The Role of Dual Embeddedness in the Innovative Performance of MNE Subsidiaries: Evidence from...

The Role of Dual Embeddedness in the InnovativePerformance of MNE Subsidiaries: Evidencefrom Braziljoms_965 417..440

Paulo N. FigueiredoBrazilian School of Public and Business Administration (EBAPE) at the Getulio Vargas Foundation (FGV)

abstract This paper explores variability across a set of subsidiaries in a given local contextand the same industry in terms of innovative performance as an outcome of the manner andextent to which they embed within both corporate (internal) and local (external) counterparts.By drawing on fieldwork evidence of seven subsidiaries operating in Brazil (1996–2007) it wasfound that: (1) subsidiaries that were able to develop knowledge-intensive linkages with specificinternal and external counterparts simultaneously and based on continually increasedfrequency and improved quality achieved higher innovative performance levels thansubsidiaries that developed such linkages with limited frequency and unchanged quality overtime; and (2) some counterparts and linkages were more effective than others in terms ofcontributing to the subsidiaries’ innovative performance. By drawing on a novel approach thatexplores dual embeddedness and its impacts on differences across a set of subsidiaries in termsof innovative performance over time, this paper extends our understanding of embeddednessas part of strategic asset-seeking strategies. It also provides a basis to deepen the analysis of thenuances of multiple embeddedness and its implications for the subsidiary’s competitiveperformance.

INTRODUCTION

Over the past two decades, a number of studies have characterized MNE subsidiariesas enterprises that show the potential to pursue the continual improvement of theircompetitive advantage at the interface between their local economies and global cor-porate networks (Birkinshaw et al., 2005; Cantwell and Janne, 1999; Forsgren et al.,2006). Subsidiaries have the potential to embed themselves within different types ofknowledge networks, in order to accumulate their capabilities needed for innovationin products, production processes, and services, thereby strengthening their competitiveposition (Cantwell and Mudambi, 2005; Kuemmerle, 2002; Pearce, 1999). In order to

Address for reprints: Paulo N. Figueiredo, Brazilian School of Public and Business Administration (EBAPE),Getulio Vargas Foundation (FGV), Praia de Botafogo,190 5th floor, office 510, 22.253-900 Rio de JaneiroRJ, Brazil ([email protected]; [email protected]).

© 2010 The AuthorJournal of Management Studies © 2010 Blackwell Publishing Ltd and Society for the Advancement of ManagementStudies. Published by Blackwell Publishing, 9600 Garsington Road, Oxford, OX4 2DQ, UK and 350 Main Street,Malden, MA 02148, USA.

Journal of Management Studies 48:2 March 2011doi: 10.1111/j.1467-6486.2010.00965.x

understand the reasons why some subsidiaries achieve a better performance thanothers, researchers must explain how their capabilities are created in the first place(Andersson et al., 2002). In particular, the role of embeddedness as a part of thesestrategic asset-seeking strategies merits further investigation (Dunning, 1998; Narulaand Dunning, in press; Young and Tavares, 2004).

Several authors have examined the impacts of either intra-corporate (e.g. Ariffin,2000; Garcia-Pont et al., 2009; Mudambi and Navarra, 2004) or local embeddedness(e.g. Almeida and Phene, 2004; Santangelo, 2009; Tallman and Fladmoe-Lindquist,2002) on the innovative performance of subsidiaries. Some of them have even suggestedthat there tends to be an inverse relationship between intra-corporate and local embed-dedness (e.g. Andersson et al., 2007). However, very few researchers, if any, have simul-taneously investigated the twin impacts of intra-corporate and local embeddedness onthe improvement of the innovative performance of subsidiaries over time.

There is a dearth of empirical studies of subsidiaries’ innovative performance as anoutcome of their simultaneous engagement in both intra-corporate and local embed-dedness, especially in the context of emerging economies. By drawing on field evidenceof seven subsidiaries in Brazil, the objective of this paper is to explore variability acrosssubsidiaries in terms of innovative performance as an outcome of the manner and extentto which they embed simultaneously within both intra-corporate and local counterpartsover time.

Improvements in innovative performance are herein operationalized in terms of theprogressive ‘levels’ of capability that are accumulated by subsidiaries over time. Becausethe embeddedness of subsidiaries represents a potential source of such capabilities, itsmeasurement is of great importance to this study. It is thus proxied by the frequency ofuse and quality of the linkages developed by subsidiaries with their intra-corporatecounterparts (hereafter ‘internal’ linkages) and local organizations (hereafter ‘external’linkages).

By drawing together concepts and insights from the literatures on strategic manage-ment and innovation, this study contributes to advancing our theoretical and empiricalunderstanding of the nature of embeddedness as a strategic asset-seeking strategy and itsrole in the subsidiary’s competitive performance. First, I investigate the nature and roleof dual embeddedness within the strategic asset-seeking strategies of MNE subsidiaries.I do this by simultaneously examining both intra-corporate and local embeddedness atthe level of the subsidiaries concerned. Dual embeddedness is difficult not only toengender (Costa and Filippov, 2008; Narula and Dunning, in press; Young and Tavares,2004), but also to assess, because its study suffers from a scarcity of systematic firm-levelevidence, especially in terms of its impact on innovative performance.

Second, this paper furthers our understanding of the process by which the subsidiaryimproves its innovative performance, by measuring it on the basis of the accumulation ofprogressive levels of capability and the influence of the underlying knowledge-intensivelinkages inherent in dual embeddedness. By substantiating that with first-hand evidencederived from extensive field research, the study reported herein adds texture to ourunderstanding of the intensity and nature of the various linkages developed over time, aswell as the nature of the capability accumulation of the subsidiary, especially within anemerging economy. Consequently, this paper provides a basis to discuss the nuances of

P. N. Figueiredo418

© 2010 The AuthorJournal of Management Studies © 2010 Blackwell Publishing Ltd andSociety for the Advancement of Management Studies

multiple embeddedness and how it occurs. Third, the paper also contributes to further-ing the debate on the role of MNEs in contributing to industrial progress, particularly inemerging economies.

ANALYTICAL FRAMEWORK

The Innovative Performance of the Subsidiary

The distinctiveness of subsidiaries and their creation of value in global and local marketsdepend largely on their ability to innovate in products, production, and organizationalprocesses and services (Almeida and Phene, 2004; Andersson et al., 2002). In order toundertake such types of innovative activity, subsidiaries draw on different types and levelsof capability (Bell and Pavitt, 1995; Lall, 1992). Capabilities are thus strategic assets thatunderpin the competitiveness of subsidiaries.

Capabilities involve herein a stock of knowledge that permits a firm to undertakeproduction and differing degrees of innovative activities. Such capabilities are accumulated, inan additive manner, in the human resources and organizational systems both within, andoutside of the firm (Bell and Pavitt, 1995; Eisenhardt and Martin, 2000; Pavitt, 1998).

