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THE ADVANTAGE OF FOREIGNNESS IN INNOVATION

C. Annique UN

University of South Carolina, Moore School of Business

Sonoco International Business Department

1705 College Street, Columbia, SC 29208 USA

Tel.: 1-803-777-0315, Fax: 1-803-777-3609, [email protected]

Earlier draft of accepted paper for publication at Strategic Management Journal

I thank the Associate Editor Will Mitchell, two anonymous referees, Bjorn Ambos, Alvaro Cuervo-

Cazurra, Yasemin Kor, Kendall Roth, Kat Wilson, and participants of seminars at the Academy of International

Business annual meeting, the Academy of Management annual meeting, and the European International Business

Academy annual meeting for useful suggestions for improvement. The paper received the Copenhagen Prize 2009

for the best paper written by a young scholar in International Business at the European International Business

Academy annual meeting. Funding from the Center for International Business Education and Research and from the

Riegel & Emory Human Resource Research Center, both at the University of South Carolina, is gratefully

acknowledged. All errors are mine.



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THE ADVANTAGE OF FOREIGNNESS IN INNOVATION

I analyze differences in the innovativeness of subsidiaries of foreign multinational enterprises

(MNEs) in comparison to domestic firms competing in the same country. In contrast to studies

that have argued that subsidiaries of foreign MNEs suffer disadvantages in comparison to

domestic firms, I argue that subsidiaries of foreign MNEs enjoy an advantage of foreignness in

innovation, that is, they are more innovative than domestic firms. To explain this I present two

arguments: the subsidy argument and the incentive argument. The subsidy argument proposes

that subsidiaries of foreign MNEs are subsidized in their innovation effort by the MNE, which

results in subsidiaries having more product innovations than domestic firms just because they

belong to a foreign MNE. The incentive argument posits that subsidiaries of foreign MNEs are

subject to unique converging pressures, one at the MNE level in the corporate factor market and

another at the host-country level in the consumer market; these pressures provide an incentive to

use the different manner in which subsidiaries of foreign MNEs manage their employees,

originally intended for better integration with the MNE, to become more successful at

transforming their own research and development investments into product innovations.

Key words: innovation, competitive advantage, R&D, multinational companies, domestic firms



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INTRODUCTION

This study analyzes differences in the innovativeness of subsidiaries of foreign

multinational enterprises (MNEs) in comparison to domestic companies competing in the same

country. Innovation is key for a firm‟s advantage (Christensen and Bower, 1996; Helfat, 2000;

Leiponen, 2008; Leiponen and Helfat, 2010; Teece, Pisano, and Shuen, 1997) because the firm‟s

ability to introduce new products is critical for achieving profitability, market share, market

value, and survival (Banbury and Mitchell, 1995; Cottrell and Nault, 2004; Nerkar and Roberts,

2004). However, despite its importance, we do not know whether there are differences in

innovativeness between subsidiaries of foreign MNEs and domestic companies in the same

country because no empirical tests have been conducted. Understanding such differences is

important to be able to provide managers of each type of firm some guidance regarding their

innovativeness and competitive ability.

More importantly for research, there appear to be two conflicting answers to the question.

On the one hand, a growing body of research that explicitly compares and tests differences

between subsidiaries of foreign MNEs and domestic firms operating in the same country has

argued that subsidiaries of foreign MNEs are at a disadvantage over domestic firms. These

studies propose that subsidiaries of foreign MNEs suffer from a cost of doing business abroad

(Hymer, 1976) or a liability of foreignness (Zaheer, 1995) and, as a result, have lower

profitability, efficiency, and survival than domestic firms (e.g., Miller and Parkhe, 2002; Zaheer,

1995; Zaheer and Mosakowski, 1997; for a review see Cuervo-Cazurra, Maloney and

Manrakhan, 2007). However, this research has not analyzed differences in their innovativeness.

On the other hand, studies of innovation in MNEs assume that subsidiaries of foreign MNEs

have a technological advantage over domestic firms competing in the same country because they



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receive knowledge and technology from the MNE (Bartlett and Ghoshal, 1989; Buckley and

Casson, 1976; Hymer, 1976; Vernon, 1966). Unfortunately, this line of research has not directly

tested this argument. Instead, it has compared innovativeness among research and development

(R&D) laboratories in the MNE, or among different types of subsidiaries (e.g., Frost, Birkinshaw

and Ensign, 2002; Mudambi, Mudambi and Navarra, 2007; Phene and Almeida, 2008).

Therefore, in this paper I contribute to the literature by linking studies of technology

strategy (e.g. Helfat, 1997, Henderson, 1993; Leiponen, 2005; Tripsas, 1997) with ideas from the

application of neo-institutional theory to the study of the MNE (e.g. Kostova and Roth, 2002;

Kostova and Zaheer, 1999; Westney, 1993) in order to propose that subsidiaries of foreign

MNEs have an advantage of foreignness in innovation – that is, they are more innovative than

domestic firms competing in the same country – and explain this by presenting the subsidy

argument and the incentive argument. The subsidy argument proposes that subsidiaries of foreign

MNEs are subsidized in their innovation effort by the MNE. This results in subsidiaries

introducing more product innovations than domestic firms just because they belong to a foreign

MNE; this is an extension of previous arguments. The incentive argument posits that subsidiaries

of foreign MNEs face two sets of unique converging competitive pressures – one at the MNE

level in the corporate factor market and another at the host-country level in the consumer market.

These pressures provide an incentive to use the different manner in which subsidiaries of foreign

MNEs manage their employees, originally conceived for better integration with the MNE, to

become more successful at transforming their own R&D investments into product innovations;

this is a novel idea.

The results of the analysis of a sample of manufacturing firms operating in Spain in

1990-2002 are in line with these arguments. The results indicate that subsidiaries of foreign



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MNEs are more likely to introduce product innovations than domestic firms, as suggested by the

subsidy argument. The results also indicate that R&D investments done by subsidiaries of

foreign MNEs are more likely to result in product innovations, as suggested by the incentive

argument.

These arguments and findings contribute to two streams of research. First, the ideas

extend the application of neo-institutional theory to the study of the MNE. They build on the idea

that a subsidiary of an MNE is subject to pressures from the MNE and from the local

environment. However, in contrast to previous arguments, I argue that these pressures exert

converging rather than diverging influences on the subsidiary‟s behavior. I explain why, at least

in the area of innovation, subsidiaries of foreign MNEs play an active role in differentiating from

rather than imitating domestic firms and other subsidiaries of the MNE. This idea challenges the

isomorphic argument that characterizes neo-institutional theory and highlights how individual

agency can play a role in neo-institutional theory.

Second, they extend studies of technology strategy, in particular analyses of innovation in

the MNE, by directly comparing the innovativeness of subsidiaries of foreign MNEs and

domestic companies operating in the same country, rather than comparing the innovativeness

among subsidiaries of MNEs as previous studies do. The paper proposes that subsidiaries of

foreign MNEs enjoy an advantage of foreignness in innovation, which is explained not only by

the previously-discussed but untested subsidy argument, but also by the incentive argument

introduced here. The incentive argument highlights strategic actions taken by subsidiaries of

foreign MNEs that domestic firms would find difficult or costly to imitate.

