Subsidiary internal and external embeddedness: trade-up and trade ...

Int. J. Multinational Corporation Strategy, Vol. 1, No. 2, 2016

Subsidiary internal and external embeddedness: trade-up and trade-off Joanna Scott-Kennel* Department of Strategy and Human Resource Management, Waikato Management School, The University of Waikato, Private Bag 3105, Waikato Mail Centre, Hamilton 3240, New Zealand Email: [email protected] *Corresponding author

Snejina Michailova Department of Management and International Business, The University of Auckland Business School, 12 Grafton Rd, 1142 Auckland, New Zealand Email: [email protected] Abstract: Much, if not most, of the international business literature argues that subsidiaries benefit from balancing their internal embeddedness in the multinational enterprise to which they belong, and their external embeddedness in the host environment in which they are located. In this paper we argue that there are tensions between embeddedness in internal and in external networks, and that a balance between these two types of embeddedness is more aspirational than achievable. We problematise the often advocated but seldom unpacked ideal of an optimal balance between subsidiaries’ internal and external embeddedness. We consider two types of interaction between them: a trade-up (a complementary relationship where higher embeddedness in one network leads to higher embeddedness in the other whilst achieving a desired outcome) and a trade-off (a substitutive relationship where embeddedness in one network replaces embeddedness in the other network, causing the multinational to forego the opportunity to benefit from both). We analyse some of the tensions that imbalances may create for the subsidiary and for the multinational enterprise, and we outline the implications for both research and practice. Keywords: subsidiary; multinational enterprise; imbalance; trade-up; trade-off; embeddedness. Reference to this paper should be made as follows: Scott-Kennel, J. and Michailova, S. (2016) ‘Subsidiary internal and external embeddedness: trade-up and trade-off’, Int. J. Multinational Corporation Strategy, Vol. 1, No. 2, pp.133–154.

Copyright © 2016 Inderscience Enterprises Ltd.

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J. Scott-Kennel and S. Michailova Biographical notes: Joanna Scott-Kennel is an Associate Professor of International Management at Waikato Management School (New Zealand) and Adjunct Professor of International Business, Strategy and Enterprise Development at Aalto University School of Business (Finland). Her research interests include the internationalisation of small to medium-sized enterprises (SMEs), the international business strategy of multinational enterprises (MNEs), MNE networks and the impact of foreign direct investment. She has published in many international journals including International Business Review, Academy of Management Perspectives, Asia-Pacific Journal of Management, Journal of World Business and Management International Review. Snejina Michailova is Professor of International Business at The University of Auckland Business School, New Zealand. Her research areas are international management and knowledge management. Her work has appeared in Academy of Management Review, Academy of Management Executive, Journal of Management Studies, Journal of International Business Studies, Journal of World Business, Management International Review, International Business Review, International Journal of Human Resource Management, Advances in International Management, Journal of International Management, Critical Perspectives on International Business, California Management Review, Long Range Planning, Management Learning, Journal of Knowledge Management, Organizational Dynamics, Technovation, Employee Relations, European Management Journal and other journals. She has co-edited books on cross-cultural management (Routledge), knowledge governance (Oxford University Press), women in international management (Edward Elgar), HRM in Central and Eastern Europe (Routledge) and research methodologies in non-Western contexts (Palgrave Macmillan). She serves on the editorial boards of several academic journals.

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Introduction

In many international business (IB) studies there is an underlying assumption that balance – where a subsidiary is deeply embedded in both internal and external networks – is the optimal strategy for multinational enterprises (MNEs) to capture subsidiary-specific advantages (Achcaoucaou et al., 2014). For example, Meyer et al. (2011) argue that it is important to ‘balance’ the subsidiary’s position within the overall enterprise against its role in the domestic market; Ferraris (2014) explains that balance between internal and external relational embeddedness (e.g., the quality of linkages with the MNE and with local business networks) allows the subsidiary to find the right combination of global integration and local responsiveness; and Narula (2014) proposes that the ideal degree of embeddedness for a competence-creating subsidiary is one that achieves a balance “between [being] centralized and autonomous” (p.7). Such ‘balance’ implies a complementary relationship between external and internal embeddedness. This can occur not only through the subsidiary’s sourcing of knowledge from both networks, but also through interaction effects between dual network knowledge flows (Giroud et al., 2014). Mustaffa (2010, p.74) elucidates this close interaction between external and internal embeddedness by explaining that “subsidiaries form intense social relations with internal actors within the corporation and external actors within the host country”, where such dual network embeddedness influences