The variables that are most appropriate to explain variations in the depth andcontinuity of the accumulation of innovative capability are those related to the specificefforts that firms make to create those capabilities – i.e. they relate to the intensity,persistence, and effectiveness with which firms manage and invest in the process ofacquiring and creating the human resources and knowledge bases needed to undertakeinnovative activities. I refer to that investment as ‘learning’, in the sense that the processes

of the knowledge acquisition help to build up a firm’s capabilities.A simplistic perspective on learning and the accumulation of capability primarily

focuses on the two-way relationships that occur between individual technology suppliersand individual firms. In order to accumulate their capabilities to innovate most firmsdraw on a comprehensive variety of knowledge-supplying partners (Bell and Pavitt, 1995;Zollo and Winter, 2002). Subsidiaries have themselves often drawn upon, and integratedknowledge inputs from multiple sources. For example, some parent companies have actedas sources of, or at least mediating channels for different types of knowledge whose aimis to enhance the innovative capabilities of its subsidiaries (Birkinshaw et al., 2005;Cantwell and Janne, 1999).

However, firms differ in the manner in which they engage in efforts to create theircapabilities. Consequently, there tends to be a degree of heterogeneity across firms of thesame industry operating under the same context in terms of innovative performance(Eisenhardt and Martin, 2000; Pavitt, 1998). Additionally, firms rarely work alone in theprocess of building their strategic assets, but in interaction with other actors of theenvironment in which they operate (Gulati, 1998). As a result, atomistic approaches areof little help in explaining the process by which firms accumulate knowledge, and theimplications of this for the variations that occur between firms in terms of their com-petitive performance. One of the main sources of such variations is the manner in whichfirms socially embed in a variety of linkages with different actors in their environment tocreate knowledge to achieve competitive performance (McEvily and Zaheer, 1999).

Dual Embeddedness and Innovation in MNE Subsidiaries 419

© 2010 The AuthorJournal of Management Studies © 2010 Blackwell Publishing Ltd and

Society for the Advancement of Management Studies

Therefore, this paper draws on a social or relational embeddedness framework toorganize the analysis of subsidiaries’ knowledge accumulation process.

The Role of Dual Embeddedness in the Subsidiary’sInnovative Performance

Embeddedness denotes the notion that the achievement of firms’ competitive perfor-mance can be facilitated by the social attachments they create with several actors in theirsocial environment (Granovetter, 1985; Uzzi, 1996). Such relationships, normallyignored by atomistic approaches to firms, are based on the logic of trustful cooperativebehaviour that can potentially create a basis for knowledge transfer and learning acrossthe boundaries of the firm (Uzzi, 1996; Uzzi and Lancaster, 2003). Specifically, the socialor relational embeddedness approach emphasizes that firms can acquire strategic assetsthrough interfirm linkages embedded in social relations and networks in order to achievecompetitive advantage (Uzzi and Gillespie, 2002).

Because I am herein concerned with the means by which subsidiaries achieve inno-vative performance by developing both their internal and external relationships simul-taneously, I adopt a dual relational view of embeddedness. Such a view is consistent witha ‘strategic asset-seeking’ perspective on subsidiaries (see Dunning, 1998; Narula andDunning, in press). This view was also applied in other work on either internal orexternal embeddedness as sources of subsidiaries’ knowledge (e.g. Andersson et al., 2002;Garcia-Pont et al., 2009). Previous work in the context of an emerging economy hasshown how various types of internal linkages have different types of impact on theinnovative performance of the subsidiary (Ariffin and Bell, 1999).

However, this paper is concerned with how the subsidiary draws simultaneously oncounterparts both internal (e.g. parent companies and sister subsidiaries) and external(e.g. universities, research institutes, consulting firms, suppliers, clients) as sources ofknowledge. Thus, the paper focuses on dual relational embeddedness of subsidiaries. Therelational embeddedness of a subsidiary is defined herein in terms of the multiple linkagesused by the subsidiary to create capabilities to achieve innovative performance. Rela-tional embeddedness varies in its degree (Dacin et al., 1999), and I thus distinguishbetween arm’s length linkages and knowledge-intensive linkages. Arm’s length linkages arerelationships that are based on a lack of social closeness between the actors (Uzzi andLancaster, 2003). They are based on a profit-seeking and opportunistic logic and mate-rialized in the form of generic business-type of relationships involving exchanging ofservices and goods, and of knowledge in the form of public good (Dacin et al., 1999;Uzzi, 1996). Although they tend to be more infrequent they may enable the discoveryof opportunities of potential partners and knowledge (Granovetter, 1973). They mayalso work as a potential platform for the establishment of knowledge-intensive ties(Hansen, 1999).

Embedded or knowledge-intensive linkages are based on strong social attachmentsinvolving trust and reciprocity (Dacin et al., 1999; Uzzi, 1996) and a long-term perspec-tive (Larson, 1992). Through such linkages the firm can acquire different types ofdistinctive knowledge and skills. They constitute strategic inputs to build the capabilitiesneeded by the firm to innovate in products, processes, and services leading to competitive

P. N. Figueiredo420


advantage (Gulati, 1998; Uzzi and Gillespie, 2002; Uzzi and Lancaster, 2003). Buildingon McEvily and Zaheer (1999), Uzzi and Lancaster (2003), and Spedale et al. (2010), thispaper considers knowledge-intensive linkages as involving the exchange of knowledgeof increasingly cognitive complexity – e.g. training, joint-problem solving for productdevelopment and research. Different degrees of such ties define the extent to which firmsare embedded within their environments (Oliver, 1996). Indeed, firms may developseveral kinds of interaction with different counterparts, but some may be more significantthan others in terms of generating benefits for firms (Galaskiewicz, 1985).

The manner and the frequency of the firm’s engagement in such linkages maygenerate benefits for the firm in terms of knowledge accumulation and innovativeperformance. Such benefits may spill over to other partners involved in close relation-ships (Uzzi and Gillespie, 2002). This is particularly important to subsidiaries as they canpotentially tap into multiple knowledge sources at the interface between global and localnetworks. The knowledge acquired through an embedded tie with a local partner can beexchanged with its parent company or sister subsidiary and vice versa (Ambos et al.,2006). Relational embedded linkages may be triggered by a number of sources – e.g.third-party referral, previous personal ties (Dacin et al., 1999; Larson, 1992; Uzzi, 1996),and senior executive professional trajectories (Clark and Soulsby, 1998). Since effectiveembedded ties are neither designed ex ante nor automatic (Gulati, 1998), these triggersmay facilitate firms to overcome difficulties in embedding with potential knowledge-supplier partners.

Building on these studies, this paper examines the relationship between innovativeperformance and dual embeddedness in a set of subsidiaries from the same industry andoperating in a given local context, by asking:

1. What was the role of dual embeddedness in affecting differences across the sub-sidiaries in terms of the extent to which they achieve innovative performance?

2. Specifically, in what manner did the internal and external counterparts and link-ages differ in contributing to the subsidiaries’ innovative performance?

The relationship between the issues addressed in the research questions constitutes theanalytical framework underpinning this paper as represented in Figure 1.

Additionally, the manner in which the subsidiary engages in dual embeddedness mayreflect the nature of its response to the local institutional framework (Scott, 2001). Thesubsidiary’s engagement in dual embeddedness may also be conditioned by its previouslyaccumulated capabilities (Cohen and Levinthal, 1990) and by the host context’s absorp-tive capacity (Criscuolo and Narula, 2008). However, such issues are outside the scopeof this paper and will be acknowledged only very superficially. The remainder of thissection outlines how the constructs underpinning the analytical framework and questionsare operationalized in this paper.

