The tension of information sharing: Effects on subsidiary embeddedness

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The tension of information sharing: Effects on subsidiary embeddedness

Grazia Domenica Santangelo

Facolta di Scienze Politiche, Universita degli Studi di Catania, Via Vittorio Emanuele 8, 95131 Catania, Italy

1. Introduction

Subsidiary embeddedness is of great interest in the study of multinational enterprises (MNEs) due to the recognition that‘‘sources of competitive advantage no longer reside exclusively within the boundaries of the firm’’ (Forsgren, Holm, &Johanson, 2005). The network model of the MNE regards indeed resources and capabilities outside the traditional boundariesof the firm as increasingly significant sources of competitive advantage (Dyer & Singh, 1998). As a result, the model assignsgreat importance to relational embeddedness, that is the quality of business relationships in the subsidiary surroundingnetwork (Hallin, Holm, & Sharma, in press).1 Specifically, relational embeddedness refers to ‘‘personal relationships peoplehave developed with each other through a history of interactions’’ (Nahapiet & Ghoshal, 1998, p. 244). Key aspects ofrelational embeddedness include interpersonal trust and trustworthiness, overlapping identities, and feelings of closeness orinterpersonal solidarity (Moran, 2005).

Within this framework, business network research has documented the effects of subsidiary embeddedness on marketperformance, knowledge creation and knowledge transfer, among others (Andersson, Forsgren, & Holm, 2001, 2002;Forsgren et al., 2005; Holm, Holmstrom, & Sharma, 2005). Very little research has been done in the business networkliterature to investigate the antecedents of differences between subsidiaries in terms of embeddedness.2 By contrast, theliterature on MNE linkage creation has devoted much attention to studying why subsidiaries differ in the formation oflinkages, focusing on a wide range of subsidiary, parent, and industry-specific factors (Jindra, Giroud, & Scott-Kennel, 2009;Scott-Kennel & Enderwick, 2004, 2005; Scott-Kennel, 2007). However, neither stream of research considers marketcompetition between foreign subsidiaries as an antecedent of subsidiary embeddedness, despite its recent recognition in theeconomic geography literature as a major factor affecting the geography of MNEs’ knowledge sourcing and of MNEs’

International Business Review 21 (2012) 180–195

A R T I C L E I N F O

Article history:

Received 17 August 2009

Received in revised form 22 January 2011

Accepted 25 January 2011

Keywords:

Subsidiary embeddedness

Market competition

Pressure to innovate

Unintended private knowledge spillovers

Peripheral areas

A B S T R A C T

This paper investigates the relationship between foreign subsidiary competition and

embeddedness in a peripheral area of an advanced country. The study argues that pressure

to innovate and unintended private knowledge spillovers compete in explaining the

relationship between competition and embeddedness as a result of the tension of

information sharing. Such a tension can be relaxed when accounting for subsidiaries’

competence-creating entry motives. Statistical analysis supports this argument. This

study contributes to the broad IB field as well as to business network theory and to

research on the creation of local linkages by MNEs. Implications for managers and policy-

makers are also discussed.

� 2011 Elsevier Ltd. All rights reserved.

E-mail address: [email protected] Network embeddedness has also a structural dimension that concerns a firm’s position in a system of relationships, which is not the focus of this study.2 An exception is Andersson et al. (2005) who note the possibility of a ‘‘reversed causality’’ in their examination of the effects of management systems on

subsidiary embeddedness.

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doi:10.1016/j.ibusrev.2011.01.004


relationships with local actors (McCann & Mudambi, 2005). We seek to advance these research streams by focusing onmarket competition3 as an antecedent of subsidiary relational embeddedness.

The relationships between competition and embeddedness may be addressed from two alternative perspectives whichidentify two competing forces reflecting the tension of information sharing (Asakawa, 2001). From the IndustrialOrganization (IO) perspective, competition promotes subsidiary embeddedness in host locations as it creates pressure to

innovate (Porter, 1990). To gain and sustain competitive advantage, firms need to leverage critical, distinctive internal andexternal resources (Trevino & Grosse, 2002). Drawing on social capital theory (Burt, 1992; Coleman, 1988; Lin, 2001), IBscholars have recognized embeddedness as a distinctive external resource that is key to MNEs’ competitiveness (Anderssonet al., 2001, 2002; Andersson, Forsgren, & Holm, 2007; Dyer & Singh, 1998; Forsgren et al., 2005; Holm et al., 2005). Analternative perspective is suggested by a number of studies (Alcacer, 2006; Baum & Haveman, 1997; Chung, 2001; Sanna-Randaccio & Veugeleurs, 2007; Shaver & Flyer, 2000) which note that firms tend to avoid market competition to reduce therisk of unintended private knowledge spillovers to rivals. These risks increase when subsidiaries are embedded in externalsocial networks and, in these cases, competition discourages embeddedness. We argue that the tension of informationsharing between the two competing forces can be relaxed by accounting for subsidiaries’ competence-creating entrymotives, that is entry motives relating to the local supply side (innovation and skills-related) potential (Cantwell &Mudambi, 2005).

Our findings show that non-rival foreign subsidiaries embed their operations in the host economy to a greater extent thanrival ones, consistent with the unintended knowledge spillovers argument (Mudambi & Navarra, 2004). Despite competition,rival subsidiaries embed in the host economy when entering the market with a competence-creating motivation (as opposedto a non-competence-creating motivation), as in the pressure to innovate argument. In this case, the expected payoffs ofembeddedness exceed those of isolation, to the extent that relationships with domestic actors are valuable in terms ofknowledge (Andersson et al., 2002; Dyer & Singh, 1998; Forsgren & Johanson, 1992; Holm et al., 2005), and these payoffs,being trust-based, imply a low risk of unintended knowledge spillovers (Coleman, 1988; Uzzi, 1996).

The objective of this paper is to investigate the relationship between competition and embeddedness in a peripheral areaof an advanced country. In such locations, resource scarcity makes competition tougher and structural characteristics limitcompetition to foreign–foreign rivals. Non-traditional locations (e.g. emerging-market economies and peripheral areas ofadvanced countries) have been increasingly targeted by foreign investors searching for opportunities and valuable resourcesto enhance their competitive advantage (Manolopoulos, 2006; Santangelo, 2004, 2009; Todt, Gutierrez-Gracia, Fernandez deLucio, & Castro-Martınez, 2007; Yan, Haiyang, Hitt, & Geng, 2007). Nonetheless, extant research on non-traditional locationshas mainly focused on emerging economies, leaving peripheral areas largely unexplored. Our analysis is located in thegeographical area of the province of Catania (NUTS 3 level of Eurostat (1995) classification)4 in Sicily, which the EuropeanUnion has recognized as being a peripheral (Objective 1) region (European Communities, 1997).5

This study offers a theoretical contribution to business network theory by exploring the antecedents of embeddedness. Italso seeks to advance the literature on MNE linkage creation by focusing on market competition between foreignsubsidiaries, an under-explored determinant of MNEs’ linkage formation. A further contribution to IB research is that thestudy is set in a peripheral area which has received to date limited research attention. In this respect, Italy is an especiallysuitable country for such an investigation, as it has been traditionally characterized by a North–South divide, with theSouthern part of the country being at the periphery of the Italian economy.