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vertical and horizontal knowledge flows between the subsidiary and both networks (Michailova and Mustaffa, 2012). Most researchers associate this interaction with subsidiary innovation and competitive advantage. For example, Collinson and Wang (2012), who study the evolution of innovative subsidiary capabilities through dual embeddedness, argue that competence development is dependent on both local integration in the host market and global integration with the MNE headquarters. Interaction between internal and external embeddedness via the subsidiary, therefore, is central to the notion of an ‘ambidextrous’ MNE whose success is based on cross-border exploitation and exploration of knowledge resources (Hsu et al., 2013; Michailova and Zhan, 2015; Narula, 2014). Michailova and Zhan (2015) concur that optimising subsidiary innovation is a result of balancing dual embeddedness. They argue that such an ambidextrous approach will ensure that the subsidiary does not depend too much on embeddedness in either network, implying simultaneous engagement in two seemingly contradictory activities (see also Gupta et al., 2006). In this paper we question the notion of optimal balance between subsidiary internal and external embeddedness that has dominated the IB literature and ask whether it is indeed possible and/or appropriate to accomplish such a balance in practice (Achcaoucaou et al., 2014; Figueiredo, 2011; Narula, 2014). Our discussion applies a problematisation (rather than gap-spotting) approach (Alvesson and Sandberg, 2011; Sandberg and Alvesson, 2011) and draws on extant research on subsidiary embeddedness from the last decade, focusing on two types of interaction effects between external and internal embeddedness, namely complementarity (or trade-up via dual networks) and substitution (or trade-off between dual networks). Our key argument is that while such balance is theoretically meaningful and often desirable to MNEs, trying to achieve it in practice creates tensions between the subsidiary, its external network partners and the MNE to which it belongs. Our analysis contributes to a better understanding of subsidiaries and their strategic management by unpacking and problematising subsidiary dual embeddedness. Our key argument favours ‘practical rationality’, a rationality that “captures essential aspects of the logic of practice” [Sandberg and Tsoukas, (2011), p.350]. ‘Practical reason’ is the general human capacity for resolving, through reflection, the question of what one is to do. Deliberation of this kind is practical in at least two senses. First, it is practical in its subject matter, insofar as it is concerned with action. But it is also practical in its consequences insofar as reflection about action itself directly moves people to act. Thus, problematising optimal subsidiary dual embeddedness has a high level of functional utility, in the sense that our observations and analysis can be applied by those who are engaged with the operations and management of MNE subsidiaries. This is important because subsidiary embeddedness is a strategic resource that can influence not only the subsidiary’s own capabilities and success, but also those of the MNE to which it belongs (Andersson et al., 2002; Gulati et al., 2000; Reilly and Scott, 2014). In the remainder of the paper we briefly discuss the existing literature on embeddedness, present its definitions and types as applied in the IB literature and outline some of the key characteristics of internal and external embeddedness. This allows us to focus on complementary and substitutive interaction effects, and subsequently to discuss subsidiary dual embeddedness as a source of tension in the MNE. The paper closes with concluding comments and implications for research and managerial practice.