Operationalizing the Constructs

A subsidiary’s capabilities and the improvement of innovative performance. Following Bell and Pavitt(1995), this paper distinguishes between production and innovative capability. The former




refers to the resources required to use existing production systems at given levels ofefficiency, and the latter to the resources required to create or improve processes,products, and services. These two kinds of capability co-exist within most firms. Theaccumulation of production capabilities tends to constitute a basis for the accumulationof innovative capability, although the relationship between the accumulation of thesetwo types of capability is not linear. Progressively higher levels of innovative capabilityare strategic assets that can distinguish a firm in global marketplaces (Bell and Pavitt,1995; Lall, 1992).

Various methods exist to measure innovative performance. Rather than adoptingtraditional indicators (e.g. patent citations and/or R&D expenditures), I draw on atypology developed by Bell and Pavitt (1995), Figueiredo (2001), and Lall (1992), whichidentifies differing levels of novelty and complexity that firms adopt over time in terms oftheir processes, products, and services. Such a typology has been used successfully inempirical studies of capability accumulation in subsidiaries (e.g. Ariffin and Bell, 1999;Figueiredo, 2008; Iammarino et al., 2008). These studies have drawn on what might betermed a ‘revealed capability’ approach. They have identified levels of increasing noveltyand significance in terms of their innovative activity. They have then gone on to infer thatdifferent levels of capability lie behind the different levels of innovative performance.

A summary of the typology tailored for use in this paper is given in Table I. The firstcolumn shows three levels of production performance and four levels of innovativeperformance running from ‘basic’ to ‘world leading’; the second column provides someillustrative examples of these levels of capability. The application of this framework in theresearch underpinning this paper was achieved after approximately six months’ work,and involved several consultations with experts in the information and communicationstechnology (ICT) industry to validate it. The original framework that was applied during

Subsidiary’s engagement inexternal linkages:

• Arm’s length• Knowledge-intensive

Subsidiary’s engagement ininternal linkages:

• Arm’s length• Knowledge-intensive

Manner of subsidiary’saccumulation of

progressively higher‘levels’ of capabilities

Other influencing factors

Subsidiary’s embeddednesswith internal and external counterparts

Subsidiary’s innovativeperformance

Subsidiary’sresponses to the institutionsand micro and

macroabsorptivecapacity

Focus of this paper

Subsidiary’s lifetime

Figure 1. A subsidiary’s innovative performance improvement and the role of dual embeddedness

P. N. Figueiredo422


the fieldwork involved the use of a matrix that identified levels of capability for specificactivities. The capability levels accumulated for these activities by each subsidiary werethen aggregated into a single index to represent the overall capability level of eachsubsidiary over time. The use of such a procedure was important for performing thestatistical tests.

The typology in Table I highlights those capabilities that are internal to a subsidiary.But it also recognizes that a substantial part of its capability lies within the corporatenetwork and in local organizations. In addition, this framework moves beyond perspec-tives that tend to classify a firm’s performance in terms of ‘innovative’ versus ‘non-innovative’ descriptors. Instead, the use of such a typology captures what firms are ableto do, in technological terms, using a nuanced perspective of the ‘levels’ of capabilitiesrequired to undertake increasingly innovative activities.

Table I. Typology for levels of capabilities (condensed version)

Levels of innovative and production performance Illustrative examples of these levels of production and

innovation performance

Innovativeperformance

World leading(frontier pushing)(Level 7)

Undertaking cutting-edge innovation in products, productionand organizational processes and systems (e.g. developmentof processes and tools for complex testing as adopted bycorporations, subsidiaries and other companies in the sector;development of products and processes that are original tothe world)

Advanced (Level 6) Closing in on leading global leaders in terms of innovation (e.g.development of tools for automatic inspection of code andsoftware testing; design, prototyping, and development ofproducts with clients, corporations, subsidiaries, and/orpartners)

Intermediate (Level 5) Implementation of relatively complex modifications to products,process organization, and systems (advanced techniques andautomated control of software development; development ofnon-original products and processes internally and/or withpartners)

Basic (Level 4) Undertaking minor adaptations (e.g. formal planning andcoordination of projects of medium complexity; developmentof software of medium complexity; simple improvements inproducts without changing their functionality

Productionperformance

Advanced (Level 3) Implementation of production processes that embody advancedtechnological features. Products and services that incorporatetechnical and design specifications and performance featuresthat are close to the most advanced in global markets

Intermediate (Level 2) Implementation of relatively complex production systems withbasic standardization of procedures that meet therequirements of national market

Basic (Level 1) Implementation of non-formal operational procedures (eachproject follows a different process). Simple replication ofspecifications for processes, production, or products




Degrees of embeddedness as sources of subsidiaries’ capabilities. Relational embeddedness isherein operationalized on the basis of internal and external linkages developed simulta-neously with both internal and external counterparts. To scrutinize such linkages, Ideveloped the typology in Table II, by building on available frameworks, especially thatof Ariffin (2000). While some authors have tended to assume unitary models for therelationships that exist between subsidiaries, parent firms, and local organizations, thistypology makes a distinction between arm’s length and progressive degrees of quality ofknowledge-intensive linkages.

By building on Ariffin’s (2000) methodology, the linkages were ranked from 2 to 5according to their intensiveness of the knowledge involved. The frequency of an eventwas obtained using the occurrence of episodes involving linkages with specific counter-parts over time. The application of such typology also allows us to capture changes in thecase subsidiaries’ dual embeddedness over time.

METHODS

Research Strategy and Empirical Context

This paper derives from an empirical study that is based on a two-year fieldworkcampaign that was implemented in three stages: exploratory, pilot, and main fieldwork.In line with the analytical framework described, and in consideration of the fact that Irequired an in-depth study with an analytical generalization, I designed the research thatunderpins this paper using evidence from a variety of different case studies. Such designallowed a more detailed investigation of the processes involved than that afforded byother methods (Eisenhardt, 1989; Pauwels and Matthyssens, 2004; Yin, 2003).

The aim of the original study that underpins this paper was to examine the underlyingdrivers of innovative performance of subsidiaries in Brazil in the electronics industryfrom the late 1990s onwards, under the influence of a specific local industrial policy. Thispolicy was implemented in the mid-1990s to provide fiscal incentives for companies toengage in innovation, particularly that which made use of links with local organizations.The policy became known as the ‘ICT Law’ (as used hereafter). In order to obtain itsfiscal benefits, ICT-related firms were required to invest at least 2.3 per cent of theirrevenues in the promotion of innovation-related links with universities and researchinstitutes in Brazil. Firms were given the option of not undertaking such investments, butof instead simply allocating the equivalent amount to a particular government fund.Such industrial policy has the potential to trigger the development of knowledge-intensive linkages between firms and other knowledge supplier organizations. It consti-tutes one of the pillars of the local institutional framework in which the case subsidiariesoperate.