2. Competition in peripheral areas

Peripheral areas are areas within national borders that engage in relatively little trade, contribute relatively little toinnovation, and are weakly linked to or physically hard to access by the core because of the poor transportation andcommunications infrastructure (Benito & Narula, 2007). Such locations are recognized as peripheral compared to coreterritorial units, which drive and dominate the economic landscape (Benito & Narula, 2007). Nonetheless, MNEs arediscovering valuable resources here (Manolopoulos, 2006; Santangelo, 2004, 2009; Todt et al., 2007).

Competition in these areas is restricted to foreign–foreign rivalry as domestic firms are limited in size and capabilities, arelacking in capital and have limited access to international capital markets.6 This has a number of implications. Firstly, the

3 This study investigates competition in a specific host location between subsidiaries of different parent companies. The analysis of competition between

subsidiaries of the same parent would entail a different theoretical setting which is beyond the scope of this analysis.4 The Nomenclature of Territorial Units for Statistics (NUTS) was created by Eurostat to provide a single uniform breakdown of territorial units for the

European Union (EU) members. NUTS nomenclature is based primarily on the current institutional divisions in the member states and is a hierarchical

classification. NUTS subdivides each member state into a whole number of NUTS 1 regions, each of which is in turn subdivided into a whole number of NUTS

2 regions, each of which is in turn subdivided into a whole number of NUTS 3 regions. NUTS 3 is the lowest territorial level, which in Italy corresponds to the

administrative unit of the province.5 Objective 1 regions (NUTS 2) are areas lagging behind in their development as their GDP is below 75% of the EU average. All of these regions are also

characterized by low investment levels, higher than average rates of unemployment, a lack of services for businesses and individuals, and poor basic

infrastructure.6 In these areas, firms’ size and capabilities are limited due to the small size of the local market with a rather unsophisticated demand as well as to low

investment levels. Low GDP level and growth undermine the level of investments and hamper capital formation. All these factors together limit access to

international capital markets.

G.D. Santangelo / International Business Review 21 (2012) 180–195 181


limited capacity of domestic actors makes sourcing valuable, distinctive resources more difficult in these locations than inrichly endowed areas, since resources here are scarce and, as a result, of exceptional strategic value to foreign investors.Secondly, in peripheral areas domestic firms usually lack sufficient capabilities and technologies to absorb foreignknowledge (Feinberg & Majumdar, 2001; Meyer & Sinani, 2009; Narula & Marin, 2003). In these circumstances, foreignsubsidiaries are more concerned with unintended knowledge spillovers to foreign rivals than to domestic firms, whichcannot easily take advantage of the developmental potential.

The literature on foreign direct investments (FDI) spillovers in the host economy has shown convincingly that foreignMNEs’ knowledge does spill over to those domestic actors with sufficient absorptive capacity (Aitken & Harrison, 1999; Gorg& Strobl, 2001; Kokko, Tasini, & Zejan, 1996). Supporting evidence for this is consistent across developed (Girma, 2005) anddeveloping (Narula & Marin, 2003) countries. Thirdly, the structural weaknesses of domestic actors prevent them fromdeveloping internationally. This means that foreign MNEs do not face competition from domestic multinationals (eitherparent or subsidiaries) locally. Despite empirical evidence showing that domestic parents outperform foreign subsidiaries(Castellani & Zanfei, 2006), such an explanation cannot be applied to peripheral locations, where domestic firms are hardly ina position to develop corporate strategies that would enable them to compete in the long term. By contrast, foreign investorsshow greater management capabilities and better performance as a result of their multinational advantages (Buckley &Casson, 1976; Castellani & Zanfei, 2006; Dunning, 1988). Locating our analysis in a peripheral area allows us to investigatethe relationship between foreign subsidiaries’ competition and embeddedness, controlling for home firms’ competition, asmarket competition is here limited to foreign–foreign rivalry. The principal concern of MNEs is unintended privateknowledge spillovers primarily to foreign competitors.

3. Conceptual model and hypotheses

Fig. 1 summarizes our conceptual model. We first explain how market competition can have a positive or negative impacton embeddedness depending on which of the two forces prevails: pressure to innovate or unintended private knowledgespillovers (Hypothesis 1). Then, we predict that the tension between the two forces is relaxed when accounting for themoderating effect of competence-creating entry motives on the unintended private knowledge spillovers force (Hypotheses 2aand 2b), that is the force inhibiting information sharing with local actors. The reason for focusing on entry motives is that IBscholars acknowledge greater heterogeneity in terms of market entry motives within and between MNEs, and document thatthis heterogeneity affects subsidiary embeddedness (Bartlett & Ghoshal, 1989; Birkinshaw, 1997; Birkinshaw & Hood, 2000;Cantwell & Mudambi, 2005; Jarillo & Martinez, 1990; Jindra et al., 2009; Kuemmerle, 1997; Nachum & Wymbs, 2005; Pearce,1999).

3.1. Pressure to innovate

Research drawing on the IO tradition (Bartlett & Ghoshal, 1986; Porter, 1980, 1986, 1990) has emphasized the role ofcompetitive environments, arguing that the sustainability of rents depends on the relative influence of competitive forcesfaced by the firm (Henderson & Mitchell, 1997). Market competition puts pressure on firms to innovate in order tooutperform competitors (Porter, 1990). To win the competitive race, and to gain and maintain competitive advantage, rivalfirms must have distinctive resources.

The relational view of competitive advantage (Dyer & Singh, 1998) has drawn increasingly on social capital theory (Burt,1992; Coleman, 1988; Lin, 2001) and recognizes that external network relationships are a source of competitive advantagewhich, since they are built up through a path-dependent process, are difficult to imitate (Gulati, 1998; Gulati, Nohria, &Zaheer, 2000) and provide unique strategic access to new knowledge and learning opportunities. External networkrelationships are embedded in a social structure (Andersson et al., 2002; Lin, 2001). Thus, economic actions and outcomes are

H1

H1 EMBEDDEDN ESS

H2a and H2 b

MARKETCOMP ETITION

(Unintended privat e knowledg e spillove rs (-))

Moder a�ng effe cts

Competence -cr ea�n g entrymo�v es (+)

(Pre ssure to innovate (+))

Direct effects

Fig. 1. Conceptual model.

G.D. Santangelo / International Business Review 21 (2012) 180–195182


affected by social and cultural relationships (Granovetter, 1985). As Thorelli (1986, p. 47) points out ‘‘trustworthiness andsocial bonds are often person-specific’’ and, as a result, the quality of network relationships is important. In thisconceptualization of embeddedness, trust between business actors is a major factor (Uzzi, 1996) since it lowers the costs ofnegotiation and resolves conflict (Zaheer, McEvily, & Perrone, 1998). Business partner relationships can be defined as beingtrust-based in that they concern reliability, fairness and goodwill (Dyer & Chu, 2000), while, when self-interest and profit-seeking behaviour prevail, the relationships are of the arm’s-length type. From this perspective, high embeddednessunderlies partners’ mutual trust and, hence, is the opposite of arm’s-length relationships (Andersson et al., 2002; Forsgrenet al., 2005; Hakansson & Shenota, 1995; Uzzi, 1996).