The remainder of the paper is organized as follows. In the next section, I briefly

summarize the two research streams upon which I build and then link them to explain why I



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argue that MNE subsidiaries have an advantage of foreignness in innovation. In doing so, I

present two testable hypotheses, one based on the subsidy argument discussed in previous

research and another based on the incentive argument introduced here. I then present the research

design and describe the results of the analyses. I conclude the paper by summarizing the

contributions to theory and practice and suggestions for future research.

THEORETICAL DEVELOPMENT

To explain differences in the innovativeness of subsidiaries of foreign MNEs in

comparison to domestic companies competing in the same country, I integrate two theoretical

streams that have been running mostly in parallel: neo-institutional explanations of the behavior

of subsidiaries of foreign MNEs and technology strategy explanations of innovation. I link the

two lines of research because their viewpoints complement each other in answering the research

question.

Neo-institutional Theory, Subsidiaries of MNEs, and Isomorphic Pressures

Neo-institutional theory has been used to explain the competing pressures faced by

subsidiaries of foreign MNEs. The theory focuses on firms‟ achievement of legitimacy and how

firms deal with three sets of isomorphic pressures (regulatory, normative, and cognitive) that

drive them to imitate each other (Scott, 1995). A subsidiary of a foreign MNE faces two sets of

isomorphic pressures which exert diverging influences (Kostova and Roth, 2002; Kostova and

Zaheer, 1999; Westney, 1993). On the one hand, the host country where the subsidiary operates

pressures it to imitate domestic companies and conform to the conditions of the host

environment. On the other hand, the parent MNE pressures the subsidiary to imitate and conform

to other subsidiaries in the MNE. As a result of the divergence of these pressures, subsidiaries of

foreign MNEs imitate the behaviors of either domestic firms or other subsidiaries in the MNE.



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However, this approach has limitations in its explanation of innovation by firms. It is

focused on explaining how firms imitate an innovator, but not why a firm innovates in the first

place. The theoretical mechanisms are designed to explain isomorphism and diffusion of

practices that increase firms‟ similarity, because the theory‟s core research question is why

organizations tend to be similar (Poole and Van de Ven, 2004). The traditional explanation of

innovation in this theory is that a firm finds itself under a different set of environmental

conditions and has to innovate to achieve consistency with the environment. Once this firm

innovates, other companies imitate such innovations, conforming to the isomorphic pressures to

achieve legitimacy. However, this literature has not compared differences in innovativeness of

subsidiaries of foreign MNEs and domestic firms competing in the same country.

Technology Strategy, Competitive Pressures, and Innovation

The technology strategy literature focuses on identifying the determinants of innovation.

Its key arguments were laid down by Joseph Schumpeter, who proposed the idea of creative

destruction, whereby innovations by new firms will result in the replacement of incumbent

companies (Schumpeter, 1942). This threat of replacement drives incumbent firms to innovate to

ensure their future (Greve, 2003; Tripsas, 1997). Thus, in essence, competitive pressures force

firms to innovate.

However, this line of research has not tested differences in innovation between

subsidiaries of foreign MNEs and domestic firms competing in the same country. Most of the

studies on innovation do not make this distinction, instead focusing on the firm and industry

characteristics that lead firms to innovate (see reviews in Fagerberg, Mowery, and Nelson,

2005). A subset of the literature on innovation in MNEs has focused on innovation in the parent

MNE and its subsidiaries, comparing MNE subsidiaries to one another (e.g., Frost et al., 2002;



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Phene and Almeida, 2008). Related research has argued that the foreign MNE enters the country

because it has a perceived technological advantage over domestic firms (Buckley and Casson,

1976; Vernon, 1966; Zhao, 2006), but has not tested this assertion.

Innovativeness of Subsidiaries of Foreign MNEs in Comparison to Domestic Firms: The

Advantage of Foreignness in Innovation

I propose that subsidiaries of foreign MNEs have an advantage of foreignness in

innovation and explain this with two arguments, the subsidy argument and the incentive

argument. I briefly review the first argument because it has been hinted at in previous literature

and explain in detail the second one because it is new.

However, before discussing the arguments I need to establish some theoretical

boundaries. First, the paper analyzes innovativeness in the form of new products as done in other

research (e.g., Banbury and Mitchell, 1995; Helfat and Raubitschek, 2000; Katila and Ahuja,

2002; Nerkar and Roberts, 2004). The study is not designed to analyze other forms of

innovativeness such as operations, organizational or marketing innovations, or other strategic

actions such as cost efficiencies or marketing campaigns. These actions are important in

contributing to a firm‟s performance and could be done in parallel to product innovation (Ettlie

and Reza, 1992). Second, the study explains the innovativeness of manufacturing firms. It is not

designed to explain the innovativeness of service firms, which follow a different innovation

process (Dougherty, 2004; Leiponen, 2008). It is also not designed to explain the innovativeness

of R&D firms, which differ in their innovativeness because they specialize in undertaking R&D

investments to create new ideas that can then be used by other companies to sell new products

(Ambos and Schlegelmilch, 2007; Cantwell and Mudambi, 2005; Frost et al., 2002). Third, the

paper analyzes differences in the innovativeness of subsidiaries of foreign MNEs and domestic



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firms competing in the same country. Therefore, it will analyze actions that subsidiaries of

foreign MNEs can take and that domestic companies would find difficult or costly to imitate. It

will not discuss actions that both types of companies can take, such as investing more in R&D or

establishing R&D collaborations. Fourth, the study explains differences in innovativeness of

established subsidiaries of foreign MNEs and domestic firms. It is not designed to explain

differences in innovativeness of subsidiaries of foreign MNEs that have just entered the host

country, because these are likely to innovate only through the transfer of innovations from the

MNE. Once subsidiaries of foreign MNEs are established in the host country, they develop local

capabilities and can create their own innovations (Bartlett and Ghoshal, 1986; Birkinshaw and

Hood, 1998; see Enright and Subramanian, 2007, and Dimitratos et al., 2009 for reviews of

subsidiary types and evolution). Fifth, the study compares two types of firms, subsidiaries of

foreign MNEs and domestic firms. It does not discuss differences among the types of

subsidiaries of foreign MNEs or the roles they play in the MNE (e.g., Bartlett and Ghoshal,

1986; Ferdows, 1997) and how these affect their innovativeness.

Subsidy argument: Advantage of foreignness in innovation through the transfer of

product innovations from other parts of the MNE. The subsidy argument indicates that

subsidiaries of foreign MNEs are more innovative than domestic firms because they receive

product innovations from the MNE; thus, their innovations are subsidized by the MNE.