Since the mid-1990s, Brazil has been in receipt of substantial amounts of foreigninvestment. The attractiveness of Brazil seems to be related in part to the substantialupgrade in its technological infrastructure that has been occurring since the mid-1990s.Efforts have been made to strengthen the local institutional framework to accelerateindustrial innovation (e.g. the ICT Law, the Innovation Law). By 2007, Brazil boastedaround 90 private and 75 public research institutes supporting innovation in a variety of

P. N. Figueiredo424


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industrial sectors.[1] Investment in R&D as a proportion of GDP increased from 0.94 percent (2000) to 1.35 per cent (2009), and the higher education sector has expandeddramatically over the last two decades, with Brazilian universities enrolling over 4 millionstudents in 2004. The annual supply of MSc and PhD graduates increased from 5000and 900, respectively, in 1990 to 32,900 and 9990, respectively, in 2007.

Sampling

After completion of the pilot stage, I carefully selected ( Yin, 2003) those subsidiaries that:(1) were operating in the ICT industry; (2) belonged to a range of different MNEs andcountries; (3) had begun their operations in Brazil around the same time, specifically inthe 1990s when the ICT Law began to be fully implemented; (4) were located in the samegeographical region, thus having similar opportunities for becoming embedded withinlocal organizations; and (5) exhibited a range of different experiences of the developmentof both their internal and external embeddedness. Using these criteria, I identified sevensubsidiaries, which together represented a mix of different pathways of improvement ofinnovative performance and of different degrees of dual embeddedness. This numberpermitted conduct of the investigation without amassing an unmanageable volume ofinformation (Eisenhardt, 1989) – see Table III.

Alpha, Beta, Gamma, Epsilon, and Theta are providers of electronics manufacturingservices (EMS), while Omega and Delta are producers of consumer electronics, includingcomputers and mobile communication devices. At the end of the fieldwork, each sub-sidiary had, on average, 2500 employees, except for Omega, which had around 5500. Allthe subsidiaries in the study are located in south-eastern Brazil, an industrialized regionthat boasts a large number of universities, research institutes, and consulting firms relatedto the ICT industry.

Information Gathering and Analysis

After Jick (1979), Eisenhardt (1989), and Pauwels and Matthyssens (2004), the study drewon triangulation methodology to achieve robust internal validity and reliability. Theevidence gathering process was undertaken over the period 2005–07 and was based on

Table III. The selected cases

Subsidiaries’ codified

names

Home country Entry time in

home country

Entry time

in Brazil

Entry mode in

Brazil

Alpha Canada 1994 1999 AcquisitionBeta Singapore 1969 1998 AcquisitionGamma USA 1966 2000 AcquisitionOmega USA 1983 1996 GreenfieldEpsilon USA 1980 1997 AcquisitionDelta Japan 1978 1998 AcquisitionTheta USA 1977 1997 Acquisition

P. N. Figueiredo426


a combination of extensive fieldwork and follow-up questionnaires. During the pilot andmain fieldwork, the evidence collection involved 91 formal and 11 informal interviews(from one to three hours in length), eight direct observations, and several consultations ofarchival records. Eleven interviews were conducted with local universities and researchinstitutes to verify the nature of their relationships with the subsidiaries.

The information gathering process began by contacting the managing director ofeach subsidiary to clarify the purpose of this research and to establish its legitimacy(Marschan-Piekkari et al., 2004). With their approval I was able to tap into various sourcesof information (e.g. industrial directors, managers, engineers, researchers, technicians,consultants, human resources and engineering departments, R&D units, labs, retired staff,and archival records). Open-ended interviews were conducted using an interview guidethat was constructed in the light of the analytical framework, constructs, and typologies.Double and triple checks of specific events were made via e-mail and/or phone calls.

In all the subsidiaries (except Omega), the interviewees had started working in thecompany prior to their acquisition by the current MNE, and were thus able to recall theimportant milestones of projects. The extensive use of triangulation made it possible togather evidence from a range of different sources to substantiate the results of the analysis.

After the main fieldwork, 109 follow-up questionnaires were sent to target informants.Because most of them had previously met the researcher during the fieldwork, a 95 percent response rate was achieved. The application of the questionnaire sought to expandthe findings and, especially, to systematize evidence of internal and external linkagesdeveloped by the subsidiaries over the period covered by the study. The questionnaireinvolved a matrix type of form derived from the framework in Table II. The columnscontained a list of potential internal and external counterparts with which the subsid-iaries could have developed linkages; the rows contained a continuum of possible activi-ties that expressed the nature of relationships that could have developed between thesubsidiaries and their internal and external counterparts (e.g. from commercial transac-tions and supply of components to different types of knowledge linkages like informalmeetings, product development projects, training, joint product development, research,etc.). In the cells the respondents wrote examples of benefits of these linkages for thesubsidiary’s innovative activity (e.g. development of product ‘x’).[2] There was one set ofthese questions for each year covered in the lifetime of each subsidiary.

This procedure permitted the gathering of evidence related to the frequency and also thequality of the relationships developed by the subsidiaries with different counterparts overtime. As a result, I captured 2727 observations of linkages during the period 1996–2007,consisting of 1588 internal and 1139 external relationships.

While I was conducting the interviews, I built up an inventory of associations betweenthe ways in which the subsidiary interacted with particular counterparts and the impactsof these on its innovative performance. Formal analyses involved the techniques oftabulating the frequency and type of events over time and building ‘cross-company displaytables’ (Miles and Huberman, 1994).[3] Such procedures proved essential for reducing thevolume of information down to a manageable size, and to track the main stages in thesubsidiaries’ capability accumulation and the frequency and nature of the underlyinglinkages over time. I also sought to match different pieces of evidence to the analyticalframework (Tables I and II) to increase the validity of the constructs. The evidence




obtained from the follow-up questionnaires was combined and harmonized with thatderived from the interviews in order to compile the dataset on which to run the statisticaltests.

FINDINGS

The Innovative Performance of the Case Subsidiaries

This section begins by providing evidence of the innovative performance levels achievedby the subsidiaries under study. As shown in Table IV, all the subsidiaries have accu-mulated the capabilities to undertake advanced production activities (Level 3). By theearly 2000s, their products incorporated technical and design specifications and perfor-mance features that were close to those of the most advanced companies in the world.

Before being acquired, all the subsidiaries (except Omega) were either local indepen-dent electronics companies or production sites for MNEs. By the time they were acquiredin the late 1990s, they had all accumulated at least intermediate production capabilities(Level 2). Their efforts to accumulate such levels of capability reflected the industrialrestructuring that followed the opening up of Brazil to global competition in 1990. Thesubsidiaries had built on the intermediate capabilities that they already possessed (Level2) to accumulate advanced production capabilities (Level 3).

All case subsidiaries attained a Level 4 innovative performance in processes andproduction organization for hardware, while six of them attained Level 5 innovativeperformance in this area. Five subsidiaries achieved a Level 4 innovative performance insoftware engineering and processes. Delta achieved a Level 4 innovative performanceonly in process and production organization for hardware, while its ability to undertakethe other two functions remained confined to production levels.

