Subsidiary Specific Advantages and Multiple Embeddedness
in Multinational Enterprises
Alan M. Rugman(Henley Business School, University of Reading)

Abstract
Multinational enterprises (MNEs) have rapidly expanded over the last few decades,
but the mechanisms to effectively manage the intra-firm knowledge flows withincomplex and dispersed MNE hierarchies and networks have remained very much a
black box.

This paper makes two contributions. First, it expands on the linkages

between country specific advantages (CSAs), firm specific advantages (FSAs) andsubsidiary specific advantages (SSAs), emphasising the different types of embeddeness.
Second, it highlights that while MNEs can create SSAs in their growing portfolio ofcompetence creating subsidiaries, there is a fundamental difficulty in turning suchlocation bound FSAs into non location bound FSAs. Effective competence creation
through a network of MNE subsidiaries requires an appropriate balance between
internal and external embeddedness, leading to four interactions which we call
´PXOWLSOHHPEHGGHGQHVVµKeywords
Multinational enterprise; subsidiary specific advantage; multiple embeddedness;competence creating subsidiary; MNE networks; rebundling.

1. Introduction
The theory of the MNE has developed over the last fifty years to explain three units ofanalysis: the country; the parent firm; and the subsidiary. At country level there arecountry specific advantages (CSAs); at parent firm level there are firm specificadvantages (FSAs); and at subsidiary level there are subsidiary specific advantages(SSAs). The MNE is a unique organisational form that links all three of these units ofanalysis, Rugman, Verbeke and Nguyen (2012).
To explain the MNE scholars of international business first explored the linkages
between CSAs and FSAs, Rugman (1981). From international economics, we have
explanations of how factor price arbitrage leads to international trade, and why
economies of scale and trade in differentiated products approximates the activities of
MNEs; these are all CSA based explanations. From Coase (1937) we have the market
imperfections basis for internalization theory, Rugman (1975), Buckley and Casson(1976). This also builds on Hymer (1960) to emphasize how parent MNEs can generate
FSAs based upon their home nations CSAs. This led to the product life cycle of Vernon

11

(1966) and related literature on the internationalisation process by Johanson and
Vahlne (1977).
More recently it has been recognized that the early development of CSAs and FSAs
assumed a dominant parent firm, operating in a hierarchical manner, transmitting its
FSAs, in tacit knowledge, to its subsidiaries. A managerial literature has developed
where the autonomy of the subsidiary has been examined, in particular the manner inwhich a subsidiary interacts with host country CSAs, and with its parent, Bartlett andGhoshal (1989). The subsidiary may develop location-bound FSAs in the host country
and possibly use the network of the MNE to transfer such SSAs back to the parent firm,or to other subsidiaries, in which case the subsidiary has developed non-location bound
FSAs, Rugman and Verbeke (1992, 2003).
Birkinshaw (1996, 1999) has explored the manner in which subsidiaries develop
DXWRQRPRXV ´LQiDWLYHVµ or mandates, and how these SSAs may become best practicefor the MNE network.

These interactions between parent firm and subsidiary , andthe unique role of the sXEVLGLDU\ LQ LQWHUDFWLQJ ZLWK KRVW &6$V LV FDOOHG ´GXDOµ
embeddedness. The manner in which the subsidiary can turn LB FSAs into non LB
FSAs in a third type of embeddedness. Finally the manner in which the parent firm
has developed FSAs based on the home country CSAs is a fourth linkage to be studied.
Thus this paper examines these four types RI´PXOWLSOHµ HPEHGGHGQHVV For a related
and more detailed discussion of these interactions, see Ferraris (2014).

2. Advancing Understanding of Multiple Embeddedness
A useful way to approach analysis of the competence creating subsidiary (CCS) is
through the 2011 concept of multiple embeddedness, Meyer (2009). By this is meant
the ability of a CCS WRHQJDJHLQ´GXDOµHPEHGGHGQHVVto both transfer FSAs from its
parent firm (internal embeddedness) but also for the CCS to engage in recombinations
with host country CSAs (external embeddedness), Narula (2014).

Multiple

embeddedness occurs when the CCS can possibly transfer these host country FSAs
back to the parent firm, and when the parent firm itself engages with home country
CSAs.
In order to model dual embeddedness it is necessary to recognize that the internal
embeddedness of the CCS results from the parent firm recombinations with external
complementary assets (home CSAs) in the home country.