Subsidiaries of foreign MNEs benefit from being part of the MNE because they can

receive technology and innovations developed elsewhere in the MNE. Initial discussions of the

existence of MNEs proposed that subsidiaries of foreign MNEs have to enjoy some superiority

over domestic firms; otherwise, the MNE would not enter the country (e.g., Buckley and Casson,

1976; Hymer, 1976; Vernon, 1966). More recent research has refined these arguments,



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explaining how MNEs achieve an advantage in creating and transferring knowledge and

innovations across countries. One stream of research proposes that some subsidiaries of MNEs

focus on developing innovations that other subsidiaries and the parent MNE can use. For

example, Kuemmerle (1997) proposes that MNEs have dispersed their R&D centers across the

world to undertake research or development of new products that are later transferred to other

subsidiaries. Ferdows (1997) suggests that some manufacturing plants of the MNEs can become

lead factories that generate innovations for themselves as well as for other factories. Birkinshaw

(2001) discusses how some subsidiaries can develop the initiative to become centers of

excellence and provide innovations to other subsidiaries. Vereecke, Van Dierdonck, and De

Meyer (2006) propose that certain plants can act as centers of excellence, providing knowledge

and expertise to other plants. Another stream of research analyzes the mechanisms that enable

the MNE to transfer these innovations and other knowledge among subsidiaries in the MNE. For

example, Bartlett and Ghoshal (1989) and Ghoshal and Bartlett (1990) propose methods to

organize the MNE and manage people in order to facilitate the transfer of knowledge among

subsidiaries. Kogut and Zander (1993) explain the conditions that enable MNEs to become better

than markets at transferring knowledge across countries.

Extending this line of thinking to the research question analyzed in this paper, I suggest

that a subsidiary of a foreign MNE is more innovative than a domestic firm competing in the

same country because it is subsidized in its innovation effort. Other subsidiaries in the MNE,

especially specialized R&D subsidiaries that focus on generating innovations, create new

products that are transferred to the subsidiary of the foreign MNE in the host country. Thus, this

subsidiary is able to introduce new products in the host country without needing to undertake its

own R&D to generate them. In this sense, the subsidiary is being subsidized in its product



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innovations because the costs of developing the new products are borne by other subsidiaries of

the MNE. As a result, the subsidiary of the MNE can become more innovative than a domestic

firm just by being part of a foreign MNE; in the extreme, it could introduce new products in the

host country without undertaking any R&D investment on its own, relying instead on R&D

investment undertaken elsewhere in the MNE.

Domestic firms would find it difficult and costly to imitate this source of innovation

advantage. MNEs use external mechanisms such as the patent system and internal mechanisms

such as systemic complexity and causal ambiguity to actively protect their technologies and

innovations from imitation (Frost and Zhou, 2005; Levin, Cohen and Mowery, 1985; Zhao,

2006). To replicate this innovation advantage, domestic firms would have to become MNEs

themselves and establish multiple operations abroad to generate product innovations that are then

transferred back to the firm, but becoming an MNE is very costly and difficult to undertake

(Cuervo-Cazurra et al., 2007).

In sum, the subsidy argument proposes that subsidiaries of foreign MNEs are more

innovative than domestic firms just because they are part of the MNE. They are subsidized in

their innovation efforts because they receive product innovations developed by other subsidiaries

of the MNE located in other countries. These arguments, which extend previous arguments that

had not been empirically tested, support the following hypothesis:

Hypothesis 1. Among firms competing in the same country, subsidiaries of foreign MNEs have

more product innovations than domestic firms.

Incentive argument: Advantage of foreignness in innovation through the management

of personnel to achieve higher success in transforming R&D investments into product

innovations. The incentive argument I introduce in this paper proposes that subsidiaries of



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foreign MNEs are more innovative than domestic firms because they are subject to unique

converging pressures that drive them to use the way in which they manage personnel, originally

intended for better integration with the MNE, to become more successful at transforming their

own R&D investments into innovations; in other words, subsidiaries of foreign MNEs have a

unique incentive to innovate.

Subsidiaries of foreign MNEs face two sets of pressures that domestic firms operating in

the same country do not face. One set of pressures is at the MNE level in the corporate factor

market, in which they face competition from other subsidiaries in the MNE for headquarters‟

support. Another set of pressures is at the host-country level in the consumer market, in which

they face discrimination by consumers. In contrast to previous neo-institutional arguments that

have argued for a divergence of the effects of these two sets of pressures that result in

subsidiaries of foreign MNEs either imitating domestic competitors or other subsidiaries in the

MNE (Kostova and Zaheer, 1999), I argue that in the realm of innovation they exert converging

influences that drive subsidiaries of foreign MNEs to focus on innovation to differentiate

themselves from both domestic competitors and other subsidiaries in the MNE.

First, a subsidiary of a foreign MNE is in competition with other subsidiaries within the

MNE for support from the parent; this competition drives it to innovate. Although MNEs

manage their subsidiaries differently depending on the strategy and coordination of operations

they follow (Bartlett and Ghoshal, 1989), subsidiaries tend to be in competition with each other

for support from the parent MNE because they fulfill different roles in the network of operations

(Bartlett and Ghoshal, 1986; Ghoshal and Bartlett, 1990). The parent MNE may accept poor

performance at the beginning of operations in the foreign market, but over time it expects the

subsidiary to develop its capabilities, meet its mandate, and perform (Birkinshaw, 1996;



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Ferdows, 1997). Based on the level of capabilities, the subsidiary can keep its current charter to

operate, gain a new one, or lose it to another subsidiary (Birkinshaw and Hood, 1998). A

subsidiary that contributes to the MNE‟s overall competitiveness rises in importance within the

MNE and receives additional resources and status, while another subsidiary that does not

contribute gets reduced recognition and support (Bouquet and Birkinshaw, 2008; Frost et al.,

2002; Vereecke et al., 2006) and may be even closed (Benito, 1997). Thus, to deal with this

pressure within the MNE and become better than other subsidiaries, the subsidiary of the foreign

MNE can focus on innovating and introducing new products. New products can easily improve

the subsidiary's relative position in the network of subsidiaries within the MNE because these

new products can be used in other countries, contributing to the overall competitiveness of the

MNE, thus making the subsidiary that generates the new products relatively more valuable than

others. At the same time, this focus on product innovation in response to pressures within the

MNE results in the subsidiary of the foreign MNE becoming not only more innovative than other

subsidiaries in the MNE, but also more innovative than domestic firms, which are not subject to

such pressures.

Second, subsidiaries of foreign MNEs face pressures in the host country that domestic

firms do not face in the form of customer discrimination of foreign products; these pressures

drive subsidiaries of foreign MNEs to innovate their products to compensate for the

discrimination. Although all firms in the host country face pressures to innovate for fear of being

replaced by competitors (Ceccagnoli, 2009; Christensen and Bower, 1996; Schumpeter, 1942;

Tripsas, 1997), subsidiaries of foreign MNEs face additional pressures that domestic competitors

do not encounter because consumers tend to be biased against foreign products (Bilkey and Nes,

1982; Jaffe and Nebenzahl, 2001; Verlegh, 2007). Negative feelings towards foreign products



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can arise because consumers consider it wrong, almost immoral, to buy foreign products (Shimp

and Sharma, 1987), have animosity toward a country (Shoham et al., 2006), or think products

from certain countries are inferior regardless of their actual quality (Elliott and Cameron, 1994).