In the last decade, studies of MNEs have recognized foreign subsidiaries as a source of new ideas and capabilities for thewhole corporate network (Frost, 2001). This is because of their embeddedness in different and unique external localnetworks of suppliers, customers, competitors, institutions, authorities and associations (Forsgren, Johanson, & Sharma,2000; Ghoshal & Bartlett, 1990; Ghoshal & Nohria, 1997; Giroud & Scott-Kennel, 2009; Granovetter, 1985; Hakansson &Shenota, 1995; McEvily & Zaheer, 1999; Rowley, Behrens, & Krackhardt, 2000). Relational embeddedness enables foreignsubsidiaries to link to local actors via strong ties and shared common processes and values (Cohen & Prusak, 2001). Inaddition, relational embeddedness makes foreign subsidiaries capable of smoothly exchanging information with andlearning from local actors (Mowery, Oxley, & Silverman, 1996; Uzzi, 1996). From this perspective, competition positivelyaffects subsidiary embeddedness as it pressures firms to search for distinctive resources in order to outperform competitors.

3.2. Unintended private knowledge spillovers

Theoretical and empirical studies have shown that knowledge spillovers are critical in competitive relationships (Alcacer,2006; Baum & Haveman, 1997; Cantwell & Santangelo, 2002; Narula & Santangelo, 2009; Sanna-Randaccio & Veugeleurs,2007) as they create the risk of unintended private knowledge spillovers to rivals. Knowledge spillovers are certainly morevaluable to direct competitors than to other firms (McCann & Mudambi, 2005), since rivals own the capabilities andtechnologies (which other firms lack) to exploit the private good aspect of knowledge (Cohen & Levinthal, 1990). Due to theirdetrimental effects on firms’ profits and R&D levels (Bernstein & Nadiri, 1989; Steurs, 1997), intra-industry knowledgespillovers are perceived negatively by firms (Grindley & Teece, 1997) and are enhanced by geographical proximity(Audretsch & Feldman, 1996; Jaffe et al., 1993). Studies of MNEs (Alcacer, 2006; Baum & Haveman, 1997; Cantwell &Santangelo, 2002; Narula & Santangelo, 2009; Sanna-Randaccio & Veugeleurs, 2007) point to a geographical separation of,and limited information sharing between, rival firms willing to minimize the risks of imitation of their technologies bycompetitors.

The relevant aspect of knowledge in our discussion is private knowledge which is complex, tacit and difficult to transfer(Nelson & Winter, 1982) unless intentionally traded (von Hippel, 1987).7 However, private knowledge can spill overintentionally (von Hippel, 1987) or unintentionally (Mudambi & Navarra, 2004; von Hippel, 1987). Spillovers to customers,suppliers and partners may be largely planned, but spillovers occurring through other channels (e.g. employee mobility,reverse engineering and imitation by competitors) may be largely unintended (Mudambi & Navarra, 2004) and detrimentalto a firm’s competitive advantage. Private knowledge spillovers which are intentionally planned in customer, supplier andpartner relationships have a mutually positive effect, which firms look for when embedding in specific relationships toenhance their competitive advantage and performance (Hong, Snell, & Easterby-Smith, 2009). By contrast, privateknowledge spillovers to competitors which are unintended, and amplified when subsidiaries are embedded in externalsocial networks, are perceived as negative. In the latter case, competition has a negative impact on embeddedness, and therelationships between competition and embeddedness may ultimately fail to materialize. The degree to which valuableknowledge can be imitated by rival firms is crucial to the understanding of competitive advantage and its sustainability(Lippman & Rumelt, 1982; Simonin, 1999).

When embedding in domestic networks, foreign firms seek to maximize incoming spillovers from the host environmentand minimize outgoing spillovers of their private knowledge to foreign competitors. Due to the detrimental effect ofunintended knowledge spillovers on competitive advantage and performance, foreign subsidiaries tend to be moreembedded when they have less to lose. Thus, the risks of unintended private knowledge spillovers to rivals may preventfirms from embedding in external network relationships, while non-rival firms have less to lose from these risks.Accordingly, non-rival foreign investors are more embedded in trust-based relationships with domestic actors than are rivalsubsidiaries.

To test the two alternative perspectives on the relationship between foreign subsidiaries’ competition andembeddedness, we posit:

7 Unlike the private good aspect, the public good aspect of knowledge is always codifiable in a way that enables easy transmission. Firms may positively

perceive public knowledge spillovers (d’Aspremont et al., 1998) in pure agglomerations characterized by atomistic competition (McCann & Mudambi,

2005), where knowledge spillovers contribute to a virtuous cycle by strengthening the knowledge base of both location and firms (Jaffe et al., 1993).

However, this positive perception of public knowledge spillovers is ruled out in situations of oligopolistic competition between large firms (McCann &

Mudambi, 2005) where the private good aspect of knowledge is the dominant consideration. This scenario is likely to arise when multinational firms are

involved, since they traditionally operate in oligopolistic markets.



H1. Non-rival foreign subsidiaries are more embedded in relational ties with domestic actors than are rival foreignsubsidiaries.

3.3. The role of entry motives

Relationships between competition and embeddedness may nevertheless develop despite the documented role ofunintended private knowledge spillovers in competitive relationships. Competition may positively affect embeddednesswhen accounting for strategic moderating influences.

FDI increasingly taps knowledge in specific host markets where they seek to enhance their competitive advantage(Almeida, 1996; Bartlett & Ghoshal, 1989; Frost, 2001; Hedlund, 1986). Accordingly, there is a distinction between strategicand non-strategic entry motivations (Birkinshaw, 1994; Kuemmerle, 1997; Pearce, 1999). Strategic entry motivation isrelated to asset-seeking considerations and is about the exploration of local knowledge and expertise complementary to thecorporate network’s competencies (competence-creating motivation). MNEs entering the host economy with these motivesare interested in the local supply side (innovative and skills-related) potential (Cantwell & Mudambi, 2005). Non-strategicentry motivation is related to market and efficiency-seeking considerations (non-competence-creating motivation). MNEsentering the host economy with this motivation are interested in the local demand-side potential.

Market entry motivation is likely to affect subsidiaries’ activities. Subsidiaries with a competence-creating entrymotivation are more likely to conduct activities more distant from the product market (e.g. R&D) and are, therefore, lessvulnerable to direct competition.8 The activities carried out by subsidiaries with a non-competence creating entrymotivation are more likely to be closer to the product market and are, therefore, susceptible to greater competitive pressure(Alcacer, 2006). Subsidiaries entering the host market with different motivations may acquire a competence-creatingmandate through gradual subsidiary-specific evolution, where location, parent and subsidiary characteristics play an equaland significant role (Cantwell & Mudambi, 2005). Mudambi and Navarra (2004) contend that achieving competence-creatingstatus depends on the cost–benefit analysis of inward versus outward knowledge spillovers. Thus, competence-creatingsubsidiaries flourish when foreign investors gain more from the inward knowledge spillovers associated with relationshipswith domestic actors than they lose from the outward knowledge spillovers associated with competition. Recent literature atthe subsidiary level (Andersson & Forsgren, 2000; Birkinshaw, Hood, & Jonsson, 1998; Nobel & Birkinshaw, 1998) has arguedfor the mutually reinforcing relationship and co-evolution between greater subsidiary autonomy and greater embeddednessin external network relationships with domestic firms and institutions.