Therefore, multiple

embededness embodies four sets of relationships. The CCS uniquely benefits fromhome and host country CSA recombinations. This is achieved through its status as a
subsidiary within the MNE, where the parent MNE has built FSAs based on its homenation CSAs.

Second, the CCS specializes in FSA development in the host economy,

EXW DOVR PDNHV XVH RI DSSURSULDWH WUDQVIHUV RI WKH SDUHQW ILUP·V )6$  7KXV WKH &&6has access to two sets of CSAs (home and host) and two sets of FSAs (parent andsubsidiary). These relationships are shown in Figures 1 and 2.
22

Figure 1: Parent-level firm-specific advantages (PARENT FSAs) and home CSAs
Parent-level Firm-Specific
Advantages (FSAs)
Low

High

High

1

3

Low

2

4

Home
CountrySpecific
Advantages(CSAs)

Figure 2: Subsidiary-level firm-specific advantages (SUBSIDIARY FSAs) and host
CSAs
Subsidiary-level firm-specificadvantages (SSAs)
Low

High

High

5

7

Low

6

8

Host
CountrySpecific
Advantages(CSAs)

The axes of Figures 1 and 2 build upon the basic CSA/FSA matrix, first conceived by
Rugman (1981) and illustrated in the Japanese edition of his International Businesstextbook, Rugman et al.(1987). In Figure 1 home CSAs are related to parent firm FSAs.

3
3

In Figure 2 host CSAs are related to subsidiary FSAs.

The latter can be calledsubsidiary specific advantages (SSAs). In the basic CSA/FSA matrix, cell 1 represents
successful firm level strategy built upon the harvesting, exploitation and marketing ofcountry level advantages.

There are no FSAs dependent upon the strong CSAs

engaged by the parent MNE.
Here we extend this CSA/FSA framework to incorporate the three types of FSAs
popularized by Verbeke (2009): stand alone FSAs; FSAs based on routines andcodification; and tacit knowledge FSAs. These are shown in Figure 3. But first it
should be noted that there are no FSAs in area X. This is an area of pure CSAs.
In Figure 3, area A represents stand alone FSAs for the parent firms, which areentirely derived from recombinations with home CSAs.

In contrast, area B will

represent FSAs due to routines and codification. Finally, area C represents the mostadvanced type of tacit knowledge FSAs due to the recombinations with advanced
complementary assets in the home country.

We now apply this thinking toembeddedness and then relate it back to Figures 1 and 2.
In principle, all three types of parent firm FSAs can be transferred to its subsidiaries.
We shall now explore these cases of internal embededdness. Clearly, there is more
complexity in understanding these three types of FSAs than is currently recognized in
the CCS literature.
On the left hand top side of Figure 3, area A, represents stand alone FSAs which areentirely due to recombinations with home CSAs.

There is weak external

embeddedness as these FSAs are entirely dependent upon strong CSAs. Area B of
Figure 3 represents parent firm FSAs due to routines and codification, along the linesof Kogut and Zander (1993), these yield more robust FSAs. Finally, area C represents
tacit knowledge recombinations by the parent firm, which can lead to strong internal
embeddedness.
This thinking can also be applied to the subsidiary. In Figure 3 on the right hand side
is Area A* where there are stand alone subsidiary specific advantages (SSAs). Theseoccur when the subsidiary interacts with host CSAs.

This leads to weak external

embeddedness, with a stand alone SSA. In area B* there are location bound SSAs dueto the implementation by subsidiary managers of a strategy of national responsiveness.
In area B* SSAs are largely driven by the need to adapt to the host country regulatory
framework and to develop routines and codification for such SSAs this leans to alocation-bound SSA. In area C*, the SSAs in tacit knowledge are location bound inorigin but can also become non location bound if this subsidiary is part of a successful
MNE network organizational structure.

In such a case the best practice of thesubsidiary can be transferred around the MNEs network, Rugman and Verbeke (2003).

4
4

5

The main point of this paper is to demonstrate that most of the literature (especiallythe institution based view) assumes that area Y explains the CCS, even attempting toshow that there exist FSAs (or SSAs in area Y). We are puzzled by this, as an earlier
literature on parent FSAs (in areas A, B and C) clearly does not assume that FSAs
arise for a parent MNE in area X.
Figure 3 can be linked back to Figure 1 and 2.
embeddedness is in the CSAs of cells 1 and 5.