Moreover, domestic firms can build on consumers‟ nationalism and reinforce their biases against

purchasing products from foreign firms (Shoham et al., 2006). One way the subsidiary of the

foreign MNE can overcome such discrimination is by innovating its products and providing

customers with more innovative products than those offered by domestic competitors. Such

innovative products can compensate for the negative feelings against foreign products by

providing better quality-price relationships than products offered by domestic firms. To convince

customers, the subsidiary can highlight the innovation superiority with marketing campaigns to

reduce negative perceptions about being foreign (Suzuki, 1980). Thus, this discrimination creates

in the subsidiary of the foreign MNE an additional incentive to focus on innovation1.

To respond to these pressures and innovate, the subsidiary of the foreign MNE can use

the different way in which it already manages its employees to become more successful than

domestic firms in transforming R&D investments into product innovations. Subsidiaries of

foreign MNEs and domestic firms share many management practices, for example, vacation time

or minimum wages that complies with customs and labor laws in the host country. However,

subsidiaries of foreign MNEs use some different management practices because they need to

facilitate the integration of their employees with other parts of the MNE (Nohria and Ghoshal,

1

These two arguments depend on two assumptions. The first assumption is that the parent MNE rewardsinnovation in subsidiaries. This tends to hold for subsidiaries operating in developed countries, because the parent

MNE may expect them to generate innovations to meet the needs of more sophisticated consumers there and also

serve as sources of innovations for other subsidiaries (Bartlett and Ghoshal, 1989). The second assumption is that

host-country consumers discriminate against foreign products. This also tends to hold for subsidiaries operating in

developed countries. Consumer bias against foreign products there tends to be based more strongly on consumer

ethnocentrism and national identification (Verlegh, 2007). The two assumptions may hold less well in developing

countries. The parent MNE may consider the subsidiary there not up to par with subsidiaries in developed countries,

and consumers there may prefer foreign products from the developed countries over domestic ones because they are

viewed as technologically superior.



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1997; Fey and Furu, 2008). These different management practices, although not initially

implemented to achieve innovation, are nevertheless useful for it because they provide

employees with the mindsets needed for integrating knowledge from different sources that

facilitates innovation. Two sets of such management practices are particularly useful for

achieving higher success in transforming R&D into product innovations: the selection of

employees with an understanding of foreign knowledge, and the development of employees to

have foreign knowledge and challenge local assumptions.

First, the subsidiary of the foreign MNE tends to select employees that have a better

appreciation and understanding of foreign knowledge; this is also useful for product innovations.

Since the employees are working for a foreign MNE, the subsidiary selects them based on their

existing ability to work for a foreign MNE and openness to foreign ideas and knowledge about

foreign countries (Hsieh, Lavoie and Samek, 1999; Kedia and Mukherji, 1999). Employees that

have foreign language abilities can more easily communicate with headquarters and other

subsidiaries (Buckley et al., 2005). Those that are more open to foreign ideas can more easily

adapt to management systems and practices that have been developed in another country (Hsieh

et al., 1999). This method of selecting employees with the openness and ability to work in the

MNE can help the subsidiary of the foreign MNE achieve higher success in its innovation effort

because the employees have better mindsets toward acquiring and integrating diverse knowledge.

They are more aware of the existence and importance of differences in sources of knowledge and

have the attitude that good ideas can come from many alternative places beyond the local

environment. Thus, in response to the pressures and associated incentives to innovate, employees

of subsidiaries of foreign MNEs can more easily search widely for unconventional ideas that can

be useful for transforming R&D investments into innovative products.



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Second, the subsidiary of the foreign MNE tends to develop employees to learn about

foreign ideas and knowledge, which is also useful for innovation. Exchanges of personnel across

subsidiaries help subsidiaries of foreign MNEs build relationships with each other (Nohria and

Ghoshal, 1997). As part of the development process of new employees in the MNE, they are

rotated through subsidiaries in several countries to learn about the various operations in the MNE

(Kedia and Mukherji, 1999). Employees are also given work experiences in the country of the

parent company as well as in other subsidiaries‟ countries (Hsieh et al., 1999), and are involved

in the product development process of other subsidiaries (Hansen, 1999; Subramaniam and

Venkatraman, 2001). These same development practices are useful for innovating products. They

result in employees having direct access to new ideas and concepts from other countries,

becoming more curious about and open to new and useful ideas, and being more mentally ready

to look for and accept novel insights from unfamiliar sources, all of which is useful for

innovation. Moreover, to be able to understand the knowledge transferred from other parts of the

MNE, the subsidiary of the foreign MNE develops employees to challenge the assumptions of

the local environment (Simonin and Ozsomer, 2009; Vance and Paik, 2005); which is useful for

innovating products. By decontextualizing knowledge from its environment, employees of the

subsidiary of the foreign MNE can understand the capabilities of the subsidiary and its

competitive advantage separate from the conditions of its country of origin and the local

conditions. These employees will question how and why things are done in the country, realizing

opportunities for new products that employees of domestic firms will not be able to do because

they take for granted the conditions of the local environment. Thus, such development of

employees can help the subsidiary of the foreign MNE become more successful than domestic

firms in transforming R&D investments into innovations.



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It is costly and difficult for domestic competitors to imitate these management practices.

Domestic firms select and develop their employees differently from subsidiaries of foreign

MNEs because they do not need to connect their firms with a parent MNE and other subsidiaries

abroad. Although domestic competitors could select and develop their employees to integrate

knowledge from different sources and question assumptions, such selection and development of

employees would be costly because it requires the domestic firm to undertake a specific

investment for innovation. In contrast, the subsidiary of the foreign MNE selects and develops its

employees in this way as part of the management practices it uses to facilitate integration with

other parts of the MNE. Additionally, it is difficult for domestic firms to imitate the management

practices of subsidiaries of foreign MNEs. The establishment of a different employee

management system may clash with the established employee management system and the

organizational reality of the domestic company, creating tensions and problems in its operations.

Moreover, questioning the assumptions of the local environment requires employees to have a

point of comparison. After all, assumptions are taken for granted and not challenged until the

employees face conditions under which such assumptions are put into question. Such a point of

comparison is missing for most domestic companies whose main market and point of reference is

the home country.

In sum, the incentive argument posits that subsidiaries of foreign MNEs are more

successful at transforming their own R&D investments into innovations than domestic firms

competing in the same country. The unique converging pressures subsidiaries of foreign MNEs

face provide them with an additional incentive to innovate, while the way they manage their

employees, originally intended for better integration with the MNE, enable them to achieve



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higher success in transforming R&D investments into innovation. These arguments can be

summarized in the following hypothesis:

Hypothesis 2. Among firms competing in the same country, R&D investments of subsidiaries of

foreign MNEs have a higher positive impact on product innovations than R&D investments of

domestic firms.

