International business (IB) scholars have long acknowledged the centrality of the firm's knowledge assets to an understanding of the raison d'etre of multinational enterprises (MNEs) (Buckley and Casson 1976; Cantwell 1989; Caves 1971; Hymer 1960). The MNE's ability to leverage the knowledge dispersed across its various foreign markets, capitalizing on and maximizing learning from these local markets, is a fundamental strategic imperative (Bartlett and Ghoshal 1989). Several IB scholars have investigated the questions of generation, assimilation, and transfer of knowledge created in various parts of the MNE (Fan et al 2015; Fang and Zou 2010; Gupta and Govindarajan 2000). Central to this is an emphasis on absorptive capacity.

Absorptive capacity encompasses human capital and structural features of the organization, such as strategic and organizational flexibility, which is crucial in emerging economies due to the highly volatile institutional environment (Cohen and Levinthal 1990; Lane and Lubatkin 1998; Lane et al. 2001; Uhlenbruck et al. 2003). Central to a firm's absorptive capacity is the assumption that prior, related individual units of knowledge are available within the firm that enhance the acquisition and use of new knowledge (Cohen and Levinthal 1990; Kim 2001). This notion is based on the premise that firms can effectively untangle causalities based on prior activities and draw accurate inferences (Levinthal and March 1993; Levitt and March 1988). This is particularly pertinent in the case of the MNE, for which coordinating, distributing, and using valuable knowledge within its global network of subsidiaries is central to distinctive competency (Roth and Morrison 1992).

Cohen and Levinthal's (1990) original definition of absorptive capacity was added to by Zahra and George (2002) to arrive at the following dimensions...

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