Table IV. The progress of the case subsidiaries’ innovative performance for specific functions

Levels of

capabilities

Technological functions

Software engineering

and processes

Processes and production

organization for hardware

Products and

solutions in ICT

Innovationcapabilities

World leading (frontierpushing) (Level 7)

Not attained Not attained Not attained

Advanced (Level 6) Omega Not attained OmegaIntermediate (Level 5) Epsilon, Omega Alpha, Beta, Gamma,

Omega, Epsilon,Theta

Omega, Theta

Basic (Level 4) Alpha, Epsilon,Theta, Omega,Gamma

All Omega, Epsilon,Gamma, Theta

Productioncapabilities

Advanced (Level 3) All All AllIntermediate (Level 2) All All AllBasic (Level 1) All All All

Source: Derived from the empirical study.

P. N. Figueiredo428


Over the ten-year period, Omega was the only subsidiary that achieved a Level 6innovative performance in two technological functions. By 2002 Omega had alreadyachieved a Level 5 innovative performance, which seems to have served as an incentivefor Omega to engage in more sophisticated product development. For example, by 2003Omega had fully designed and developed, in partnership with local organizations, amobile phone based on the division multiple access (TDMA) technology. By 2006,Omega had already accumulated a Level 6 innovative capability, and since this lay insoftware engineering, it enabled Omega to consolidate its worldwide mandate for testingmobile phone software.

In 2003, Epsilon established its first R&D centre, in order to further its workon advanced software development, thus gaining a capability maturity model (CMM)certification. Similarly, Beta began to expand its research on radio-frequency identifica-tion (RFID) to improve its solutions to clients. In contrast, however, most of Delta’scapabilities were confined to its production activities. This reflected Delta’s management‘option’ for emphasizing the strengthening of its production capabilities (productionefficiency) at the expense of the accumulation of higher levels of innovative capability.

The Role of Dual Embeddedness in the Subsidiaries’Innovative Performance

The evidence examined in this section is divided into two sub-periods (1996–2002 and2003–07) because (1) the paper seeks to capture changes in the frequency and quality ofthe linkages over time, and (2) these two sub-periods are related to the two major phasesof the ICT Law.

Variability in the frequency and quality of internal and external linkages over time. To examine that,I first tested for any statistically significant differences that existed between the means ofthe scores awarded to the relationships established by each subsidiary with its internaland external actors. The means were tested using the ANOVA F-test. I considered thenature of each linkage by testing separately both the internal and external linkages acrossthe two sub-periods. The ANOVA F-test was used because the number of observationswas high, and the data followed an approximately normal distribution. In these tests, thedependent variable was the number of linkages, and the factor under test was the type oractor of the linkage.

Using the typology in Table II, the categories that were analysed for internal linkageswith parent companies and sister organizations were learning for production and inno-vation (LP and LI) and research (R); and for external linkages with research institutes anduniversities were arm’s length (AL), human resources (HET), joint adaptation ( JAM),and research (R). The number of observations of internal AL linkages and of all externallinkages with suppliers, consulting firms, and clients were not sufficient to run thestatistical tests.[4] Because the factor (i.e. actors related to the internal and externallinkages) contained more than two categories, I used the post hoc Duncan test to groupsuch categories. The results are shown in Tables V and VI.




The results in Table V indicate that each subsidiary developed a different mean scorefor its linkages with different actors. In almost all cases, such differences were positivelysignificant. Using Duncan’s test, I identified the nature of these differences (see Table VI).

The evidence indicates variability within and across the subsidiaries in terms of thefrequency and nature of the multiple linkages developed with both internal and externalcounterparts over time. During the first sub-period (1996–2002), which referred to theearly stages of the development of the innovative capability of these subsidiaries, the highfrequency of use of their knowledge-intensive linkages occurred to a greater extent withtheir internal counterparts than with their external ones. This could be explained by thefact that, under the condition of having been recently acquired by a MNE or of havingbeen recently set up in Brazil (e.g. Omega), the subsidiary sought (or perhaps needed) todevelop better relationships with its internal counterparts than with its external ones.

Nonetheless, the subsidiaries differed in terms of their embedding within internalnetworks. For instance, Delta was characterized by the low frequency of use of its internallinkages, from 1998 onwards. Differently, Beta established several knowledge-intensiveinteractions that evolved into research-based linkages with its parent company, in orderto learn how to develop new devices using embedded software for multi-product testingpurposes. From 1999 onwards, Epsilon engaged in relationships (that involved periodsof overseas training) with its parent company and sister subsidiary, together with a local

Table V. ANOVA results for comparing the means of the frequency and quality of internal and externallinkages developed by the subsidiaries

1996–2002 2003–07

Internal External Internal External

Alpha 18.298 (0.000)*** 17.087 (0.000)*** 60.817 (0.000)*** 23.351 (0.000)***F (5;18) F (7;24) F (5;24) F (7;32)

Beta 10.314 (0.000)*** 2.362 (0.046)** 257.177 (0.000)*** 385.012 (0.000)***F (5;24) F (7;32) F (5;24) F (7;32)

Delta 25.000 (0.000)*** None None 7.469 (0.000)***F (5;30) F (7;32)

Epsilon 9.306 (0.000)*** 4.641 (0.001)*** 20.790 (0.000)*** 35.551 (0.000)***F (5;30) F (7;40) F (5;24) F (7;32)

Gamma 35.562 (0.000)*** None 23.315 (0.000)*** 11.961 (0.000)***F (5;24) F (7;32)F (5;12)

Omega 3.523 (0.011)** 5.923 (0.000)*** 13.187 (0.000)*** 37.305 (0.000)***F (5;36) F (7;48) F (5;24) F (7;32)

Theta 20.122 (0.000)*** 3.895 (0.000)*** 8.407 (0.000)*** 29.898 (0.000)***F (5;30) F (7;40) F (5;24) F (7;32)

Notes: The first value in each cell refers to the F-statistics followed by the p-value and the degrees of freedom of the F-test.Dependent variable: number of linkages (weighted). Factor: type (quality) of the linkage.Categories for the factor ‘type of internal linkages’ (see Table II for details): LP, LI, and R: parent; sister. Categories for thefactor ‘type of external linkages’ (see Table II for details): AL, HET, JAM, JR: universities (U); research institutes (RI).The degrees of freedom for Alpha and Gamma (first period) are low because they began developing linkages later thanthe others.** p < 0.05; *** p < 0.01.

P. N. Figueiredo430


Tab

leV

I.R

esul

tsof

Dun

can’

sgr

oupi

ngte

stsh

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gth

edi

ffere

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eque

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sof

spec

ific

type

sof

linka

ges

deve

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the

subs

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with

thei

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alan

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alco

unte

rpar

ts

Cas

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subs

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ries

19

96

–2

00

22

00

3–

07

Inte

rnal

Ext

erna

lIn

tern

alE

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nal

Fre

quen

cya

Fre

quen

cyF

requ

ency

Fre

quen

cy

Hig

hM

oder

ate

Low

Hig

hM

oder

ate

Low

Hig

hM

oder

ate

Low

Hig

hM

oder

ate

Low

Alp

haL

P-Pb

(24)

R-P

(12.