RESEARCH DESIGN

Sample

I test the hypotheses on a sample of manufacturing firms operating in Spain. Data come

from a survey of manufacturing firms operating in the country and were collected by the SEPI

Foundation in collaboration with the Ministry of Industry, Tourism and Commerce. The survey

asks about the strategies and operations of manufacturing firm operating in Spain. The database

has been used in other studies to analyze diversification (e.g., Merino and Rodriguez, 1997),

internationalization (e.g., Salomon and Shaver, 2005), and R&D investment (e.g., Cuervo-

Cazurra and Un, 2007). However, it has not been used to analyze differences in the

innovativeness of subsidiaries of foreign MNEs and domestic firms.

Complete data are available for 761 firms over a period of 13 years, from 1990 to 2002.

All firms operate in manufacturing industries, in codes 15 through 37 of the CNAE, the Spanish

equivalent of the SIC classification. These include food, beverages, textiles, leather, shoes,

apparel, wood, paper, construction materials, chemicals, plastics, metallurgy, machinery,

computers, electronic products, automobiles, other transportation equipment, and precision

instruments. This sample is representative of the underlying population of firms in

manufacturing industries in the country. The sample includes firms dispersed throughout the

country and includes small, medium-sized, and large firms. Subsidiaries of foreign MNEs and



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domestic companies are present in all industries except leather manufacturing, where all firms in

the sample are domestic companies. As a robustness check I ran analyses excluding firms in the

leather industry from the sample and found that the results support similar conclusions to the

ones presented below.

Restricting the analysis to manufacturing firms in Spain helps me evaluate the hypotheses

and reduces the influence of the differing innovative behavior of R&D facilities and service

firms. The sample does not include firms that focus exclusively on R&D because the SEPI

Foundation only samples manufacturing firms. R&D laboratories of MNEs are highly

specialized subsidiaries whose nature and behavior differs from that of other subsidiaries

(Cantwell and Mudambi, 2005; Frost et al., 2002). Domestic R&D laboratories also differ in

behavior from manufacturing firms because their focus is generating innovation, not producing

for the market. At the same time, it is not fully clear how R&D laboratories would bias the

results. R&D subsidiaries would have higher levels of R&D investments but at the same time

higher numbers of product innovations; the objectives of these subsidiaries is to invest in R&D

to generate innovations. Moreover, R&D subsidiaries tend to be very few in numbers in

comparison to the overall population of firms (Belderbos, 2003) and thus are unlikely to affect

the general trends found. To ensure this, I ran robustness tests in which I deleted outliers in R&D

investments from the sample and found that the results of such analyses support the same

conclusions found with the results presented below. For the same reason, I do not include service

firms, whose development of innovative capabilities is typically done at the same time as the

undertaking of activities (Dougherty, 2004). Again, it is not fully clear how service firms would

bias the results, because these companies have fewer formal investments in R&D but also fewer

product innovations because many of their innovations are process innovations.



20

Spain is a suitable location for conducting the empirical test. Although it is a developed

country, it is neither at the forefront of technological development nor at the bottom (OECD,

2009). Thus, subsidiaries of foreign MNEs can still benefit from technologies developed

elsewhere, and at the same time can benefit from developing new products in Spain; this

provides a natural laboratory for testing the hypotheses. If the country analyzed is at the forefront

of technological development, subsidiaries of foreign MNEs may not be able to benefit from the

transfer of innovations and instead may have to focus on R&D investments to develop

innovations for the market. If the country analyzed is at the bottom of technological

development, subsidiaries of foreign MNEs may be able to rely on their parent companies for

innovation and not need to develop their own product innovations to become more innovative

than domestic firms.

Variables and Measures

Table 1 summarizes the variables and measures used in this study. The dependent

variable is the number of new products introduced by the firm in Spain in the year. This is

measured by a question that asks managers to answer whether during the year their firm has

introduced product innovations in the market, defined as completely new products or product

that have changes so significant as to make them different from the ones that were produced

before, and if this was the case to indicate the number of products. Measuring firm

innovativeness in terms of new products has been used in other studies (e.g., Banbury and

Mitchell, 1995; Cottrell and Nault, 2004; Katila and Ahuja, 2002; Nerkar and Roberts, 2004;

Subramaniam and Venkatraman, 2001). This measure is particularly appropriate in this paper

because the main purpose of manufacturing firms is to make and sell products as they compete

with each other primarily on this basis (Cottrell and Nault, 2004; Nerkar and Roberts, 2004). The



21

number of new products, as well as all other measures, is at the level of the firm operating in

Spain, that is, a subsidiary of a foreign MNE or a domestic firm. This ensures agreement in level

of analysis between theory and empirical analysis and enables the comparison of the behavior of

subsidiaries of foreign MNEs and domestic firms.

To test Hypothesis 1, which proposes that subsidiaries of foreign MNEs are more

innovative than domestic firms just because they are part of the MNE, I created a variable called

“subsidiary of foreign MNE.” This variable is measured with an indicator that takes a value of 1

if the firm has a foreign company as owner of some or all of its stock and 0 otherwise. In using

this measure I follow previous literature on the liability of foreignness such as Mezias (2002)

who analyzes how being a subsidiary of a foreign MNE results in differences in the number of

labor lawsuits in the United States, Elango (2009) who analyzes how being a subsidiary of a

foreign MNE results in differences in performance among insurance firms also operating in the

United States, and Lu and Hwang (2010) who analyze how being a subsidiary of a foreign MNE

results in differences in deal sources among venture capital firms operating in Singapore. This

literature uses an indicator of whether the firm is a subsidiary of a foreign MNE or not in

multivariate analyses that test for differences in the behavior of subsidiaries of foreign MNEs

and domestic firms competing in the same country2.

To test Hypothesis 2, which argues that subsidiaries of foreign MNEs are more

innovative than domestic firms because they are more successful in converting their own R&D

investments into product innovations, I use the interaction between the indicator of being a

2 An alternative method to identify a liability of foreignness is the test of differences in means between a

group of subsidiaries of foreign MNEs and a group of domestic firms, such as differences in mean performance

(Zaheer, 1995), mean exit (Zaheer and Mosakowski, 1997; Kronborg and Thomsen, 2009), or mean efficiency

(Miller and Parkhe, 2002). However, this approach has a major limitation in that it does not allow to control for

other factors that may explain differences in behavior beyond foreignness, unless one uses a matched sample as

Kronborg and Thomsen (2009) do.



22

subsidiary of a foreign MNE and the variable R&D investments. The variable “R&D

investments” is measured as the ratio of total expenditures in R&D to sales, multiplied by one

thousand. This measure of R&D investment follows other studies of R&D investment as a

determinant of innovative capabilities of subsidiaries of foreign MNEs (e.g., Belderbos, 2003;

Cantwell and Mudambi, 2005) and of firms in general (e.g., Cohen, Levin and Mowery, 1987;

Greve, 2003). I use per thousand rather than percentage to increases the magnitude of the

coefficients, making them easier to interpret; this does alter their statistical significance. There

are no differences in how domestic firms and subsidiaries of foreign MNEs report their R&D

expenditures.

*** Insert Table 1 about here ***

I control for other determinants of product innovation that are commonly discussed in the

literature. I group these controls under several headings that reflect alternative explanations.

First, I control for firm resources because a firm‟s resource bundle affects its innovation.