Therefore, rival competence-creating (as opposed to non-competence-creating) motivated subsidiaries are moreembedded in the host environment because they have less to lose and more to gain in terms of exploration of complementaryknowledge (Mudambi & Navarra, 2004), once entry motivation has been controlled for. This implies that competitionpositively affects subsidiary embeddedness, to the degree that subsidiary entry motivation is competence-creating.

H2a. Rival foreign subsidiaries are more embedded in relational ties with domestic actors when they have a competence-creating rather than a non-competence-creating motivation.

H2b. Rival foreign subsidiaries are more embedded in relational ties with domestic actors producing knowledge when theyhave a competence-creating rather than a non-competence-creating motivation.

4. Research method

The research method uses a quantitative approach complemented by in-depth interview material/case studies asexamples which illustrate managers’ perceptions of trust and embeddedness. In particular, data collection relied on a surveyquestionnaire, which was administered during face-to-face interviews with top managers at the foreign subsidiaries’ sites, asdescribed in detail below. Anonymity was guaranteed to the foreign investors who participated in the interview. Executiveswere also assured that data would be presented as broad aggregates without any specific reference to single firms. However,to fully exploit the richness of the information gathered during the interview, we contacted top managers interviewed againand asked permission to discuss their specific experience while still masking the company name. We obtained permissionfrom six subsidiaries which provide additional illustrative, detailed examples of non-rival foreign subsidiaries, rival foreignsubsidiaries with a non-competence-creating motivation, and rival foreign subsidiaries with a competence-creatingmotivation, as discussed in detail below.

4.1. Data collection

The sample frame was originally drawn from the Reprint database, which, developed and annually updated at thePoliticenico di Milano, contains a census of inward and outward Italian FDI since 1986. For this study, information provided

8 Subsidiary activities can be classified in a more finely grained way. Pearce and Papanastassiou (1999), for instance, propose a classification of subsidiary

R&D laboratories whose activities can be more or less distant from the product market, depending on whether the focus is on R or D. Such a detailed

classification is beyond the scope of this paper.



by Reprint was further updated and refined through newspaper and web searches. At the end of the data collection, weidentified 24 foreign-owned subsidiaries located in the province of Catania in 2005. Data were collected for 20 of thesesubsidiaries (i.e. 83% of the total number of foreign-owned subsidiaries located in the province), as the remaining fourdeclined to participate. In terms of size (measured by the number of employees), the sample firms are mostly small (i.e. withno more than 49 employees), with one medium size firm (between 50 and 249 employees) and two large firms (with morethan 250 employees) as per the 2003 European Commission classification. The 20 firms operate in five broad sectors, whichcan be further classified as high-tech and non-high-tech manufacturing and knowledge-intensive service sectors accordingto the EUROSTAT (2006) classification of industries and services, which focuses explicitly on the level of technology. Inparticular, five firms (25% of the sample) operate in high-tech (HT) manufacturing sectors, two (10%) in non-high tech (NHT)manufacturing sectors and 13 (65%) in knowledge-intensive service (KIS) sectors. 12 (60%) of the sample firms have a USheadquarters, six (30%) have a European headquarters and two (10%) have a Japanese headquarters. To address non-response bias, we compared the two subsets of respondents and non-respondents along the dimensions of sector andnationality of ownership (see Table A1). No statistically significant differences were found between respondents and non-respondents when running a Fisher exact test of independence.

The random sample can be regarded as representative of the phenomenon of inward FDI for the entire region of Sicily,where a sharp increase in the presence of foreign investors operating in high-tech sectors (e.g. electronics andpharmaceuticals) has been recorded from the mid-1990s onwards (Cominotti, Mariotti, & Mutinelli, 1999), with the provinceof Catania leading the trend and over time becoming more attractive than Sicily as a whole, as illustrated in Table 1 by theforeign investor entry growth rate.

Data on the 20 foreign-owned subsidiaries were collected through a structured questionnaire administered to topmanagers of the foreign-owned multinationals who are responsible, or are involved in the strategic management of the localsubsidiary, during face-to-face interviews.9 Although headquarters may influence subsidiaries’ relationships with local firmsand institutions depending on the autonomy allowed to foreign subsidiaries (Jindra et al., 2009), the decision to interviewmanagers at the subsidiary level draws on the idea that managers running the local subsidiaries have a greaterunderstanding of the subsidiary’s local relationships.

Data collection was assisted by a local investment promotion agency, which initially contacted the foreign subsidiariesand sent them a personalized letter with the description of the project, an assurance about confidentiality of the collecteddata and a formal request for a face-to-face interview. Then, the introductory part of the questionnaire was sent by faxdirectly to each firm, asking them to answer questions about the structural features of the firm. Interviews were conducted atthe foreign subsidiary’s site between November 2004 and March 200510 by the same two-person team, comprising anexperienced researcher and an associate of the local investment promotion agency.11 To ensure the reliability and accuracyof data collection, meetings were regularly held between team members after each interview. Follow-up telephoneinterviews with firm managers were also arranged to ask for clarifications and resolve inconsistencies that arose whenchecking for inter-researcher reliability.12 Managers’ answers were validated by additional data sources (i.e. newspapers andweb searches). Validation of the data was helped by participating managers’ feedback and critiques at a review seminar weorganized, a technique suggested by Henderson and Clark (1990) and also recommended by Daniels and Cannice (2004). Wefound that the participant managers generally agreed with our findings.

Table 1

Italian inward-FDI, average entry rate per year (number of foreign plants), by host sub-national area.

1986–1997 1998–2004

North–West 118.33 531.33

North–East 54.42 106

Centre 31.92 92.33

South and Islands 26.92 7.33

Sicily 2.75 2.33

Catania 0.92 1.5

Total 231.58 737

Source: Authors’ calculations on database Reprint, Politecnico di Milano – ICE.

9 The questionnaire, developed from the IB literature, was formulated and administered in Italian and only the parts used in the analysis were translated

into English (for a similar procedure see e.g. Marschan-Piekkari & Resi, 2004). The number of managers interviewed in each firm varied depending on the

availability of the firms, with the largest firm allowing for the participation of two managers, while in all others a single top-level manager was usually

interviewed.10 Each interview lasted between 90 and 120 min and in most cases interviews were supplemented by a site visit.11 Each individual in the team had a distinct role, with the experienced researcher handling the structured questionnaire and coding the answers in a

standardized (mainly binary) format, while the associate of the local investment promotion agency conducted the interview, requesting clarifications,

asking additional open questions and requesting examples. The idea was to combine the perspective of the academic and the practitioner.12 Team meetings were also held throughout the project to share thoughts and emergent ideas.



4.2. Measures

The information collected concerns market competition, entry motivation, and local relationships.