5)L

I-P

(2)

JR-R

I(1

3.8)

JAM

-RI

(5.5

)A

L-R

I(4

)JR

-U(1

.3)

HE

T-U

(0.8

)A

L-U

(0.5

)

R-P

(24)

LP-

S(1

8)R

-S(1

.6)

LI-

P(8

.8)

LI-

S(1

.8)

AL

-RI

(25)

JR-R

I(1

1)JR

-U(9

)H

ET

-U(4

.8)

AL

-U(4

)JA

M-R

I(4

)B

eta

R-S

c(4

0)R

-P(2

9)L

P-P

(28.

8)

LP-

S(1

6.8)

LI-

P(8

)L

I-S

(7.2

)N

one

JAM

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(4.8

)H

ET

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.8)

R-S

(56.

8)R

-P(5

6)L

P-P

(30)

LP-

S(1

8)L

I-S

(13.

8)L

I-P

(12)

JAM

-RI

(32.

8)H

ET

-U(9

.6)

Non

e

Del

taN

one

LP-

S(1

.7)

Non

eN

one

Non

eN

one

Non

eN

one

Non

eJR

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(30)

JR-U

(12)

HE

T-R

I(2

.4)

AL

-RI

(2.4

)E

psilo

nL

P-P

(6)

LP-

S(4

)R

-P(2

.5)

R-S

(1.3

)N

one

JR-U

(7.5

)JR

-RI

(5)

AL

-RI

(0.7

)R

-P(2

3)R

-S(1

8.4)

LP-

P(7

.8)

LI-

S(5

.6)

LP-

S(4

)

Non

eJR

-U(1

5)JR

-RI

(7)

AL

-RI

(0.8

)

Gam

ma

LP-

P(2

3)R

-S(1

5)R

-P(1

0)L

P-S

(8)

LI-

P(8

)L

I-S

(3)

Non

eN

one

Non

eR

-S(6

5)L

P-P

(23.

4)L

I-P

(20)

R-P

(10)

LP-

S(8

)L

I-S

(3)

JR-R

I(8

5)JR

-U(1

2)H

ET

-RI

(7.8

)A

L-R

I(4

)

Om

ega

R-P

(21)

R-S

(13)

LI-

P(2

8)

LP-

P(9

)L

I-S

(3.4

)N

one

HE

T-U

(37)

JR-U

(20)

JR-R

I(1

8)JA

M-R

I(1

2)H

ET

-RI

(17)

AL

-RI

(3.4

)A

L-U

(1.7

)R

-P(5

6)R

-S(3

2.8)

LI-

P(1

6.8)

LI-

S(6

)L

P-P

(4.2

)L

P-S

(1.2

)

JR-R

I(3

2)JR

-U(2

9)JA

M-R

I(1

4)H

ET

-U(1

2)JA

M-U

(6.4

)H

ET

-RI

(5.4

)A

L-U

(3.2

)A

L-R

I(7

.6)

The

taN

one

LP-

P(1

2.5)

LP-

S(1

0)N

one

JR-R

I(1

1)H

ET

-RI

(9)

JR-U

(7.5

)H

ET

-RI

(3)

HE

T-U

(2)

JAM

-U(1

.3)

R-S

(13)

LP-

P(1

6)L

P-S

(12)

LI-

S(1

0.2)

R-P

(4)

LI-

P(3

.2)

JR-R

I(1

7.6)

JAM

-RI

(15)

JR-U

(6)

JAM

-U(3

.2)

HE

T-R

I(5

.4)

HE

T-U

(0.6

)

Not

es:

aFr

eque

ncy

isfo

rea

chsu

bsid

iary

.Num

bers

inpa

rent

hese

s=

wei

ghte

dm

eans

oflin

kage

s.K

ey:(

see

Tab

leII

):b

Pare

nt;c

Sist

er.

Sou

rce:

Der

ived

from

the

empi

rica

lstu

dy.




research institute, to improve its quality control systems. As noted by one manager:‘Through these interactions we absorbed knowledge that permitted us to become the firstin Brazil to run full production lines based on lead-free technology.’

In 1998, following a radical corporate restructuring that transferred the worldwidemandate in the development of the Java software language from Russia to Brazil, Omegaengaged in several knowledge-intensive interactions with its parent company, learning-for-innovation and research linkages (LI and R) and also with its sisters to strengthen itsknowledge base. As noted by one manager:

These relationships gradually became more intense as they [parent company] realizedour high commitment to excellence and trusted we would meet the corporations’expectations; so they shared precious knowledge with us that helped solve criticalproblems in software development.

As far as external linkages are concerned, some of the interviewees suggested thatthe relatively low engagement in linkages with local counterparts during the period1996–2002 could also reflect the fact that the new managing directors who took officeafter the acquisition did not seem to have a sufficient knowledge of their local counter-parts, especially during the early stages of implementation of the ICT Law. As a result,some subsidiaries like Alpha, Epsilon, and Omega developed arm’s length linkages withsome universities and research institutes to begin to understand their potential as knowl-edge suppliers. Such arm’s length interactions worked as a kind of preparation for theestablishment of further local knowledge-intensive linkages, as these subsidiaries con-comitantly engaged in relationships with their internal counterparts.[5]

The local linkages took several forms. For example, from 1999 onwards, in an attemptto strengthen its expertise in human resources, Omega approached some prominentuniversities in south-eastern Brazil to propose pioneering joint programmes in educationand training. Unfortunately, this proposal was rejected by such universities.[6] Omegathen approached a research institute in north-eastern Brazil (the Cesar Institute), whichwas more open for such a kind of interaction. The director of the Cesar Institute hadworked with some of Omega’s executives in the former state-owned Brazilian telecomsystem. Through Cesar, Omega then approached a local federal university (The FederalUniversity of Pernambuco, UFPE), the first in Brazil to introduce Java software devel-opment and applications to its computer science course.

Omega, Cesar, and UFPE engaged in intense discussions that evolved into the jointdesign of a large two-year education and training programme in software development.This involved professionals from Omega and Cesar, and UFPE’s researchers and stu-dents. Later, the partnership evolved into research linkages, particularly between Cesarand Omega. This interaction worked as a benchmark for Brazil’s ICT industry by‘breaking the ice’ in terms of the establishment of close ties between a foreign subsidiaryand a federal university.

During the period 2003–07, subsidiaries like Alpha, Beta, Epsilon, and Omegaincreased the frequency and improved the quality of their internal learning-for-innovation (LI) and research (R) linkages as they engaged in relationships with localcounterparts. For instance, the development of a TDMA mobile phone in Brazil ensued

P. N. Figueiredo432


from a linkage between Omega and its Corporate Global Team. Such product innova-tion also involved knowledge from the local research institutes Cesar and Eldorado.

As shown in Table VI, the frequency and nature of both internal and external linkageshave been upgraded into higher-level knowledge-intensive over time, particularly inAlpha, Beta, Epsilon, and Omega. For instance, in 2003 Beta developed a combination

between a training programme with a local university and software development projectwith a sister subsidiary, to design new techniques for testing portable hardware withembedded software. This innovation led to a substantial reduction in its productioncosts. Because of its positive benefits, such innovation was then adopted by other sistersubsidiaries, illustrating an example of knowledge spill over.