Thus, I control for the amount invested in R&D. This captures the impact that R&D investments

have on innovation independent of the type of firm that undertakes the R&D (Greve, 2003;

Helfat, 1997; Leiponen, 2005). Moreover, I control for the employees‟ skills because companies

with more skilled employees may be able to achieve higher levels of innovation (Leiponen,

2005). Following previous studies, employee skill level is measured by the percentage of

employees with a university or technical college degree. Additionally, I control for firm size

because larger firms are likely to have more complementary resources that support innovation

(Greve, 2003; Katila and Ahuja, 2002; Schumpeter, 1942). Size is measured using the value of

total sales in millions of euros.



23

Second, I control for the type of firm because different types of domestic firms have

access to different knowledge sources that may affect innovation. Therefore, I control for

whether or not the domestic firm is a division of another domestic company because such firm

may receive technologies from the parent firm that make them more innovative (Galunic and

Eisenhardt, 2001). Division of domestic firms is measured using an indicator that takes a value

of 1 if the domestic firm has another domestic company as owner of some or all of the stock and

does not have a foreign firm as an owner of stock, and 0 if it does not, that is, if it is an

independent domestic firm. Additionally, I control for whether the domestic firm is an MNE with

operations outside Spain because by being an MNE it may benefit from access to foreign

technology that facilitates innovation (Subramanian and Venkatraman, 2001). I measure this

with an indicator that takes a value of 1 if the firm has employees outside Spain and does not

have a foreign firm as owner of its stock.

Third, I control for firm scope because the presence of a firm in different industries or

locations provides it with knowledge that affects innovation. Therefore, I control for the level of

diversification of the firm because diversified firms may develop the ability to integrate

knowledge from different industries and thus become more innovative (Garcia-Vega, 2006). I

measure the degree of diversification with an indicator that the main business line represents less

than 70% of sales (Rumelt, 1974); unfortunately, to ensure firm anonymity the database does not

have more precise measures of diversification. Moreover, I control for the number of production

and non-production facilities of the firm because a company with more facilities may be able to

access a wider variety of knowledge (Contractor, Kundu and Hsu, 2003). I use the term facility

to refer to operations of the firm that are geographically separate but belong to the same

company; these can be production facilities of the firm such as manufacturing plants as well as



24

non-production facilities such as administrative offices, design centers, or sales offices.

Additionally, I control for the facilities of the firm outside Spain because such facilities may

enable the firm to obtain a wide variety of knowledge and innovations (Bartlett and Ghoshal,

1989). I measure this with an indicator of the number of firms outside Spain in which the firm

has a share of stock. I lack more precise indicators of the characteristics of the facilities in Spain

or abroad.

Fourth, I control for competition because this affects innovation; higher competition

drives firms to innovate (Schumpeter, 1942). I measure the degree of competition indirectly with

two measures: an indicator of the number of competitors, and an indicator of the percentage of

the industry controlled by the largest four firms. Moreover, I control for the geography of the

competitive market because this affect innovation (Crevoisier, 2004). Firms operating in smaller

competitive markets may be shielded from competitive pressures and thus be less likely to

innovate. I measure this with indicators of the geography of the competitive market (provincial,

regional, Spanish, foreign, or Spain and foreign). Additionally, I control for industry because

other industry characteristics such as appropriability and technological opportunities influence

innovative effort (Levin, Cohen and Mowery, 1985). I include an indicator for each industry at

the two-digit CNAE level, the Spanish equivalent of the SIC codes.

Fifth, I control for other influences on innovation. Therefore, I control for year using an

indicator for the year of study because annual effects may affect the rate of innovation.

Moreover, I control for other unobserved firm characteristics with a random effects model. A

fixed effect model is not appropriate because time-invariant variables and firms with no

innovations in the period would drop out of the analyses.

Methods of Analysis



25

Since the dependent variable is the number of product innovations introduced in the year,

I use a negative binomial model, which is appropriate for count data with an overdispersion of

zeroes. I lag the independent and control variables one year because there is a lag of at least one

year between investments made for innovations and their market introductions (e.g., Grupp et al.,

1990; Katila and Ahuja, 2002). The model used is the following:

Number of product innovations introduced it = β 0 + β 1 * Subsidiary of foreign MNE it-1 + β 2 *

Subsidiary of foreign MNE it-1 * R&D investment it-1 + β 3 * R&D investment it-1 + β 4 * Skilled

employees it-1 + β 5 * Division of domestic firm it-1 + β 6 * Domestic MNE it-1 + β 7 * Size it-1 +

β 8 * Diversification it-1 + β 9 * Number of production facilities in Spain it-1 + β 10 * Number of

non-production facilities in Spain it-1 + β 11 * Number of firms controlled abroad it-1 + β 12 *

Number of competitors it-1 + β 13 * Concentration of competition it-1 + β 14 * Provincial market it-1

+ β 15 * Regional market it-1 + β 16 * Spanish market it-1+ β 17 * Foreign market it-1+ β 18 *

Spanish and foreign market it-1+ β j * Industry j + β k * Year k + ε

To test Hypothesis 1, the coefficient of interest is β 1. A positive and statistically

significant coefficient would provide support for Hypothesis 1, that a subsidiary of foreign MNE

introduces more product innovations than domestic firms because it is part of a foreign MNE. To

test Hypothesis 2, the coefficient of interest is β 2. A positive and statistically significant

coefficient would provide support for Hypothesis 2, that subsidiaries of foreign MNEs are more

successful at transforming their R&D investment into product innovation introductions than

domestic firms. This identification strategy of Hypothesis 2 relies on a strong assumption of

monotonicity in the subsidy benefits as a subsidiary. Non-monotonic relationships in the

subsidies received by the subsidiary of the foreign MNE may result in higher levels of product

innovation introduced through the interaction coefficient.



27

parts of the MNE. Thus, previous untested claims about the technological superiority of

subsidiaries of foreign firms (Buckley and Casson, 1976; Vernon, 1966) are supported in the

realm of product innovation.

The results also support Hypothesis 2. The coefficient of the interaction term between the

variables „subsidiary‟ and „R&D investment‟ is positive and statistically significant. Interpreting

the results of Model 3c in terms of economic significance reveals that an increase of 1 percent of

R&D investment over sales by a subsidiary generates 0.04 new products more than a domestic

firm would achieve, everything else being equal, taking into account that R&D investment over

sales was measured as a per thousand rather than per cent. These results suggest that subsidiaries

are more successful in transforming their R&D investments into innovations than domestic

firms. These findings support the incentive argument, introduced in this paper, that competitive

pressures from domestic producers in the consumer market and from other subsidiaries in the

MNE in the corporate factor market drive subsidiaries to focus on innovation and use the

different manner in which they manage their employees to achieve higher success in the

transformation of their R&D investments into new products.