4.2.1. Market competition

Market competition between foreign subsidiaries was measured in terms of both business and geography of activity assuggested by Chen (1996) who defines competitors as firms operating in the same industry and targeting similar customers. Wefocus on the subsidiary’s activity and its geographical market as reported in the interview. Accordingly, we classified twosubsidiaries as rivals if they operated in the same line of business and in the same geographical market. Otherwise, subsidiarieswere classified as non-rivals. To identify different lines of business, subsidiaries’ activities were classified at the lowest level ofthe 4-digit classes. 12 out of the 20 sample subsidiaries were classified as market rivals (R), and 8 as non-market rivals (NR).

4.2.2. Market entry motivation

Entry motives were operationalised in terms of strategic versus non-strategic objectives when entering the foreignmarket. If the foreign investor entered the host economy primarily to access assets, competencies and technologicalcapabilities, achieve scale and motivation economies in R&D, spread R&D risk, and/or access technological resources, then itsentry motives were classified as being competence-creating (CC). If the foreign investor entered the host economy primarilyto increase market share, rationalize or enter into new businesses and geographic markets, and/or access cheap labour, thenits entry motives were classified as non-competence-creating (non-CC). Table A2 gives the full list of items referring tocompetence-creating and non-competence-creating entry motives.

Overall, four subsidiaries were classified as CC and 16 as non-CC. The classification of the sample under analysis along thedimensions of market competition and entry motivation is summarized in Table 2, which shows that R, non-CC motivatedsubsidiaries are over-represented.

4.2.3. Embedded local relationships

In a departure from the recognition that ‘‘economic exchanges are embedded in social and cultural exchanges’’ (Forsgrenet al., 2005, p. 106), firms must have some kind of relationship, considering that they identify their network in terms ofbusiness actors. Research on subsidiary embeddedness has argued that firm networks are characterized by a mixture ofarm’s-length (low embeddedness) and trust-based relationships (high embeddedness) (Forsgren et al., 2005). Thus, weclassified the relationships of foreign subsidiaries as trust-based or arm’s-length, depending on the perception of themanagers interviewed. Specifically, we asked whether they perceived the relationships of the local subsidiary with specificexternal actors as being trust-based or arm’s-length. The use of a perceptual measure closely follows the literature onrelational embeddedness (Forsgren et al., 2005, p. 108) which argues that ‘‘business networks can only be subjectivelydefined from an actor’s view point’’. This measure is also consistent with the aim of the paper, which investigates whether ornot competitors embed in the host economy. In particular, we focus on relational ties (RTs) with domestic institutions,domestic suppliers and customers, domestic sources of knowledge (e.g. the university and public research centres), andrecruitment relationships with domestic actors.

5. Statistical analysis

Following the methodology used by Cassiman, Colombo, Garrone, & Veugelers (2005) on an equally small sample, wecarried out a two-step statistical analysis. First we ran a principal component analysis (PCA)13 to summarize the informationon the various original questions about perceived trust-based relationships with domestic institutions, domestic suppliersand customers, domestic sources of knowledge (e.g. the university and public research centres), and recruitment

Table 2

Classification of foreign subsidiaries.

Market competition Total sample

R NR

Market entry motivation

CC 4 0 4

Non-CC 8 8 16

Total sample 12 8 20

13 Given the binary nature of the variables, to avoid complications of running a PCA on a tetrachoric correlation matrix without automatic computerized

routines (missing in statistical packages such as SPSS), we standardized the binary measures drawn from the questionnaire answers and ran a PCA

performed on a standard Pearson correlation matrix.



relationships with domestic actors. We relied on such information to build a series of (quantitative) synthetic indicatorsthrough a PCA of four independent groups of individual answers concerning each of the abovementioned RTs.

The PCA technique provides a more parsimonious description of the phenomenon, simultaneously compensating forpotential subjectivity problems through question diversity. Our sample size may raise concerns on the suitability of PCA,although there is no universal agreement on the minimum level of the size. Research has challenged the general rules ofthumb of the minimum sample size (MacCallum, Widaman, Zhang, & Hong, 1999; Preacheer & MacCallum, 2002).

MacCallum et al. (1999), and Osborne and Costello (2004) argue that the minimum level of the sample size is dependenton other design aspects such as communalities and loading size. To remove any concern, we tested for sampling adequacy byrunning the KMO test, for which we obtained values greater than or equal to 0.7 falling within the range of ‘‘good’’ values(Hutcheson & Sofroniou, 1999; Kaiser, 1974). To test that the factor model is appropriate, we ran Bartlett’s test of sphericity,and we obtained statistically significant results at p < 0.01.

We ensured that the communalities of our variables were all greater than 0.6 and that their means were greater than 0.7.Loading size was well above 0.7 in all, except in one case where it was 0.655, suggesting a good fit of the sample-to-population pattern (Velicer and Faca, 1998). No cross-loading of the variables was detected among the components.

We followed Kaiser’s (1960) recommendation of considering only Eigen values over 1 when selecting components. Wevalidated this rule of thumb by means of Cattell scree test plotting. These tests and checks confirmed the reliability of PCA onour small sample.

PCA yielded seven components the details of which are reported in Table 3.We related the seven components to subsidiary market competition and entry motivation, to test for mean statistically

significant differences. We tested for statistically significant differences between the component distributions of rival (R)and non-rival (NR) categories (H1), without distinguishing between different subsidiary entry motivations, and then we

Table 3

Principal components extracted, individual questions and load factors.

Principal componenta Questions Load factor

RTs with domestic institutions

Relationships with

domestic institutions

Relationships with the local university 0.897

Relationships with the local industrial/union institutions 0.885

Relationships with the local public research institutions 0.777

RTs with domestic suppliers and customers

Relationships with domestic suppliers Relationships with domestic (nonmultinational) firms 0.950

Supplying of intermediate products and components

by domestic (nonmultinational) firms

0.931

Supplying contracts with domestic (nonmultinational) firms 0.782

Relationships with domestic

suppliers and customers

Relationships with domestic (nonmultinational) firms operating in the same sector 0.956

Relationships with domestic (nonmultinational) customers 0.934

Relationships with domestic (nonmultinational) suppliers 0.730

Relationships with specialized suppliers Specific supplying from domestic spin-offs 0.773

Relationships with domestic services suppliers 0.687

RTs with domestic knowledge sources


sources of knowledge

Relationships with local public research institutes 0.935

Relationships with the local university in research consulting 0.910

Relationships with the local university in joint research project 0.881

Relationships with local public research centres in joint research projects 0.829

Relationships with local public research centres in research consulting 0.808

RTs with domestic recruitment sources

Recruitment relationships with domestic

actors (managers and professionals)

Recruitment of top managers from the local university 0.872

Recruitment of top managers from domestic firms 0.872

Recruitment of managers and professionals from Italian MNEs 0.655


actors (skilled and unskilled workers)

Recruitment of skilled workers from domestic firms 0.897

Recruitment of unskilled workers from domestic firms 0.838a Rotation method: Varimax with Kaiser normalization.

Table 4

Selection of the six subsidiaries.