Essentially strong external
For the subsidiary, external

embeddedness is represented in cell 5, the access to host CSAs, with no related FSAs.
Stand alone FSAs are combined in cells 3 and 7. This suggests that weak external
embeddedness need to focus on such FSAs in areas A plus A*. In addition cells, 3 and
7 are also relevant for the tacit knowledge recombinations of areas C plus C*. Finally,
the FSAs due to codification and routines, of cells 4 and 8 need to be addressed, as inareas B plus B*.
In short, the internal embeddedness of FSAs with SSAs, is much more complex thanis currently recognized in the literature. Yet much of the current literature is not even
about FSAs; it looks into area Y (host CSAs) only.

3. FSAs and Dual Embeddedness
Based on the frameworks above, we need to distinguish between subsidiaries and
LQGLYLGXDO ¶HVWDEOLVKPHQWV· %\ ¶HVWDEOLVKPHQW· ZH PHDQ D FOHDUO\ GHOLQHDWHG DQGcoherent individual unit of a firm that engages in value adding activity as a single anddistinct organisational and managerial unit. A specific subsidiary may legally own
and/or control several establishments in a given country and actively or passively
coordinate these activities; in much the same way as an MNE may own and/or control
the activities of several subsidiaries.
The

competence

creating

subsidiary(CCS),

mayconsist

of

one

or

many

establishments. Our focus here is on the aggregate of the activities in one host country,
and thus our focus is on subsidiaries that are in aggregate systematically anddeliberately engaged in creating new competences. It will probably do so with theutilisation of competences, both new and old, which in itself will also lead to
improvements in existing competences, for much learning is of an incremental rather
than a radical nature. Subsidiaries rarely have single roles, as indeed is the case forindividual establishments.
To summarise a distinct literature, subsidiaries and parents tend to have overlapping
but nevertheless distinct sets of competences at their disposal. The MNE at large is an
integrator: it seeks to combine the assets of a variety of subsidiaries together. Eachsubsidiary seeks to do the same, and this includes not just internally generated
competences, but also externally-based location-specific assets.
Competence cUHDWLRQOLHVDWWKHKHDUWRIWKHVXUYLYDODQGVXVWDLQDELOLW\RIDQ\ILUP·V
competitive advantage. Firms (and their subsidiaries) are continuously engaged in
66competence-FUHDWLRQ HYHQ LI LW LV ¶RQ WKH PDUJLQ· WR LPSURYH WKHP LQFUHPHQWDOO\through learning-by-doing or learning-by-using. Productivity improvements may alsocome through the auspices of customer-supplier interactions, as well as by observing
the activities of competitors. Firms also seek new classes of assets by deliberately
engaging in systematic exploration, through formal R&D.
In theory, the concept of competence-creation is largely associated with one specific
type of ownership advantage ² that associated with knowledge assets in the traditional
sense of technology/engineering, such as machinery and equipment, and in the
personnel who operate and maintain them, and the rent-generating knowledge
embodied in personnel. These asset-type ownership advantages have dominated muchof the empirical literature (Dunning, 1993). They are more tangible and easier to proxy(and therefore empirically test) through data on R&D expenditures, patents, royalties
and licensing fees, and so on. They are also the focus of formal R&D activities, andcompetence-creating subsidiaries are generally taken to imply subsidiaries that are net
contributors to aggregate FSAs of this type (Cantwell and Mudambi 2005). Their value
to the MNE as a whole is a function of the subsidiaries to make these FSAs available to
the rest of the MNE. In other words, the generation of competences by subsidiaries
needs to be complemented by an effective distribution of these assets to otherconstituent parts of the MNE, and their ability to internalise these assets.
Yet while the theoretical literature, correctly is focussed upon what is area C* in
Figure 3, much of the empirical literature is using data about host nation CSAs, inarea Y. What we are highlighting is that exploiting the benefits of multinationality
from the point of view of a competence creation subsidiary requires us to revisit theconcept of dual or multiple embeddedness (Meyer et al 2011). That is, for subsidiaries
to be effective competence-creators they must be effectively embedded in the external,
host HQYLURQPHQW ¶H[WHUQDOO\HPEHGGHG· in the Y space of Figure 3), and if these newcompetences are to be distributed and utilised throughout the MNE, they must also be
ILUPO\ HPEHGGHG ZLWKLQ WKH 01( QHWZRUN ¶LQWHUQDOO\ HPEHGGHG· in the FSAs areas
A*, B* and C* of Figure 3, which, in turn, need to interact with the parent firm FSAs ofareas A, B and C in Figure 3.