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J. Scott-Kennel and S. Michailova

Prior literature on embeddedness outside of and in IB research: A brief overview

The concept of embeddedness has been developed through contributions from multiple disciplines, which have enriched and enlarged subsequent application to the MNE. It was first presented in the work of economic historian Polyani in 1944, as part of his substantive approach to understanding economic activities in non-market economies in which kinship and religious or political institutions were embedded (Polyani, 1944). Economic sociologist Granovetter (1985) further developed the embeddedness concept, pioneering the view that economic exchange between firms and their environment is mediated by social networks and relations between actors within these networks. He argued that these networks and relationships shape information flows between actors, where weak ties (infrequent interaction with more distant acquaintances) are more important than strong ties (more frequent interaction with closer friends and family). Thus, firms are embedded via social ties or linkages with other actors within and across networks and these networks determine the firms’ strategic actions (Burt, 1992; Gulati et al., 2000; Uzzi, 1996; Zukin and DiMaggio, 1990). Organisational embeddedness scholars have considered differences within and between the sources and nature of embeddedness (Holm et al., 1996; Lam, 1997; Oliver, 1996; Uzzi, 1997). Of particular relevance to the MNE are the subsidiary’s knowledge-intensive linkages, which are based on strong social attachments outside the firm, and which involve trust and reciprocity (Uzzi, 1996) and a long-term perspective (Larson, 1992). Structural embeddedness (i.e., the configuration or contextualisation of economic exchange relationships) and relational embeddedness (i.e., the quality of those relationships) are used most often in the study of MNE networks (Moran, 2005; Dacin et al., 1999), and remain closely intertwined because economic (pecuniary) activities and performance are influenced by both the social ties between actors (subsidiaries and the individuals within them) and the structure of the complex web of relationships within the entire network, e.g., the MNE (Granovetter, 1985). Economic geographers have lent their insights to the development of the network embeddedness concept by emphasising the importance of location and proximity to local firm development (e.g., Holm et al., 2003; Iammarino et al., 2008; Ivarsson and Alvstam, 2005). Related research in the IB field examining inter-organisational linkages also considers the impact of external embeddedness on both foreign subsidiaries and local firms (Giroud and Scott-Kennel, 2009; Jindra et al., 2009; Scott-Kennel, 2007). The MNE as a differentiated network (Nohria and Ghoshal, 1997; O’Donnell, 2000; Zander, 1998) has evolved amidst an interdependent set of network relationships, where a diverse range of functional and geographic units replaces one central parent or hierarchical firm (Benito et al., 2011). Optimising interaction effects which occur between actors in these networks, particularly those between competence-creating subsidiaries and the rest of the MNE, is a critical managerial task. In response to increasing costs, competition and customer demand, MNEs must simultaneously extract more value from their research and development (R&D) activities whilst becoming more efficient. The solution to the problem of pressures for both local responsiveness and global integration (Prahalad and Doz, 1987) has been to disaggregate the R&D function worldwide and “share the burden of innovation with external organizations” [Economist Intelligence Unit, (2007), p.2]. This strategic change has brought structural progression in MNEs, “from ownership-based organisations to a nexus of inter-related entities [which]