Market competition Total

R NR

Market entry motivation CC Non-CC

OECD sector KIS KIS HT NHT

No. foreign subsidiaries 4 8 1 5 2 20

No. selected subsidiary 2 1 1 1 1 6

Subsidiary label KIS2–KIS3 KIS4 KIS1 HT1 NHT1

KIS, knowledge intensive service; HT, high-tech manufacturing; NHT, non-high-tech manufacturing.



made the same comparison within the non-CC category to control for the role of entry motivation. Then we tested for meandifferences between CC and non-CC categories within the R group (H2a and H2b). All mean differences were investigatedthrough a Mann–Whitney test, for which we reported exact significance.

6. Results

In discussing the results of the mean differences, we refer to six subsidiaries which were deemed to be representativeexamples of the three categories under analysis (i.e. NR, R with a CC motivation and R with a non-CC motivation) acrosssectors (HT, NHT and KIS sectors) (Pettigrew, 1990). We asked subsidiaries in each sector in each of the three categories toexplicitly discuss their experiences. Although managers’ availability constrained our selection, we sought to obtainpermission from at least one subsidiary for each sector within each category (see Table 4). For the NR category, we obtainedpermission from three subsidiaries (HT1, NHT1, KIS1); for the R with a CC motivation category, from a KIS subsidiaryconducting R&D in biotechnology and a KIS subsidiary developing software and wireless equipment (KIS2 and KIS3,respectively); for the R with a non-CC motivation category, from a KIS firm (KIS4). The number of six illustrative in-depthinterview material/case studies falls within the range for a meaningful analysis yielding a satisfactory degree of theoreticalcomplexity without running into the difficulty of coping with a large volume of data (Eisenhardt, 1989). Table 5 summarizesthe main features of these six subsidiaries.

6.1. The relationship between competition and embeddedness

The first column of Table 6 lists the seven different components describing the different RTs that foreign investorsestablished with domestic actors. In subsequent columns, results for R and NR foreign investors are given, with and withoutcontrolling for subsidiary entry motivation (columns four and three, respectively).

Regardless of their motivation, non-rival foreign subsidiaries are more embedded in RTs with domestic actors (H1), beingless anxious about knowledge spillovers to competitors. More specifically, non-rival subsidiaries are more embedded in RTswith domestic institutions, and with domestic suppliers and customers. Mean differences between rival and non-rivalforeign subsidiaries were statistically significant at p < 0.01, with the non-rival group scoring a higher mean value than therival group. This confirms the greater embeddedness of non-rival subsidiaries; it seems likely that this is becausecompetitive pressures are not as strong. These results are discussed with reference to the experiences of HT1, NHT1 and KIS1.

HT1 is a US subsidiary involved in production and R&D in pharmaceuticals (e.g. antibiotics and penicillin) and wasestablished in Catania in the mid-1950s. HT1 is a large firm which entered the market through the acquisition of a localcompetitor, to gain technological synergies. Given its long-term presence in the host economy, the manager interviewedclaimed that the firm was strongly embedded in the host environment, where it had developed trust-based RTs withdomestic suppliers and local institutions. Network relationships with domestic firms mainly consisted of subcontractingintermediate products, components and production phases as well as visits, meetings and participation in training courses.

Table 5

Main features of the six selected subsidiaries.

Subsidiary Activity Nationality of

ownership

Size Entry

mode

Entry

time

RTs with domestic actors

NR

HT1 Production and R&D activity

in pharmaceuticals

US Large Acquisition Mid-1950s Domestic suppliers,

local University,

public research centres

and local institutions

NHT1 Production and

commercialization

of crinkled paper

US Medium Acquisition Late 1950s Domestic clients and suppliers,

local university and institutions

KIS1 Design and implementation

of industrial plants

Germany Small Greenfield Late 1990s Domestic suppliers, domestic

firms operating in the same

sectors and local institutions

R with CC motivation

KIS2 R&D activity in biotechnology Switzerland Small Greenfield 2001 Local university,

public research centres,

domestic suppliers

KIS3 Development of software

and wireless equipment,

and R&D activity

US Small Greenfield 2001 Local university,

public research centres,

domestic suppliers

R with non-CC motivation

KIS4 Service and technical

assistance of

semiconductors

equipment

Japan Small Greenfield Mid-1990s Domestic Institutions

(i.e. local University)



The manager also said that the subsidiary outsourced a series of activities to local firms, ranging from R&D and logistics todistribution, stock management and maintenance. Similarly, the manager acknowledged strong RTs with the local universityin terms of joint research projects, production and research consultancy. At the time the research was conducted, thecompany said that further development of the R&D department would take place in the near future, partly as a result of therelationship with the local university. The university, together with domestic firms, was also recognized as being a majorrecruitment source for top managers, managers and clerical staff. Despite the RTs established with domestic actors, themanager reported no concern over risks of unintended private knowledge spillovers to the local environment through, forexample, imitation.

NHT1 is a US subsidiary producing and commercializing crinkled paper. Established in the host market in the late 1950sthrough an acquisition, NHT1 is a medium-size firm. The early establishment of NHT1 allowed the foreign subsidiary to buildup its network relationships with domestic actors. The manager interviewed declared that NHT1 had intense and long-lasting relationships with domestic clients and suppliers, firms operating in the same sectors, and the local university.Network relationships with domestic firms mainly consisted of supplying intermediate products and components as well asoutsourcing of services such as distribution, building maintenance and equipment. These RTs confirm the foreignsubsidiary’s knowledge of the local competencies, a result of the foreign subsidiary learning to trust local suppliers over time.The strong embeddedness of NHT1 in the host location was also reflected in the local recruitment strategy of the subsidiary.Skilled and unskilled workers were recruited from domestic firms. Similarly, the manager acknowledged imitation of NHT1’sproduction and commercialization activities by local firms. The manager reported no concern over the subsidiary’scompetitive advantage, the domestic firms being effectively unable to compete with the foreign company and there being noforeign direct competitors in the host market.

KIS1 is a German company operating in business activities, locally executing the design and implementation of industrialplants. Located in Catania in the late 1990s through a greenfield investment, KIS1 is a small firm. Although younger than thesubsidiaries discussed above, KIS1 entertained strong network relationships with domestic suppliers, domestic firmsoperating in the same sectors, and local institutions. The manager interviewed declared that domestic firms suppliedintermediate products and components, and also sub-contracted production phases to them. These relationships revealedawareness of and confidence in the competencies of the domestic firms, which was also confirmed by the sales contracts thatKIS1 had signed with domestic companies. In addition to these network relationships with domestic suppliers andcustomers, KIS1 also recruited employees from domestic firms. This strategy clearly revealed a great knowledge of domesticfirms’ expertise, which the foreign subsidiary came to know through relationships with suppliers and customers over time.In such relationships, the foreign subsidiary has learned to recognize the value of its domestic counterparts and has acquiredthem where possible. Recognition of valuable competencies was mutual, as stated by the manager, who claimed that localfirms imitated KIS1 production activities. Nonetheless, unintended knowledge spillovers in the host environment wereperceived as harmless by the foreign subsidiary, due to the lack of foreign competition.

Therefore, in line with the unintended private knowledge spillovers argument, foreign subsidiaries seek to avoidunintended private knowledge spillovers to foreign rivals by limiting their RTs with domestic actors. As a robustness check,

Table 6

Subsidiary embeddedness and market competition.