4. External Embeddedness
External embeddedness for the competence subsidiary differs from the internal SSAs
at the subsidiary level (Rugman and Verbeke 2001). MNE subsidiaries are generally
always externally embedded with local customers and suppliers, an aspect of area Y.
Offshoring is an example of area Y. Here the MNE is part of a supply chain, or a
production network, using cheaper host country labour, or other elements of hostcountry CSAs in area Y. In contrast, SSAs arise if the CCS is continuously engaged in
adaptations and modifications to meet specific needs, since its products and services
must use complementary host CSAs in a unique manner to create location bound SSAs.
7
7

For external embeddedness, in area Y, subsidiaries engaged in competence creationneed ´IODJVKLSµ UHODWLRQDO FRQWUDFWV DQG access to specialised actors that make up the
local innovation system, that are linked to the subsidiary either directly or indirectly.
This includes universities, public and private research institutes, government researchcouncils, as well as competitors, collaborators and suppliers, (Rugman DQG '·&UX]
2000). The importance of collocation with the other actors in an innovation system
when conducting R&D activities cannot be overstated. Important synergies can exist,
and at its most optimal, such collocated institutional knowledge infrastructure canpossibly move from area Y into area C* when D¶FOXE·or community of practice provides
access to specialised knowledge to those who are locally embedded, and excludes those
who are not (Tallman and Chacar 2011, Narula and Santangelo 2012). Thus thenshould generate a proprietary SSA.
Competence creation by subsidiaries located abroad presumes that the location itself
provides distinct host CSA benefits deriving from that location, (area Y) that aresuitably different from those of other locations, including its parent (area X). Such host
CSA benefits are broadly classified as implying local external embeddedness, butnaturally there is considerable variation in the degree to which they locally embedded.
Local embeddedness can mean being integrated more broadly with the innovation
system of the host country. Such local embeddedness may be organic, in that thesubsidiary has grown roots over a long period of time, perhaps as a part of a multidomestic strategy, either currently, or in the past, and is operationally andstrategically autonomous. It may also occur through an acquired subsidiary, althoughgreenfield entrants have greater difficulty becoming externally embedded; because
membership is especially difficult (McCann and Mudambi 2005). Both situations imply,
intensive, deep external embeddedness with an extensive set of actors, such that it isconsidered as a local firm (Cantwell and Mudambi 2011).
On the other hand, a subsidiary can be a less embedded, because local linkages areintensive, but not extensive. For instance, a subsidiary that forms part of a locallyconcentrated cluster around a flagship firm will have intensive linkages with the otherfirms within this geographic enclave, possibly even only with the flagship firm (or key
partners), at whose behest it engages in creation of competences specific to thiscustomer 5XJPDQ DQG '·&UX]  .

Local embeddedness, of course, remains a

gradual process, and newly established greenfield subsidiaries are expected to be¶RXWVLGHUV· DW LQLWLDO HQWU\ Local embeddedness is a slow process, since it requires
building up a certain degree of social capital to establish ties with the key local players
in the innovation system (Narula and Santangelo 2012), (Cantwell and Mudambi 2011).
As Andersson et al (2014) point out in their paper on external embeddeness, the extent
to which subsidiaries are able to leverage location-specific assets in the host country isdriven by the competitive dynamism of the host country market conditions, a type of
CSA.

8
8

One of the primary FSAs of the MNE is its ability to utilise stand alone FSAs (areas A
and A* in Figure 3). The ability to monitor and sift through information and identify(and subsequently exploit) market imperfections of areas X and Y, in a timely fashion
underlies the capacity of firms to develop FSAs. Such activities presume considerable
knowledge of markets, and the ability to acquire such knowledge on an ongoing basis,and the ability to integrate information from various markets together. Such markets
include markets for knowledge, which though imperfect, do exist. This class of FSAs inareas B and B* thus implies a degree of local internal embeddedness.

5. Internal Embeddeness, Internalisation and Recombinations
A high degree of local embeddedness is required for most forms of knowledge creation;
this is largely an activity that requires the combining and implementing of various
existing knowledge sets.