*** Insert Table 3 about here ***

The test of differences in model fit indicates that the inclusion of the interaction effect

results in a significant improvement over the baseline model (Model 3c), whereas the inclusion

of the direct effect is only a marginal improvement (Model 3b). From this analysis one can

conclude that the main driver of differences in innovation between subsidiaries of foreign MNEs

and domestic firms, in this sample, comes from the innovation effort of the subsidiaries rather

than the innovation transferred from the MNE. Figure 1 illustrates the effects. This is likely a

reflection of one of the boundaries of the analysis discussed, that is, the level of development of



28

the country. As Spain is a developed country, the number of foreign products that can be

considered innovative are relatively limited, while the technological infrastructure of the country

is relatively well developed and thus subsidiaries of foreign MNEs can use it to become highly

innovative.

*** Insert Figure 1 here ***

These findings are important. Manufacturing subsidiaries of foreign MNEs are not

merely passive recipients of innovations from other parts of the MNE, as previous research

appeared to suggest, but are active innovators on their own merit, and are actually more

successful innovators than domestic firms. Moreover, in contrast to previous studies that argue

that subsidiaries of foreign MNEs face diverging pressures and have to imitate the behaviors of

either local competitors or other subsidiaries in the MNE to achieve legitimacy (e.g., Kostova

and Roth, 2002; Kostova and Zaheer, 1999; Westney, 1993; Zaheer, 1995), this paper finds

support for the idea that, in the realm of innovation, these pressures exert converging influences,

driving subsidiaries of foreign MNEs to differentiate themselves from both the domestic firms

and other subsidiaries in the MNE.

CONCLUSIONS

This study explains differences in the innovativeness of subsidiaries of foreign MNEs in

comparison to domestic companies competing in the same country. In contrast to some literature

that argues that subsidiaries of foreign MNEs are at a disadvantage in comparison to domestic

firms, I argue that subsidiaries of foreign MNEs have an advantage of foreignness in innovation,

which I explain using two arguments: the subsidy argument proposes that subsidiaries of foreign

MNEs receive innovations from other parts of the MNE, while the incentive argument posits that



30

but not tested (e.g. Buckley and Casson, 1976; Vernon, 1966; Zhao, 2006), but also active

developers, reacting to distinct pressures and using the different manner in which they manage

employees to become more successful in their innovation efforts. Thus, future studies of

innovation in MNEs need to focus on separating these effects on the innovativeness of

subsidiaries.

Second, these arguments add depth to the idea that innovation is primarily driven by

competitive pressures (Greve, 2003; Helfat and Raubitschek, 2000; Tripsas, 1997). The

arguments presented here explain that pressures for firms to innovate vary depending on the type

of firm. In addition to the competitive pressures that subsidiaries of foreign MNEs and domestic

firms share, subsidiaries of foreign MNEs face unique pressures that induced them to focus more

on innovation. Thus, future studies of the impact of competition on innovation need to take into

account the existence of pressures that are unique to certain types of firms.

Third, the arguments add depth to the idea that R&D investments have a positive

relationship with innovations (e.g., Cohen and Levinthal, 1989; Greve, 2003; Helfat, 1997) by

explaining that the relationship between R&D investments and innovations varies across firms.

Whereas there is a general positive impact of R&D investments on innovation, this impact varies

across types of firms. The management practices that subsidiaries of foreign MNEs use to

integrate and coordinate with other parts of the MNE enable them to be more successful at

transforming their R&D investments into innovation. Thus, future studies of R&D investments

need to take into account how different management systems, even when they are not created

with innovation in mind, can better support success in R&D efforts.

Managers of subsidiaries of foreign MNEs can benefit from the arguments presented in

this study. In contrast to the idea that subsidiaries of foreign firms suffer from a liability of



31

foreignness that puts them at a disadvantage in comparison to domestic firms, the study argues

that subsidiaries of foreign firms enjoy an advantage of foreignness in innovation. This

advantage of foreignness is not only the result of passively receiving innovations from other

parts of the MNE, as previous studies suggest, but also the result of actively undertaking R&D

investment to generate innovations. To accomplish this, managers need to invest in R&D and

also build on the management practices established to facilitate the integration of the subsidiary

with the rest of the MNE. These practices are useful not only for integrating the subsidiary, but

also for achieving higher success in the transformation of R&D investments into innovation than

domestic firms. Thus, reticence about developing employees through work experiences in other

countries or through language or cultural training should be cast aside. Although such

development may not appear to have a direct return on the subsidiary and instead may appear to

merely facilitate control from headquarters, it can actually have an indirect return in the form of

achieving higher success in innovation in the subsidiary. Such innovation would help the

subsidiary compete not only against domestic companies in the host country, but also against

other subsidiaries for support and charters from the parent company.

Despite the strength of the research design, the analyses have some limitations which

future studies can address. First, I do not directly measure the mechanisms discussed, evaluate

the degree of innovativeness of the products, separate innovations received from the parent firm

and innovations developed by the subsidiary, assess the degree of competitive pressures in

consumer and corporate factor markets, or measure differences in the types of subsidiaries.

Instead, I assume that I capture these influences indirectly with the variables and controls and

thus can generalize beyond the specific sample. Second, the arguments can be generalized to

other countries with similar levels of development. I view the assumptions underlying the



32

incentive argument as holding in Spain given that it is a developed country with relatively good

technological development. Hence, innovations coming from Spain may be more likely accepted

by the parent MNE, while consumers in Spain may not always prefer goods produced abroad.

These assumptions and argument are likely to hold in other developed countries. They may not

generalize well to developing countries because parent MNEs may not accept innovations

coming from developing countries, or consumers in developing countries may prefer goods from

developed countries. Nevertheless, in developing countries the subsidy argument may become

more relevant as domestic firms may not be able to match the innovativeness of products

transferred from developed countries. Third, the arguments assume that innovations can be

transferred and used across countries, which tends to be the case for most firms. However,

innovations in culturally-sensitive products tend to transfer poorly across countries. In such cases

the subsidy argument may have more limited applicability but the incentive argument may

become more relevant.

In sum, the study contributes to a better understanding of differences between

subsidiaries of foreign MNEs and domestic firms competing in the same country, arguing and

explaining that subsidiaries of foreign MNEs have an advantage of foreignness in innovation that

is the result of not only being part of an MNE but of the subsidiary‟s ability to generate its own

innovations. This is an important insight that is useful not only for studies of technology and of

the MNE, but also for managers. Future studies can follow this lead and go deeper into

understanding other advantages and disadvantages that subsidiaries of MNEs have in comparison

to domestic firms.



33

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341-363.Zhao M. 2006. Conducting R&D in countries with weak intellectual property rights protection.

Management Science, 52(8): 1185-1199.