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represents an evolution towards increasing flexibility” [Cantwell et al., (2010), p.580]. Such organisations are also referred to as ‘global factories’ (Buckley, 2009). Their operations are distinguished by the ‘fine slicing’ or segmentation of stages of the value chain and the placing of each stage in its optimal location (Buckley, 2011; Gerybadze and Reger, 1999); and by MNEs drawing on dual embeddedness in intra- and inter-organisational networks to support performance via innovation and competence development (Ghoshal and Bartlett, 1990; Scott-Kennel and Giroud, 2015). Effective management of network knowledge begins at subsidiary level. As subsidiary competences are developed and distributed within two networks, the subsidiary gains access to unique external knowledge in the host economy as well as resources and knowledge available in its internal MNE network. Therefore the MNE subsidiary may be seen as an ‘insider in two systems’ (Westney, 2009). This advantageous position enables the subsidiary to increase its levels of innovation, profitability and autonomy within the MNE structure. The subsidiary may adopt a ‘listening post’ approach where it acts as an advisor, receiving and transferring knowledge back to headquarters (Meyer et al., 2011; Reilly and Scott, 2014). The challenge is, however, to manage effectively across this ‘double network’ structure (Zanfei, 2000), particularly when competing internal and external network forces are at play. In theory at least, the dual embeddedness of the subsidiary’s networks should facilitate the successful exchange of essential organisational resources, extending to the generation and transfer of knowledge resources which are critically important to MNE innovation and competitiveness. In practice, however, this is very much organisationally dependent. For example, MNEs’ innovative competences are influenced by their absorptive capacity, which is the “ability to recognise the value of new external information, assimilate it, and apply it to commercial ends” [Cohen and Levinthal, (1990), p.128]. Subsidiary-specific advantages are fundamentally context-specific, not only locally embedded, but also path-dependent on the subsidiary’s earlier technological and organisational trajectories (Rugman and Verbeke, 2001). Such advantages, which develop isomorphically alongside both subsidiary and host economy contexts, become more difficult to diffuse internally. Thus, the value of subsidiary innovation is dependent upon the ability to recombine local knowledge with that of the MNE (Andersson et al., 2014; Ciabuschi et al., 2011; Figueiredo, 2011). The application of network theory to the MNE (Ghoshal and Bartlett, 1990) not only demonstrates that the MNE’s ability to transfer and integrate knowledge from multiple geographical locations via multiple hierarchical and market-based ties remains at heart of its competitive advantage (Cantwell, 2009), but also recognises subsidiaries as having inimitable capabilities and knowledge valuable to the wider MNE (Cantwell and Mudambi, 2005; Mudambi and Navarra, 2004). In contrast to the work of economic geographers, the focus of this research is on intra- rather than inter-firm relationships. The notion of the ‘differentiated network’ MNE (Nohria and Ghoshal, 1997) helps to bring the role of subsidiaries into sharper focus, where ‘subsidiary initiative’ (Birkinshaw and Hood, 1998), ‘centres of excellence’ (Forsgren et al., 2000; Frost et al., 2002; Moore, 2001), and subsidiaries with ‘competence creating’ mandates (Narula and Rugman, 2014) can transform location-specific advantages into subsidiary-specific advantages (Rugman, 2014). Further, the ‘federative’ view of the MNE emphasises reciprocal relationships between a focal subsidiary, headquarters, and sister subsidiaries that might

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result in the recombination of subsidiary-specific advantages formed in the local context into firm-specific advantage in the global context (Achcaoucaou et al., 2014; Buckley and Strange, 2011; Yamin and Andersson, 2011). Thus, the notion of the subsidiary percolating its own advantages in the local business milieu promotes it from a position on the periphery of the organisation to one of strategic importance and increased responsibility within the MNE (Ambos et al., 2006; Andersson et al., 2005; Gupta and Govindarajan, 1994; Hedlund, 1986). Combining the contributions of network theorists with the work on embeddedness from other disciplines, IB researchers have explored the connection between external relationships based on social, relational and geographical ties, and the structural relationships within the MNE (e.g., Forsgren et al., 2005). From the accumulation of this work three types of subsidiary embeddedness can be identified: •

Internal embeddedness refers to the subsidiary’s positioning within the MNE’s global structure, and more specifically to internal network relationships between the subsidiary itself, the parent firm (headquarters) and peer subsidiaries.

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External embeddedness refers to the subsidiary’s positioning in the local context, and its ability to create new competences by recombining (or bundling) the firm-specific advantages of co-located firms such as alliance partners, customers, suppliers and competitors (Gulati et al., 2000) and the location-specific assets associated with the local innovation system, such as universities, public and private research institutes (Verbeke, 2009)

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Dual embeddedness refers to the subsidiary’s positioning as a ‘bridge’ between internal MNE and external host market networks (Giroud and Scott-Kennel, 2009; Granovetter, 1985; van Wijk et al., 2008). This bridging position enables the subsidiary not only to locate relevant knowledge through exchange and mutual development via both networks, but also to act as a source of unique, unit-specific competences to the rest of the MNE (Cantwell and Mudambi, 2005; Hedlund, 1986; Rugman and Verbeke, 2001).