Some of these multiple sets of knowledge are normallyassociated with the FSAs of specific firms embedded in the host innovation system, or
it is extracted from other non-firm actors within the knowledge infrastructure throughformal and informal collaborative processes. Such complementary knowledge assets are
essentially location-bound SSAs, in areas A*, B* and C*. Geographical proximity isoften essential for the exchange of area C* tacit information, and the greater theembeddedness of the subsidiary, the greater the likelihood of achieving therecombination. Indeed, MNEs have the ability to combine and internalise locationspecific assets associated in the home CSAs, along with the host country CSAs in which
it is engaged, plus its existing FSAs, Hennart (2009).
Local embeddedness is a means to an end, the end being the creation of newcompetences. The VXEVLGLDU\·VDELOLW\ to create new competences depends on the ability
WRUHFRPELQH RU¶EXQGOH· WKH)6$VRUORFDWLRQ-specific assets associated with the host
ORFDWLRQ·V LQQRYDWLRQ V\VWHP ZLWK LWV H[LVWLQJ DVVHWV 9HUEHNH    7KH DELOLW\ WR
recombine is itself a crucial set of FSAs that not all firms possess in equal measure.
7KDWLVZKLOHWKHVXEVLGLDU\DFWVDVD¶PHFKDQLVP·WR convert location-specific assets to
FSAs, it is by no means a set of assets that all firms possess.
Recombination advantages are FSAs, which represent capabilities for the recombining
9HUEHNH RU¶EXQGOLQJ· +HQQDUW RIFRPSOHPHQWDU\DVVHWVto improve theirperformance. As shown in Figure 3, such FSAs come in several different classes, not allof which may be needed by any given firm. Different firms will have varying
combination of strengths in the various asset classes of areas A*, B* and C* of Figure 3.
Firms require a certain threshold of assets to successfully compete in any given milieu,
and this threshold of FSAs consist of several different classes of complementary assets
ZKLFK PXVW EH ¶EXQGOHG· WRJHWKHU VRPH RI ZKLFK DUH ORFDWLRQ-bound and to which afirm may have privileged access. Where a firm is deficient in one type of FSA, it cannonetheless continue to be competitive, overcoming this weakness by leveraging otherassets (whether associated with a specific location or a firm). This requires expertise99

that is not easily acquired, nor transmitted. Such expertise is therefore a firm-specificasset in its own right (Rugman and Verbeke 2003, Narula 2014).
There are several ways to overcome such limitations.
i.

compensating with a stronger portfolio of assets in another category ²
say, if it has superior technological skills that give it a cost advantage
which is greater than the disadvantage of having poor brandrecognition;ii.

seeking to utilise the complementary assets from the portfolio of another
firm, say by acquiring or licensing, or by engaging in a joint venture;iii.

seeking

privileged

accesstolocation-specificadvantages

which

compensate for the disadvantage, and where its current location does
not provide such access, in a new location.
Rebundling FSA-type advantages are establishment-specific, and reflect theabsorptive capabilities of the establishment. They require the ability to value the ILUP·V
internal assets. To value an asset requires objective information about tangible andintangible assets but such information is often un-codified, embedded in routines,
equipment, and brands, in individuals, and is often variously protected (Narula, 2014).
Rebundling advantages have an important location-bound aspect. There is aconsiderable proportion of the FSAs of an given subsidiary that are location-bound, andare therefore subsidiary-specific advantages (Rugman and Verbeke 2001). This hostcountry ¶VWLFNLQHVV·is still a CSA, to do with institutions, and this forms another type ofmultiple embeddedness. Deep external embeddedness in the local innovation system (ofhost CSAs) implies familiarity with institutions, and provides the benefit of access to
specific knowledge sources not available to outsiders (such as the parent of the MNE
being located elsewhere), but at the same time, it implies that the new competences
have an important location-specificity.
Not all institutions directly affect market transactions of firms. There are otheractivities essential for the survival and functioning of the firm on a day-to-day basis, aswell as those that ensure the long-tem survival of the firm. Firms must interact withPDUNHWVIRU¶VXSSRUW·LQSXWVVXFKDVFDSLWDOPDUNHWVODERXUPDUNHWVHWF)RULQVWDQFH
selecting and training suitably qualified employees means that firms must develop
flagship relationships with universities, and not just to hire the best graduates
5XJPDQ DQG '·&UX] (2000). More embedded firms are able to shape the curriculum,
select the best graduates, and establish joint research activities with universities. They
also tend to invest in long term cooperation, sponsoring visiting professors andresearchers from other countries in research themes that they felt needed to be
developed (Narula and Santangelo 2012). Formal and informal institutions bind firms
to other non-firm actors, including those established by governments. This includes
research funding organisations, standards institutes, and regulators.
10
10Given that there is a tendency for firms in a given industry to be spatially proximate
to each other, they also benefit from informal networks between firms, allowing for agreater flow of knowledge between firms and between firms and non-firms (Nachum
and Keeble 2003).
Economic actors in any location may have close relationships with other economic
actors in the same location. In many cases, the knowledge infrastructure has evolved
around and with their own domestic activities, often over a long period of time
(Granovetter, 1973; 1985). Such linkages confer the basis to generate economic rent forincumbents, and are a cost to new entrants or those less entrenched in the domestic
PLOLHX (VWDEOLVKLQJ ¶PHPEHUVKLS· LQ EXVLQHVV DQG LQQRYDWLRQ QHWZRUNV LQ QHZlocations is not costless, and each location requires a similar investment. Knowledge toovercome or reduce the liability of outsidership, once acquired can be used and updated
at low marginal cost.