Frequency and quality of internal and external linkages and innovative performance. In this analysis,I used the whole of the period 1996–2007. The factor under analysis was the type oflinkage, and I considered the internal and external linkages separately. The dependentvariable was the number of linkages that were established by each subsidiary. Again, totest for the comparison of the means, I used the ANOVA F-test, followed by a post hocDuncan grouping test. The results are shown in Tables VII and VIII.

The results shown in Table VII indicate that the means of the linkages achievedbetween the subsidiaries and at least one of the counterparts, either internal or external,were different from those achieved with other counterparts, in relation to each of thelevels of innovative performance under examination. Such differences were strong(p < 0.01) in all cases. Through the Duncan grouping test it was possible to identify thenature of such differences (see Table VIII).

The evidence in Table VIII suggests that some types of linkages with particularcounterparts were more effective than others in terms of contributing to the innovative

Table VII. ANOVA results for comparison of the means of internaland external linkages of the subsidiaries in relation to their level ofinnovative performance levels

Levels of innovative

performance

Internal linkages External linkages

Level 6 8.252 (0.000)*** 8.604 (0.000)***F (5;66) F (7;88)

Level 5 4.840 (0.001)*** 19.649 (0.000)***F (5;60) F (7;80)

Level 4 11.649 (0.000)*** 7.831 (0.000)***F (5;222) F (7;296)

Level 3 8.333 (0.000)*** 3.852 (0.001)***F (5;60) F (7;80)

Notes: The first value in each cell refers to the F-statistics followed by the p-valueand the degrees of freedom of F-test. Dependent variable: number of linkages(weighted). Factor: type of linkage established.*** p < 0.01.Source: Derived from the empirical study.




performance of the subsidiaries. For example, learning-for-innovation and researchlinkages with parent companies and research linkages with sister subsidiaries, combinedwith research and human resources linkages with local research institutes and universitieswere the most effective in the achievement of Level 6 innovative performance. For Level5 innovative performance, the research linkages and learning-for-production linkageswith parent companies and, to some extent, with sister subsidiaries, together withresearch linkages with local universities and research institutes seemed to a large extentto be the most effective. A combination between research and learning-for-innovationand learning-for-production linkages with parents and sisters and research and jointadaptation linkages with local research institutes and universities was more effective forLevel 4 innovative performance.

DISCUSSION

The purpose of this paper was to explore variability across a set of subsidiaries operatingin a given local context and in the same industry in terms of innovative performance asan outcome of the manner and extent to which they embedded within both internal andlocal counterparts over time. In contrast with most existing studies, this paper has

Table VIII. Results of Duncan’s test showing differences in the means of frequency and quality of linkagesestablished between the cases and internal and external actors in relation to the level of innovative perfor-mance levels

Innovative

performance

levels

Types of linkages

Internal External

High

frequency

Moderate

frequency

Low

frequency

High

frequency

Moderate

frequency

Low

frequency

Level 6 R-Pa (35)LI-P (23)

R-Sb (21) LP-P (7)LI-S (4.5)LP-S (0.5)

JR-RI (24)JR-U (23.7)HET-U (26.8)

JAM-RI (12.7)JAM-U (2.7)HET-RI (12.3)AL-RI (5.2)AL-U (2.3)

None

Level 5 R-P (11.8)R-S (9)LP-P (6.8)

LP-S (4)LI-P (2.5)

None JR-U (11)JR-RI (6)

AL-RI (0.7)

Level 4 R-S (24)R-P (18)LP-P (22)

LP-S (9.4)LI-S (4.9)

LI-P (7.6) JR-RI (17) JR-U (4.8)JAM-RI (9.7)AL-RI (3.9)

JAM-U (0.6)HET-U (2.6)HET-RI (2.2)AL-U (0.6)

Level 3 None None LP-S (0.9) JR-RI (14) None JR-U (5.4)HET-RI (1)AL-RI (1)

Notes: a Parent; b Sister. Numbers in parentheses = weighted means of linkages.Source: Derived from the empirical study.

P. N. Figueiredo434


proxied innovative performance using the concept of ‘levels’ of capabilities. Drawing onfirst-hand fieldwork evidence, this paper has scrutinized the frequency and quality oflinkages, in terms of those that are at arm’s length and those that have different degreesof knowledge-intensity, as proxies for the embeddedness of subsidiaries. Below I discuss thefindings that provide answers to the two research questions underpinning this paper.

Variability in Innovative Performance and the Role of Dual Embeddedness

In relation to the first question, on the role of dual embeddedness in promoting inno-vative performance, the findings indicate a cumulative and heterogeneous pattern ofimprovement in innovative performance at higher levels (e.g. Omega and Epsilon),intermediate levels (Alpha, Beta, Theta and, to some extent, Gamma), and lower levels(Delta). Such differences in the achievement in innovative performance reflect thedifferent frequency of use and quality of the many knowledge-intensive linkages that thesubsidiaries developed with both their internal and external counterparts. Subsidiariesthat were able to develop knowledge-intensive linkages with specific internal and externalactors simultaneously and on the basis of increased frequency and improved quality overtime (e.g. Omega and Epsilon) achieved much higher levels of innovative performancethan subsidiaries that relied on linkages with limited frequency and unchanged quality(e.g. Gamma and the extreme case Delta).

This paper has moved forward in relation to existing studies addressing these issues intwo ways. First, this study has identified differences across the subsidiaries of the sameindustry and local context in terms of innovative performance. However, the paper hasmade use of a novel approach that captures levels of capabilities to undertake differenttypes of innovative activities. Second, the study has uncovered the role of dual embed-dedness in affecting such variances in the case subsidiaries’ innovative performance.Specifically, the paper has explored the extent to which variances in the subsidiaries’innovative performance were related to differences in the frequency and nature of thelinkages that they developed with both internal and external counterparts simultaneouslyover time. Subsidiaries with superior innovative performance exhibited an ability todevelop linkages with multiple internal and external counterparts and explore comple-mentarities and combine their knowledge as sources of strategic assets (e.g. Omega andEpsilon). Such dual embeddedness also generated knowledge that spilt over to othersister subsidiaries (e.g. Beta).

Relative Importance of Counterparts to the Subsidiaries’Innovative Performance

In relation to the second research question, on the differences between the influence ofthe diverse counterparts and linkages, the findings show that some counterparts weremore effective than others in terms of contributing to the subsidiaries’ innovative per-formance. As far as external embeddedness linkages are concerned, counterparts likeuniversities and research institutes proved more effective than suppliers, consulting firms,and clients. Even so, there was some variability across the local universities: some werereluctant or unprepared to engage in linkages while others were proactive and open.




Linkages with research institutes played a critical role in the achievement of higher levelsof innovative performance (e.g. Omega and Epsilon). In relation to internal counterparts,linkages with parent companies seemed to be more conducive to higher innovativeperformance levels. However, as some subsidiaries accumulated progressively higherlevels of innovation capabilities, they not only increased the frequency of linkages withboth internal and external counterparts. They upgraded their embeddedness with bothtypes of counterparts into learning-for-innovation and research types of linkages. Indeed,the more innovative subsidiaries were able to explore the interfaces between certaininternal and external counterparts. They upgraded, simultaneously, the knowledgeintensity of the linkages with internal and external counterparts as they needed knowl-edge to engage in more complex innovative activities.