In sum, the key message from IB research to date is that the MNE remains competitive by developing dually embedded, balanced network relationships, linking with global sources of knowledge through subsidiaries’ networks, and spanning the divide between external markets and internal hierarchies. However, this proposition rests on the ability of innovative subsidiaries to draw on the resources of external networks and to recombine these resources in the MNE network by being deeply connected to both (Ferraris, 2014; Rugman, 2014). Studies in other disciplines have contributed to a multi-faceted view of network relations in the MNE, and in particular of the interactions that underscore the problem of potential misalignment between subsidiary and MNE optimisation of dual network activity. Specifically, these streams of research highlight the distance – geographical, social, structural and relational – between the local business relationships formed by the subsidiary and the global MNE network to which it belongs, and some of the resultant tensions (Almeida and Phene, 2004; Mudambi, 2011; Narula, 2014). Recent research in IB has highlighted the conflicts that arise from pressure on the subsidiary to act in the best interests of both the local partners with which it is engaged and the MNE to which it belongs, where strategic priorities and operational demands differ between the two (Reilly et al., 2012). Adopting a more nuanced view of dual network interaction, Narula (2014) suggests that optimal levels of dual embeddedness


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may be achieved without balance or deep integration in both networks. While we concur that this may be true of the subsidiary, which stands to gain from either network, optimal embeddedness from the MNE’s perspective only occurs when the subsidiary meets two conditions: first, it is capable of generating competences in its location, and second, these competences are made available to the rest of the MNE (Narula, 2014). By definition, therefore, we argue that this requires balance between external embeddedness which enables the subsidiary to generate competences in its local milieu, and internal embeddedness which allows those competences, where appropriate, to be transferred, adopted or applied successfully in the MNE (Meyer et al., 2011). However, such a scenario may be more aspirational than achievable in practice. In the words of Yamin and Andersson (2011), “simultaneously benefiting from internal and external embeddedness may prove to be a tough balancing act” (p.161). The following discussion turns our attention to these interactions and underlying tensions, which have received relatively scant attention to-date.

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Interaction effects between subsidiary internal and external embeddedness

Dual embeddedness is recognised as the prime mechanism by which the subsidiary, acting as an “interface between local economies and global corporate networks” [Figueiredo, (2011), p.417], may transform location-specific advantages into firm-specific advantages for use in the wider MNE (Athreye et al., 2013; Scott-Kennel and Giroud, 2015). The subsidiary’s capacity to embed effectively into multiple networks not only impacts upon its own innovation and technological competence (Collinson and Wang, 2012), but can be critical to upgrading and sustaining the MNE’s competitiveness. The remainder of this section considers two types of interaction between internal and external embeddedness, namely complementary and substitutive interaction.

3.1 Complementarity between internal and external embeddedness – trade-up Much of the existing literature supports the notion of a complementary relationship – or trade-up – between the subsidiary’s internal and its external embeddedness. Further, some literature also supports the subsequent contribution of the embedded subsidiary to the wider MNE in the form of firm- (MNE-)specific advantage (Andersson and Forsgren, 1996; Andersson et al., 2001, 2002; Håkanson and Nobel, 2001; Marin and Bell, 2010; Mu et al., 2007; Schmid and Schurig, 2003). Unpacking such interaction effects begins with the subsidiary and its own competences. At subsidiary level, competence development has frequently been linked to network embeddedness (Forsgren et al., 2000; Mowery et al., 1996; Uzzi, 1996; Zaheer and McEvily, 1999), and innovative capability may develop via either external or internal network connections, or both (Ciabuschi et al., 2011, 2014). Internal embeddedness has been linked to subsidiary competence, as strong ties within the MNE can increase the overall quality of subsidiary R&D (Helble and Chong, 2004; Lahiri, 2010). Knowledge capability developed through external embeddedness has also been shown to contribute to subsidiary innovation and competitive advantage (Andersson et al., 2002, 2007; Ciabuschi et al., 2011; Figueiredo, 2011; Dyer and Hatch, 2006). External embeddedness