Building up this knowledge for another location takes

considerable time and investment, and explains the propensity of firms to show atendency to maintain the more knowledge-intensive value adding activity in the homelocation or region, particularly where they are optimally embedded. Even where thelocal system is sub-optimal or incomplete, firms are reluctant to venture abroad given
the high cost of exit.

Nonetheless, firms that do not enjoy high levels of these type of

FSA are likely to use outward FDI also be a means to exit institutional constraints at
home.
High levels of institution-based FSAs, because they are context and location-specific,
paradoxically means that new competences generated are more likely to be locationERXQGDQGXOWLPDWHO\PDNHVWKHPGLIILFXOWWR¶H[SRUW·WRVLVWHUVXEVLGLDULHV, even witha good MNE network capability.

6. Rethinking Subsidiary Internal Embeddedness
As we have already emphasised, it is one thing for the subsidiary to createcompetences; it is entirely another that they benefit the MNE at large. This requires

internal embeddedness, for areas A*, B* and C* in Figure 3. That is, there must be
tangible and cogent mechanisms by which both the parent and the subsidiary(presuming for simplicity a stylised MNE composed of a dyadic single-subsidiary andsingle HQ):
1. The HQ needs to identify assets at the subsidiary level that it can potentially
utilise.
2. The subsidiary must be willing to make these assets available to the parent on
mutually acceptable terms. Even where such assets are identified by the parent,
the subsidiary may not wish to make them available.

1111

3. Determine whether such assets are in fact transferrable, and not locationERXQG$UHWKHFRPSHWHQFHVFUHDWHGE\WKHVXEVLGLDU\¶XVHIXO·WRWKHUHVWRIWKH
MNE?
4.

Transfer these non-location-bound FSAs efficiently from the subsidiary to the
HQ, and to integrate these DVVHWV ZLWK WKH +4·V H[LVWLQJ ORFDWLRQ-bound and1/% )6$V   LH KRZ GR WUDQVIHUUHG DVVHWV SURJUHVV IURP EHLQJ ¶XVHIXO· RU
¶XVDEOH· WR EHLQJ ¶XVHG· WKURXJK LQWHJUDWLRQ"

This is the essence ofrecombinations in cells 1 and 7; 3 and 7; and 4 and 8 of Figures 1 and 2.
HQ-subsidiary relationships in reality are complex, and much of the research in thisarea presumes highly stylised set of interactions (Rugman and Verbeke 2001). At thevery least, there is a principal-agent problem, and even wholly-owned subsidiaries do
not always act in the best interests of the parent. This relates to the classic
centralization/autonomy paradox (Tavares 2001).
These challenges are further exacerbated when one thinks of the rapid expansion of
MNE activity over the last 20 years. The growing multinationality,- both in terms ofnumbers of subsidiaries, and the intensity of their activities in multiple locations ² ofboth established MNEs, as well as new MNEs