38

TABLE 1

Variables and measures

Types of

variable

Variables Measures

Dependent

variable

Number of product

innovations

Number of new products introduced in the market in the year

Independent

variables

Subsidiary Bivariate indicator that the firm has a foreign company as owner of

some or all of the stock

R&D investment Total R&D expenditures divided by sales and multiplied by 1,000,

measured at the level of the domestic firm or at the level of the

subsidiary of the foreign MNE, not at the level of the parent firm

Skilled employees Number of employees with a university or technical college degree

divided by total number of employees and multiplied by 100

Size Value of total sales in millions of euros

Domestic MNE Bivariate indicator that the firm has value-added operations outside

Spain and does not have a foreign firm as owner of stock

Division of domestic

firm

Bivariate indicator that the firm has another domestic company as

owner of some or all of the stock and does not have a foreign firm asowner of stock

Domestic production

facilities

Number of geographically separate production facilities in Spain

besides the main facility

Domestic non-

production facilities

Number of geographically separate non-production facilities (e.g.,

sales offices, headquarters, warehouses…) in Spain besides the main

facility

Controls Foreign facilities Number of companies outside Spain in which the firm owns stock

Diversified firm Bivariate indicator that the main business line represents less than 70

percent of sales

Number of competitors Number of competitors in the industry: 1 if less than 10 competitors, 2

if between 10 and 25 competitors, 3 if more than 25 competitors

Concentration of

competition

Percentage of the industry controlled by the largest four firms

Provincial market Bivariate indicator that the geographic area of the competitive market

is the province

Regional market Bivariate indicator that the geographic area of the competitive market

is the region

Spanish market Bivariate indicator that the geographic area of the competitive market

is the Spain

Foreign market Bivariate indicator that the geographic area of the competitive market

is outside Spain

Spanish and foreign

market

Bivariate indicator that the geographic area of the competitive market

is Spain and outside Spain

Industry Bivariate indicators of the industry of the firm‟s main activity at the 2-

digit level

Year Bivariate indicators of the year



39

TABLE 2

Descriptive statistics and correlation matrix

Mean Std dev 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

1. Number of product innovations 1.547 5.722 1.000

2. Subsidiary 0.207 0.405 0.047

***

1.000

3. R&D investment 6.792 22.741 0.048

***

0.079

***

1.000

4. Skilled employees 8.491 15.948 0.013 0.126

***

0.149

***

1.000

5. Size 5.074 11.999 0.065

***

0.297

***

0.154

***

0.116

***

1.000

6. Division of domestic firm 0.156 0.363 0.002 -0.220

***

0.089

***

0.045

***

0.147

***

1.000

7. Domestic MNE 0.007 0.081 -0.022

*

-0.042

***

-0.013 -0.012 0.029

**

0.042

***

1.000

9. Domestic production facilities 1.313 1.233 -0.013 0.061

***

0.031

**

0.015 0.194

***

0.034

**

0.069

***

1.000

10. Domestic non-production facilities 1.084 3.842 -0.009 0.073

***

0.020

+

0.022

*

0.108

***

0.040

***

0.035

***

0.273

***

1.000

11. Foreign facilities 0.424 3.099 0.022

*

0.108

***

0.058

***

0.035

***

0.280

***

0.027

**

-0.008 0.013 0.010 1.000

12. Diversified firms 0.532 0.499 -0.044

***

-0.118

***

-0.004 -0.088

***

-0.116

***

-0.024

*

0.023

*

-0.010 -0.028

**

-0.064

***

1.000

13. Number of competitors 3.721 1.791 0.014 0.050

***

0.037

***

0.042

***

0.027

*

0.025

*

-0.002 0.014 0.022

*

0.027

**

-0.048

***

1.000

14. Concentration of competition 32.012 37.156 0.037

***

0.210

***

0.050

***

0.064

***

0.191

***

0.116

***

0.024

*

0.035

***

0.035

***

0.049

***

-0.094

***

0.156

***

1.000

15. Provincial market 0.107 0.309 -0.078

***

-0.158

***

-0.074

***

-0.067

***

-0.120

***

-0.072

***

-0.020

+

-0.019

+

-0.033

**

-0.046

***

0.050

***

-0.040

***

-0.067

***

1.000

16. Regional market 0.118 0.322 -0.037

***

-0.127

***

-0.076

***

-0.037

***

-0.065

***

-0.019

+

0.012 -0.018

+

-0.009 -0.013 -0.016 -0.018

+

0.023

*

-0.126

***

1.000

17. Spanish market 0.425 0.494 0.032

**

-0.001 -0.011 0.020

+

-0.009 0.013 -0.024

+

0.013 0.021

+

-0.003 0.036

**

0.065

***

0.016 -0.297

***

-0.314

***

1.000

18. Foreign market 0.072 0.258 -0.025

*

0.129

***

0.030

**

0.025

*

0.036

***

0.012 -0.023

*

-0.018

+

-0.001 0.043

***

-0.181

***

0.010 -0.014 -0.096

***

-0.102

***

-0.239

***

1.0

19. Spanish and foreign market 0.203 0.402 0.090

***

0.205

***

0.146

***

0.090

***

0.194

***

0.087

***

0.026

*

0.015 0.014 0.045

***

0.005 0.003 0.069

***

-0.174

***

-0.184

***

-0.434

***

-0.1

*

Significance levels: + p < 0.10, * p < 0.05, ** p < 0.01, *** p < 0.001



TABLE 3

Results of the analysis of the innovativeness of subsidiaries of foreign MNEs in comparison todomestic companies competing in the same country

Dependent variable: Number of product innovations introduced in the year

Model 3.a Model 3.b Model 3.c

Subsidiary (H1) 0.093* 0.032*(0.046) (0.016)

Subsidiary * R&D investment (H2) 0.004**

(0.002)R&D investment 0.004** 0.004** 0.003**

(0.001) (0.001) (0.001)Skilled employees 0.000 0.000 0.000

(0.001) (0.001) (0.001)Size 0.003+ 0.003+ 0.003+

(0.002) (0.002) (0.002)Division of domestic firm -0.148* -0.111 -0.104

(0.073) (0.080) (0.080)Domestic MNE -1.464+ -1.446+ -1.455+

(0.856) (0.856) (0.857)Domestic production facilities -0.032 -0.033 -0.031

(0.021) (0.021) (0.021)Domestic non-production facilities -0.010+ -0.010+ -0.010+

(0.006) (0.006) (0.006)Foreign facilities -0.002 -0.002 -0.002

(0.010) (0.010) (0.010)Diversified firm 0.326** 0.326** 0.331**

(0.055) (0.055) (0.055)Number of competitors 0.002 0.002 0.002

(0.016) (0.016) (0.016)Concentration of competition 0.003** 0.003** 0.003**

(0.001) (0.001) (0.001)Provincial market

0.013 0.021 0.019(0.193) (0.193) (0.193)Regional market 0.595** 0.599** 0.597**

(0.174) (0.174) (0.174)Spanish market 0.879** 0.875** 0.874**

(0.158) (0.158) (0.158)Foreign market 0.788** 0.774** 0.772**

(0.179) (0.179) (0.179)Spanish and foreign market 1.036** 1.024** 1.025**

(0.163) (0.163) (0.163)Industry indicator Included Included Included

Year indicator Included Included Included

Constant -2.172** -2.168** -2.159**

(0.282) (0.282) (0.282)

Chi 2 433.760 435.470 451.660Log likelihood -9327.790 -9326.409 -9323.762

Chi 2 change likelihood 2.760+ 8.054**

Observations 9132 9132 9132

Number of Firm 761 761 761

Note: Standard errors in parentheses. Industry and year controls were included in the analysis but are not reported here.

Si ifi l l 0 10 * 0 05 ** 0 01

Innovation MNEvsLocal 100920

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