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facilitates learning, and close relationships in a business network are a good predictor of increased organisational learning as parties are more likely to exchange knowledge (Lane and Lubatkin, 1998). There is considerable evidence that trade-up interaction effects between external and internal network embeddedness influence the subsidiary’s role, innovation and performance. Autonomy to engage in innovation can be a product of the strength of a subsidiary’s local embeddedness and in turn strengthens its contribution to the network through an enhanced capacity to obtain new resources (Ferraris, 2014) and increases its influence in the MNE (Reilly and Scott, 2014). Interdependence between dual network embeddedness acts as “the canvas through which the subsidiary can build its distinctiveness within the MNC” [Garcia-Pont et al., (2009), p.209]. The autonomous subsidiary may further increase its influence in the MNE by assuming a R&D role through the evolution of innovative capability creation (Achcaoucaou et al., 2014), being recognised within the MNE for its superior knowledge assets, or becoming a ‘centre of excellence’ (Birkinshaw and Hood, 1998; Moore, 2001). Focusing on subsidiaries’ innovation-related activities, Ciabuschi et al. (2014) find complementary interaction between internal and external networks, where innovation-related business performance is directly related to the subsidiary’s external embeddedness and indirectly related to its corporate embeddedness. The authors conclude that corporate embeddedness strengthens subsidiary influence in the MNE, which in turn positively affects performance. This is consistent with Giroud et al.’s (2014) finding, in their study of the R&D cooperation decisions of MNE subsidiaries located in Korea, that the relationship between corporate and local collaboration is ‘interdependent and complementary’ (p.233). In a study of seven subsidiaries in Brazil, Figueiredo (2011) finds that subsidiaries that were able to develop knowledge-intensive linkages with specific internal and external counterparts simultaneously (and where these linkages increased in frequency and improved in quality), also achieved higher innovative performance levels than subsidiaries that were not able to do so. On the basis of case studies in the electronics and chemical industries, Castellani and Zanfei (2006) consider the impact of the relationship between internal and external networks on MNE innovation, and find a complementary (rather than substitutive) relationship between the two to be more robust. At the MNE level, subsidiaries’ external network connections offer more potential for the introduction of novel capabilities, if these can be successfully transferred and adopted internally (elsewhere in the MNE). The contribution to MNE advantage of such dual embeddedness is most often associated with a competence-creating mandate by the subsidiary (Herstad et al., 2014). A competence-creating mandate focuses the subsidiary on research, innovation and the development of subsidiary-specific assets, frequently in conjunction with local, external partners (Cantwell and Mudambi, 2005). The competence-creating subsidiary can contribute significantly to sustained MNE competitive advantage (Cantwell and Zhang, 2009), if local knowledge generation through external embeddedness is combined with organisational learning and innovation through internal embeddedness (Bartlett and Ghoshal, 1989; Blomkvist et al., 2010; Frost et al., 2002; Gupta and Govindarajan, 1994; Mudambi, 2011; Pearce, 1999; Phene and Almeida, 2008; Williams, 2009). Further, Achcaoucaou et al. (2014) suggest that subsidiaries evolve towards a competence-creating role by increasing their external and internal network embeddedness simultaneously.


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In their study of European subsidiaries, Asmussen et al. (2013) find complementary interaction, arguing that dual network balance and subsidiary contribution to the MNE are positively related. The authors find that a high level of externally sourced knowledge in a subsidiary is associated with a high level of knowledge transfer from that subsidiary to the MNE, but only past a certain tipping point of internally sourced knowledge. This suggests that subsidiary knowledge stocks that are “balanced in terms of their origins tend to be more valuable, congruous, and fungible, and therefore more likely to be transferred to other MNC units” [Asmussen et al., (2013), p.1397]. The findings of Ciabuschi et al. (2014) also suggest the importance of “simultaneously balancing both external and corporate relationships” (p.1). However, the authors also emphasise the infrequency with which this occurs in practice, with only 10–20% of the subsidiary innovations in their study being highly embedded in both networks (p.13). Similarly Wang et al. (2009), in a study of multinational subsidiaries in China, find ‘dual activists’ (active both internally and externally) account for only 12% of the total sampled: in contrast, ‘dual loners’ (inactive both internally and externally) account for a greater proportion, 20%. In their study of subsidiaries in Argentina during the late 1990s, Marin and Bell (2010) conclude that subsidiary integration into both host economy and MNE network is weak. However, when such integration does occur, it leads to greater innovation. Specifically, the stronger the integration with the parent firm, the stronger the subsidiary’s innovation in the host market, suggesting that balance between internal and external network embeddedness contributes to competence creation. Thus, innovative, competence-creating subsidiaries are more likely to be dually embedded into the external networks presented by the local market and the global networks of the MNE (Collinson and Wang, 2012; Marin and Bell, 2010). Subsidiary creation of innovative capabilities can be a direct result of intricate and interdependent internal and external interactions that take place in the embedded relationships between the subsidiary, the corporation and external players (Iammarino et al., 2008). This supports the notion of complementarity between external and internal embeddedness at the level of the subsidiary, and the potential for transfer to, and adoption of subsidiary innovation in, the wider MNE. In the context of dual embeddedness (rather than simple reverse knowledge transfer from subsidiary to MNE (see Ambos et al., 2006; Michailova and Mustaffa, 2012), however, this potential is often not realised. What remains to be problematised by researchers is the nature of these interactions between subsidiary, external and internal networks, particularly those where imbalance in dual network embeddedness occurs (Wang et al., 2009). The following discussion focuses on the nature of the trade-off between networks that can undermine the value of the competence-creating subsidiary to the MNE.