Additionally, the process by which the subsidiaries embedded with multiple internaland external counterparts was far from automatic or designed ex ante. On the one hand,it is important to recognize the relevance of some arm’s length linkages as a kind ofpreparation for the establishment of knowledge-intensive linkages (e.g. Alpha, Epsilon,and Omega). On the other hand, some knowledge-intensive linkages were facilitated bythird-party referral, previous personal ties, and senior executive trajectories (e.g. Omegawith UFPE and Cesar Institute).

There are, however, some caveats concerning some of these findings. First, themajority of the firms examined had accumulated previous capabilities, although only atproduction levels. This somehow worked as a prerequisite absorptive capacity (Cohenand Levinthal, 1990). That, in turn, enabled them to respond proactively to the localindustrial policy – the ICT Law. Second, some kind of reverse causality is apparent, inthat those subsidiaries that developed more and stronger links with local organizations onsophisticated projects (e.g. Omega and Epsilon) seem to have done so because they hadsimultaneously been accumulating high levels of innovative capability.

Third, the development of these linkages seems to reflect the different natures of thesesubsidiaries’ strategic asset-seeking strategies. Some of them were deliberate (e.g. Epsilonand Omega), while others were passive. The fact that some subsidiaries engaged effec-tively in the dual embeddedness required to achieve a positive impact on their innovativeperformance depended on their successful previous accumulation and constant upgrad-ing of their capabilities. However, it also depended on the presence of specific high-quality local research institutes and universities. In the absence of the latter, dualembeddedness would scarcely have occurred. Finally, in the case of Omega and, to acertain extent Epsilon, for example, it seems that their innovative performance mayreach a threshold (Uzzi, 1996) as their embeddedness with internal and, in particular,local partners increases. In such cases, firms could face the risk of over-using thesecounterparts and diminishing the benefits afforded by these linkages. In addition, theirinnovative performance at a world-leading level may be somewhat limited due to thenature of the technology involved.

IMPLICATIONS

The results have some implications for managers, especially of MNE subsidiaries, seekingto constantly improve their innovative and competitive performance. Managers can

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leverage their strategic assets and achieve progressively higher levels of innovative per-formance by tapping simultaneously into knowledge provided by both internal andexternal counterparts. In order to achieve this, managers should deliberately engage ina constant upgrade of the frequency and quality of multiple knowledge-intensive linkageswith both kinds of counterparts. There are for four reasons for this. First, the internal andexternal knowledge linkages that contribute to the attainment of one capability level arenot sufficient to achieve a subsequent higher level. Second, maintaining the same fre-quency and quality of knowledge linkages is likely to constrain the firm’s innovativeperformance.

Third, the internal and external counterparts and the linkages developed with themdiffer in terms of their contribution to the firm’s innovative performance. Fourth, areliance on single counterparts and knowledge-linkages, no matter how powerful theyappear, is unlikely to yield any effective knowledge accumulation. Thus managers shouldexplore and combine knowledge complementarities across different internal and externalcounterparts over time. However, dual embeddedness, as a powerful source of strategicasset, is not an automatic nor a linear process. Managers must be prepared to experiencedifficulties in establishing knowledge-generating linkages. These may be limited by theirfirms’ capabilities. They may also be limited by lack of social ties with potential knowl-edge supplier partners. Consequently, managers should recognize the importance oftriggers like personal relations to develop such linkages.

LIMITATIONS

It is important to note that in all cases, the subsidiaries at least initially possessed theabsorptive capacity required to engage in dual embeddedness. This is not always thecase, however, particularly in developing countries. Future studies could investigatedifferences between countries in terms of the impact of both of micro and macro levelabsorptive capacity on the development of dual embeddedness. The paper did notexamine the role of other factors that could affect the subsidiaries’ embeddedness withinternal and external counterparts – e.g. characteristics of age, nationality, and manage-ment initiative in response to local incentives. Additionally, the manner in whichsubsidiaries’ innovative performance shapes their internal and external networks ofrelationships remains an issue to be explored. The study did not address the impacts ofcapability accumulation on the subsidiaries’ market or on their economic performance;nor did the paper address the changes in organizational design required to permitthese knowledge linkages to occur. The nature of the thresholds involved in dual embed-dedness, but also the issues of over-embeddedness and disembeddedness from dualand/or multiple standpoints also remain to be explored. Future studies could alsoexamine how the local institutional framework is shaped by the subsidiary’s efforts inrelation to multiple embeddedness.

CONCLUSION

The findings of this study extend our understanding of dual embeddedness as part ofsubsidiaries’ strategic asset-seeking strategies. In so doing, the study has drawn together




concepts and insights from the literature on strategic management and innovation andhas provided some analysis of first-hand evidence obtained from extensive fieldwork,using a novel approach that has simultaneously explored both internal and externalembeddedness, and their impact on the differences seen in a set of subsidiaries in termsof their innovative performance. This study has added some texture to our understand-ing of the intensity and nature of the various internal and external knowledge-relatedlinkages that underlie dual embeddedness and their development over time, as well as ofthe nature of the subsidiaries’ innovative capabilities. These findings could yield morerobust explanations of the dynamics of subsidiaries’ strategic asset-seeking and competitiveadvantage in other local contexts. In relation to the broader management literature onembeddedness, this paper offers a novel approach that could deepen the analysis of thenuances of multiple embeddedness and the implications of these for a firm’s competitiveperformance.

ACKNOWLEDGMENTS

This paper is an outcome of a research project on the business strategies and competitive performance ofMNE subsidiaries in the electronics industry in Brazil. Funding from the Brazilian Association for theElectro-electronics Industry (Abinee) is gratefully acknowledged. I am grateful to the editors of this SpecialIssue, three anonymous referees, and to John Cantwell for their criticisms and helpful comments on earlierdrafts. I am deeply grateful to the professionals of the companies for their participation in the fieldwork forthis study. The research assistance of Marcela Cohen and Klauber Brito is also gratefully acknowledged. Anyflaws are my own.

NOTES

[1] See ABIPTI – the Brazilian Association of Technological Research Institutes.[2] For the sake of simplicity I obviously avoided in the questionnaire terms like ‘embeddedness’ or ‘learning

for innovation’ as in Table II. Instead, I used simpler terms in the form of activities (e.g. training inproduct development or joint research) to express the nature of the relationships.

[3] During the ‘data reduction process’ (Miles and Huberman, 1994) the observations gathered throughthe follow-up questionnaire were matched with those from the interviews and categorized in the light ofthe framework in Table II to be transformed into data.

[4] The fact that I did not find a significant number of observations for such types of linkages/actors isevidence in itself to support the variability across the counterparts and linkages in terms of theirimportance to the innovative performance in the case subsidiaries.

[5] The fact that relevant observations of external linkages were found only for universities and researchinstitutes seems to be related to the ICT Law that stimulates linkages with these two actors. Also thelocal research institutes generally enjoyed better knowledge bases and were more proactive and betterprepared than universities.

[6] According to the interviewees, for ‘nationalistic’ reasons, several universities were reluctant to interactwith foreign subsidiaries.

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