Non-CC + CC Non-CC

Market

rivals

Mean

rank

Mann–

Whitney U

Z Exact sig.a Mean

rank

Mann–

Whitney U

Z Exact sig.a


Relationships with domestic institutions NR 13.56 23.5 �1.98 * 11.63 7.0 �2.84 **

R 8.46 5.38


Relationships with domestic suppliers NR 11.94 36.50 �0.91 10.38 17.00 �1.62

R 9.54 6.63


suppliers and customers

NR 14.69 14.50 �2.64 ** 11.50 8.00 �2.59 **

R 7.71 5.50

Relationships with specialized suppliers NR 11.94 36.50 �0.91 8.63 31.00 �0.11

R 9.54 8.38



sources of knowledge

NR 10.94 44.50 �0.32 9.69 22.50 �1.31

R 10.21 7.31




NR 10.56 47.50 �0.44 8.75 30.00 �0.23

R 10.46 8.25

Recruitment of relationships with domestic


NR 11.94 36.50 �1.00 9.25 26.00 �0.70

R 9.54 7.75a [2 � (1 � tailed Sig.)].* Significant at p < 0.10.** Significant at p < 0.01.



we also controlled for heterogeneity in subsidiary entry motivation so as to ensure that rival foreign subsidiaries are moreembedded in RTs with domestic actors than non-rival foreign subsidiaries, regardless of their market entry motives.

6.2. The role of entry motives

In Table 7, the first column lists the seven components that capture the different RTs established by rival foreign investorswith domestic actors. Subsequent columns give the differences between rival non-CC and CC subsidiaries.

The Mann–Whitney test detected statistically significant differences between CC and non-CC foreign subsidiaries whenthey were market rivals, with the former being more embedded in RTs with domestic actors than the latter (H2a). Inparticular, rival CC (as opposed to non-CC) subsidiaries are more embedded in RTs with domestic institutions, suppliers andcustomers (p < 0.10). In addition, rival CC (as opposed to non-CC) subsidiaries are more embedded in RTs with domesticsources of knowledge (p < 0.01) (H2b). In all these cases, CC subsidiaries scored higher than non-CC subsidiaries.

These results suggest that, in line with the pressure to innovate argument, rival CC subsidiaries are strongly committed tosourcing new complementary knowledge locally to enhance their corporate competitive advantage. Accordingly, they widenthe exploration of the host environment to a broader range of realms where the potential creation of innovation may beconcentrated (Cantwell & Mudambi, 2005). Affiliates which are considered ‘‘centres of excellence’’ within the global network(or which seek to play this role) tend to be more integrated with domestic actors (Holm & Pedersen, 2000) in order to fosterthe creation of innovation, primarily through relationships with local institutions producing knowledge. In this case,strategic entry motives moderate concerns over unintended private knowledge spillovers, and the pressure to innovate forceprevails, since the benefits of inward knowledge outweigh the costs associated with outward knowledge (Mudambi &Navarra, 2004). Following business network theory (Andersson et al., 2002; Dyer & Chu, 2000; Dyer & Singh, 1998; Holmet al., 2005), rival CC subsidiaries value embedded relationships in terms of knowledge and distinctive resources thatenhance their corporate competitive advantage. In addition, embedded relationships are trust-based by construct (Coleman,1988, 1994; Uzzi, 1996). Thus, rival CC subsidiaries may be more embedded in RTs with domestic actors because they believethat these relationships have a low risk of knowledge spillovers. To illustrate this point we discuss the experiences of KIS2and KIS3 below.

KIS2 is a Swiss chemical company with a focus on biotechnology. Established in 2001 through a greenfield investment,KIS2 locally carried out R&D into viral vectors, virosome-based vaccines and genetic engineering. When entering the localmarket, the company was primarily motivated by the opportunity to access local scientific knowledge in chemistry. Themanager interviewed clearly stated that economies of scope in R&D, R&D restructuring and diversification were the mainentry drivers. Consistent with its competence-creating entry motives, KIS2 has developed strong linkages mainly with thelocal university and public research centres. The manager said that the core of the relationship with public research centresconcerned partnering in research activities as well as cooperation in postgraduate degree programmes. The R&D activities ofthe foreign subsidiary are conducted at the local university hospital departments, which host the subsidiary’s laboratories.Similarly, KIS2 is extensively involved in PhD and master’s degree programmes as well as in follow-up activities of graduatestudents. Despite the strong embeddedness of the foreign subsidiary with the local university, KIS2’s relationships withother local actors are far more limited. KIS2 relates most strongly to domestic knowledge sources, judging the expected

Table 7

Subsidiary embeddedness and entry motivation under market competition.

Rivals

Entry motivation Mean rank Mann–Whitney U Z Exact sig.a


Relationships with domestic institutions Non-CC 4.75 2.00 �2.66 **

CC 10.00


Relationships with domestic suppliers Non-CC 5.13 5.00 �2.08 *

CC 9.25

Relationships with domestic suppliers and customers Non-CC 6.88 13.00 �0.57

CC 5.75

Relationships with specialized suppliers Non-CC 7.75 6.00 �1.89

CC 4.00


Relationships with domestic sources of knowledge Non-CC 5.06 4.50 �2.32 **

CC 9.38




Non-CC 5.81 10.50 �1.44

CC 7.88



Non-CC 7.19 10.50 �1.44

CC 5.13a [2 � (1 � tailed Sig.)].* Significant at p < 0.01.** Significant at p < 0.05.



payoff of embeddedness to be greater than the costs of isolation from the host environment and of trusting domesticpartners.

KIS3 is a US greenfield investment established in 2001. The small subsidiary develops software and wireless equipmentlocally, and conducts R&D in the field. The motives of the subsidiary to enter the market were mainly innovation-driven, asKIS3 sought to achieve R&D economies of scale and motivation, R&D rationalization and the acceleration of technologytransfer from research to production. Similarly, the manager interviewed reported that, when entering the market, the firmwas interested in sourcing assets, competencies and technological capabilities through linkages with local firms andpartnerships with the local university and public research centres. In line with these entry goals, KIS3 establishedpartnerships with the local university and public research centres, to run joint research projects as well as for production andresearch consultancy. Relationships with the domestic environment also involve industrial institutions and domestic firms,although to a lesser extent. Network relationships with domestic firms primarily concern cooperation on research projectsand partnerships in research teams, as well as supply and sub-contracting activities. Despite local market competition fromother foreign investors, KIS3 has built up selected network relationships with domestic actors, reporting no concern overknowledge spillovers to foreign rivals.

Unlike rivals with a CC entry motivation, rival subsidiaries with a non-CC entry motivation adopted a strategy of isolationfrom the domestic environment and careful planning of the relationships with other foreign rivals to avoid risks ofknowledge spillovers. Thus, with pressure to innovate being absent, concerns over unintended private knowledge spillovers

prevail and competition negatively affects embeddedness with domestic actors. This argument is illustrated with referenceto KIS4’s experience.