has created large hierarchies (ornetworks) of subsidiaries that are geographically dispersed, with differing degrees of
local embeddedness, and a wide and varying scope and scale in each location. While
new technologies make it easier to monitor activities across distances, and to transfer
information, not least because of information and communication technologies, theVKHHU YROXPH RI VXFK LQIRUPDWLRQ PHDQV WKDW WKHUH LV ERXQG WR EH ¶LQWHUQDO PDUNHWIDLOXUHV· That is, MNEs have simultaneously expanded geographically and the scope,scale and competence levels of these subsidiaries. Information sharing systems andintra-MNE control mechanisms that act as arteries between the dispersed constituent
establishments of the MNE, have not expanded at a pace to handle the ever-greater
information flows between these dispersed activities. In short, the demand greatly
outstrips supply for intra-MNE knowledge management systems. Narula (2014) calls
this a lack of MNE inteUQDO PDUNHW ´EDQGZLGWKµ It also explains that most MNEs
operate mainly in their home region of the triad, and not globally, Rugman and Vebeke(2004).
MNE internal markets are rightly considered to be more efficient than independent
firms in engaging in expropriating the opportunities of cross-border markets forknowledge, but this does not mean that they do not suffer from endemic imperfections
or failure.
To be sure, the challenges of optimising knowledge flows between HQ andsubsidiaries are especially complex in the case of innovation, because of the intangible
nature of knowledge. Not all knowledge can be affordably codified (think of writing abook to explain how to competently play the violin; the cost required to codify all the
relevant knowledge would be prohibitive). This tends to be more so when the1212knowledge being transferred is some distance away from the market, or is complex inthat it requires a variety of complex complementary sets of knowledge to utilise. In
addition, we know that knowledge is context-specific, and even within the same
operating unit, there is need for common contexts of experience amongst employees toconvert their individual tacit knowledge to explicit knowledge.
It is recognised in the IB and strategy literature that the MNE is an efficientmechanism to transfer assets to and from its various geographically dispersed
subsidiaries (e.g., Bartlett and Ghoshal 1989, Kogut and Zander 1993, Andersson et al,2014). That is, the internal embeddedness of knowledge flows within the MNE areassumed to be efficient, although such knowledge is very scarce, and is itself an
important source of managerial-type FSAs. These advantages are capabilities for thecreation and coordination of efficient internal hierarchies and markets within MNEs
that span a complex diversity of geographic locations. Managerial FSAs associated withefficiently running a complex organisation encompass leadership, human resource
capabilities, logistics, creating and implementing organisational structures. Some of
the FSAs are about creating and maintaining routines within an MNE, andestablishing bureaucracies (Kogut and Zander 1993). Organizational structures evolvein response to the organizational need to maintain both reliability and accountability,
and in order to achieve these objectives, the institutionalisation of routines andstandardisation of processes is required.
Optimising knowledge flows within the boundaries of the economic actor (and thisapplies equally to non-firms as well) is a subject of much research. The literature onsocial capital (e.g. Nahapiet and Ghoshal 1998; Tsai 2002) has highlighted theimportance of the creation of social structures in the diffusion of knowledge within andacross organizational units. if MNEs want to increase their technological performanceby adopting a geographically dispersed and diversified network of R&D units, theymust overcome a number of managerial challenges to ensure that the knowledge
produced in the differentiated network is not only diffused internally, but is also
recombined and integrated.
They are important for MNEs because they define the capacity for the firm to become
an MNE in the first instance. Without these FSAs, a firm will be unable to benefit fromthe economies of multinationality, because knowledge transfers within the MNE will
be hindered (in the absence of such capabilities, the firm will operate as a federation of
free-standing subsidiaries, linked only through common ownership). The lack of such
FSAs will also inhibit the growth of reverse knowledge transfers. These FSAs are, by
and large, non location-bound.

7. Multiple Embeddedness and the Subsidiary
The truly multinational enterprise must, almost by definition, be able to exploit thebenefits of multinationality (Dunning 1993) Otherwise it is simply a multi-locational
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13