KIS4 is a Japanese firm providing services and technical assistance for semiconductor equipment. Established in the localmarket in the mid-1990s through a greenfield investment, KIS4 is a small firm that entered the market with a non-CCmotivation. The KIS4 manager stated that marketing and sales rationalization through partnerships with foreign clients andsuppliers, plus access to a new geographical market and to specialized production capabilities were the primary entrymotives. The manager interviewed clearly stated that the primary reason for the presence of the company in the host marketwas the local establishment of a world-leading producer of semiconductors, to which the parent of KIS4 was interested inproviding services and technical assistance. However, opportunities raised in the local market by the presence of thesemiconductor producer also attracted other foreign investors competing with KIS4 simultaneously. The tough competitionfaced by KIS4 has forced the foreign subsidiary to carefully plan relationships with its foreign competitors. No relationshipswith domestic actors were reported by the managers, except for the local university which was recognized as merely asource of personnel recruitment. Accordingly, KIS4 has sought to reduce risks of imitation and to control competitivetechnologies.

7. Conclusions

Building on the IO literature and on the literature of knowledge spillovers in competitive relationships, this studyinvestigates the relationship between foreign subsidiary competition and embeddedness by explicitly accounting forcompetence-creating market entry motives. This is investigated in a peripheral area of an advanced economy, where theshallow endowment of the host market makes embedded relationships strategic, and competition limited to foreign–foreignrivalry. The empirical evidence confirms that competition discourages foreign corporate units from establishing RTs withdomestic actors owing to the risks of unintended private knowledge spillovers to rivals. However, competing foreign unitsenter into relations with domestic actors to source distinctive valuable resources when entering the market with acompetence-creating (as opposite to non-competence-creating) motivation, as a result of the pressure to innovateassociated with competition.

This study offers three contributions. The first contribution is to business network theory, which has thus far focusedon the effects of subsidiary embeddedness on corporate performance while leaving aside the issue of the antecedents ofembeddedness. The second contribution of the study is to the literature on MNE linkage creation, in which differentantecedents of linkage formation have been identified at different analytical levels but without, however, explicitlylooking at market competition between foreign subsidiaries in the host economy. This paper advances both streams ofresearch by focusing on competitive conditions between foreign investors as an antecedent of embeddedness. The thirdand final contribution is to the broad IB literature, which has investigated FDI in non-traditional areas mainly inemerging economies (Meyer, 2004; Todt et al., 2007; Yan et al., 2007). By contrast, the activities of MNEs in peripheralareas have been little explored (Benito & Narula, 2007; Manolopoulos, 2006; Santangelo, 2004, 2009; Todt et al., 2007),probably because of the small scale of the phenomenon. The contribution of this study is in the direction of expandingour understanding of this phenomenon. By analyzing the relationships between competition and embeddedness, thestudy spells out the conditions under which inward FDI in peripheral areas may be beneficial to the host location andinvesting firms.

The study has important implications for managers. Prior studies have recognized that subsidiary embeddedness haspositive effects on performance (Forsgren et al., 2005). Our analysis alerts managers to the fact that, although embeddednessis traditionally associated with greater performance, in competitive conditions embeddedness also comes at a cost (i.e.unintended knowledge spillovers to competitors) which subsidiaries may or may not be able to afford, depending on theirability to appropriate rents. This ability is traditionally attributed to competence-creating motivated subsidiaries.



A major policy implication follows on from the analysis. Prior research has acknowledged the need to distinguish quantityFDI from quality FDI when designing FDI-attraction policy (see e.g. Beugelsdijk, Smeets, & Zwinkels, 2008; Giroud & Scott-Kennel, 2009). This study draws attention also to the competitive relationships between foreign investors, which in non-traditional locations may limit their embeddedness and, as a result, the beneficial potential of inward FDI for thedevelopment of the host economy.

The study has some limitations. Firstly, the sample size limits the empirical support for the argument proposed. Furthereconometric analysis on larger samples is needed. However, it should be noted that the sample size reflects the small scale ofthe phenomenon of FDI in peripheral areas. Secondly, other variables (e.g. time and entry mode) may have moderatinginfluences on one or both of the forces driving the relationship between competition and embeddedness. Inclusion of thesemoderators in the analysis would help further qualify the relationship between competition and embeddedness. However,we felt that at this stage it would have complicated the analysis unnecessarily. In future research, it certainly would be worthaccounting for these. Thirdly, the study adopts a perceptual measure of embeddedness, built on the concept of trust. In futureresearch, extra care will need to be taken to adopt more generalised definitions of trust that can capture the richness of thefundamental phenomenon, and to operationalize trust so as to capture the complexity of the construct (Bhattacharya,Devinney, & Pillutla, 1998).

Acknowledgments

The author would like to thank the editor and two anonymous reviewers for constructive comments. The author is alsograteful to Ram Mudambi and Ulf Andersson for insightful suggestions on earlier versions of the paper and to the participantsin the 2010 EIBA conference, 2009 DRUID summer conference, a 2008 seminar at the Department of International Economicsand Management of the Copenhagen Business School. Financial support to the 2003 PRIN project ‘‘Foreign direct investmentand local knowledge spillovers: The high-tech cluster in Catania’’ by the Italian Ministry of University and Research isgratefully acknowledged.

Appendix A

See Tables A1 and A2.

Table A1

Representativeness of the sample of analysis.

Sectors Total foreign

subsidiaries in

the population

Respondent Non-respondent Fisher

exact test (p-value)

Manufacture of pulp, paper and paper products (NHT) 1 1 0 1.000

Manufacture of chemicals and chemical products (HT) 3 3 1 0.544

Manufacture of machinery and equipment n.e.c. (NHT) 1 1 0 1.000

Manufacture of electrical and optical equipment (HT) 2 2 0 1.000

Real estate, renting and business activities (KIS) 16 13 3 1.000

Total 23 20 4

Nationality of ownership Total foreign subsidiaries

in the population

Respondent Non-respondent Fisher exact

test (p-value)

European 6 6 0 0.539

Japanese 3 2 1 0.437

US 15 12 3 1.000

Total 24 20 4

HT, high-tech; NHT, non-high-tech; KIS, knowledge-intensive services.

Table A2

Definition of market entry motivations.

Competence-creating Non-competence-creating

– Scale economies in R&D – Scale economies in production

– Scope economies in R&D – Broadening the product mix

– R&D restructuring/rationalization – Entering a new business

– Acceleration of firm’s technological transfer from

research centres to production

– Rationalization of production

– R&D risk spreading – Rationalization of marketing and sales

– Setting common standards – Accessing specialized production capabilities

– Reduction of imitation risks – Increasing market share,

– Control of competitive technologies – Entering a new geographical market

– Access to assets, competencies and technological capabilities – Accessing cheap labour force



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Table A2 (Continued )

Competence-creating Non-competence-creating

– Accessing tacit knowledge and other technical/technological

capabilities embedded in the local environment

– Establishing links with local Italian/foreign clients

– Establishing links with universities, public

and private research centres

– Establishing links with local Italian/foreign suppliers

– Establishing links with firms, domestic or foreign multinationals

belonging to local technological clusters operating

in the same or in related sectors

– Presence of infrastructures (motorways, airports,

plants for energy production, etc.) to serve target markets

– Availability of (transportation, financial, retailing,

software, etc.) services to foreign-owned firms’ activity

– Financial and fiscal incentives



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The tension of information sharing: Effects on subsidiary embeddedness

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