collection of free standing companies held together by common ownership. Indeed, afew MNEs are single organisations in name only, consisting of a set of free standing
companies loosely (and nominally) held together by a parent by virtue of a common
ownership. Not all firms function ² or seek to function- as integrated MNEs, operating,for instance, as multi-domestic firms. Subsidiaries may function as independent
entities in such instances.
At the same time, it is certainly not the case that subsidiaries are always subservientto the will of the MNE. The subsidiary may not want to reveal the nature of its asset
base to the HQ, for fear that the HQ will appropriate its technology at a minimal price,
possibly also depriving it from exploiting the new competence itself. Also, MNEs havetransfer pricing mechanisms, and a price must be established for any asset to beexchanged. If the asset is novel it will have an as yet-unproven market value. By theirvery nature, the a priori value of new competences, is hard to determine. A subsidiaryPD\EHUHOXFWDQWWR¶VHOO·Dn FSA to the HQ whose value may be underestimated by theparent, because it has less complete information about the asset. It may also be, ofcourse, that the FSAs of the subsidiary are highly context -specific. That is, they are
truly SSAs, because they are location-bound.
Subsidiaries need to find ways to utilise competences created internally, either
themselves, or by making these available to others, since they must be seen to generate
rent (or at least recover costs) on their innovative activity. However, subsidiaries are
not free agents: they do not have the freedom to make their assets available to otherfirms through external markets without the express permission of the parent. As such,thHGHIDXOW¶FXVWRPHU·UHPDLQVWKHSDUHQWILUPRUDVLVWHUVXEVLGLDU\
As such, as Ambos et al (2006) and Hoenen et al (2014) point out, subsidiaries need to
PDNHHIIRUWVWR¶VHOOWKHLUZDUHV·WRWKHUHVWRIWKH01(DQGLQRUGHUWRGRVRWKH\QHHG
to have entrepreneurial capabilities. It helps to bring their competences to theattention of the parent if they are formally recognised as being competence-creating
subsidiaries, either through a designation as a centre of excellence, or otherwise having
been granted an appropriate mandate, for instance, because one of the establishmentsthat form the subsidiary is a stand-alone R&D facility. In any case, as Mudambi et al(2014) argue, there are costs to the subsidiary in trying to make their competences
relevant to the MNE; such promotional activity requires resources, which creates a
trade-off between resources to generate knowledge and resources need to transfer andpromote their activities.
Nonetheless, there are considerable pressures for the boundary-scanning capabilitiesof the parent firm to be enhanced. Some MNEs are more capable of being able tomonitor and select promising new competences and leverage them for use by HQ, or byother subsidiaries, but this requires considerable systematic effort. Monteiro et al(2008) point out the important role of specialised technology scouting operations. Suchspecialised boundary scanners are one of several intermediary agents, such as regional

14
14

headquarters and centres of excellence that are formally designated to act as honest
brokers (Hoenen et al 2014).
Parents must be persuaded that the knowledge of its subsidiaries is relevant (Ambos
et al 2006), and it is a mistaken assumption made that the HQ actions are omniscient.
Indeed, especially where the organizational structure centralises much of the decision
making, HQ may be slow at taking up new competences, as illustrated in the paper byAthreye et al (2014). Fiat did not seem interested in internalising the new competencesdeveloped by the R&D facilities in its Indian and Turkish operations.
This, may, of course, reflect the fact that the Indian and Turkish subsidiaries were
joint ventures. But it also reflects the home-country-biased techno-centric viewcommonly described as the ¶Not-Invented-Here· syndrome, where competences
generated in other, peripheral subsidiaries are judged to be inferior, simply because of
their provenance.

Athreye et al (2014) illustrate the fundamentally different view

taken by the parent firm and the subsidiary.
Naturally, subsidiaries are likely to overvalue their own newly created assets, orindeed underestimate the extent to which they can be transferred with ease. It is forthis reason that Palmie et al (2014) make the rather useful point that not all
FRPSHWHQFHVJHQHUDWHGE\VXEVLGLDULHVDUH¶XVHIXO·This is in addition to the fact that
HYHQ ZKHUH +4 ILQGV WKH VXEVLGLDU\·V NQRZOHGJH XVHIXO LW PD\ QRW EH ¶XVHDEOH·
because they do not have the necessary rebundling FSAs to do so.

8. Conclusions
In this paper we reviewed the interactions between MNE parents, their subsidiaries,
and the respective rebundling activities of parent firms with the home country-specificadvantages (CSAs) and the subsidiary recombinations with host CSAs. The large
literature in this area has often focused upon dual embeddedness, which has thesubsidiary/host CSA focus and potentially the subsidiary-parent interaction. But dual
embeddedness frequently ignores the parent firm/home CSA interaction. I synthesize
these literatures with a focus upon multiple embeddedness. This paper suggests that
future empirical work in this area needs to be both broadened and deepened to take
into account the full range of such interactions.

Acknowledgements
I thank Professor Toshiaki Sugita for his interaction on this paper. I am also gratefulto Professor Rajneesh Narula and Dr. Quyen Nguyen for extensive comments on an
earlier draft. I am also much obliged to Alberto Ferraris for further comments, to Dan
2·&RQQHOOfor his research assistance, and to Sheri Pitteway for editing this paper.

15
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