3.2 Substitution between internal and external embeddedness – trade-off Imbalance between internal and external embeddedness occurs when the subsidiary, rather than acting as a ‘bridge’ that connects both networks, finds itself stuck between them, tending to favour one over the other (Blanc and Sierra, 1999). Essentially, this imbalance can lead to a substitutive relationship between the internal and external embeddedness of the subsidiary, meaning that a higher level of embeddedness in one network will likely result in a lower level in the other (Athreye et al., 2013). This

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imbalance can often be self-perpetuating, leading to even greater reliance on either the external or the internal network. For example, the external network may be favoured by subsidiaries seeking flexible outsourcing in local R&D networks as a substitute for ‘insourcing’ or collaborative linkages within the MNE, which eventually undermines the strength of internal connections (Boehe, 2007). In contrast, increased embeddedness in the MNE corporate network, perhaps prompted by corporate restructuring or a change in ownership/management, may actually be detrimental to the subsidiary’s position within the host country environment (Meyer et al., 2011). We argue however that problematising the trade-off scenario is more complex than merely considering the substitution effect between networks, which in itself may simply be a logical, structurally- or relationally-driven response to the operating environment that suits both the focal subsidiary and the MNE to which it belongs. It follows, therefore, that exploring interactions that extend beyond the substitution effect, for example where an organisation prioritising one network over the other foregoes the opportunities of dual embeddedness, or where dual embeddedness favours the subsidiary but disadvantages the MNE, enables us to delve further into the embeddedness concept. Merely adopting a substitutive perspective without considering unbalanced network interaction more carefully would suggest that the subsidiary is more likely to favour internal over external networks, foregoing the opportunity to develop competences through interaction with local partners but still contributing to the MNE via its own independent innovative activities. However, this view of the subsidiary through ‘rose-tinted’ glasses limits our perception of possible interaction effects. It may be the case, for example, that the subsidiary is not engaged in such activities at all, which raises the issue of the subsidiary’s role in the host economy and in the MNE (e.g., competence exploiting) rather than substitution between networks, per se, as the reason for less than optimal embeddedness behaviour. Not only does this behaviour create a trade-off for both subsidiary and MNE (as potential novelty from local input is foregone), but in addition we cannot determine appropriate managerial action because underlying interactions between participants are obscured. Assuming a competence-creating subsidiary, however, unpacking the substitution of internal for external embeddedness suggests one of several possibilities: the subsidiary favours external networks over internal networks for relational reasons (e.g., has closer social ties to external partners); or for structural reasons (e.g., is insufficiently embedded internally to share externally generated capabilities (Mu et al., 2007; Yamin and Andersson, 2011). Mudambi (2011) explains this scenario by referring to the innovation-integration dilemma, which occurs when highly innovative competence-creating subsidiaries, which are more likely to make the best use of local knowledge and resources, are also more likely to produce innovation that is difficult to integrate into the MNE network (and vice versa – subsidiaries less well-embedded externally are more likely to be embedded internally, but less likely to be innovative). In all these instances, we argue that is not merely a question of network substitution (implying resource needs are met by one network rather than the other) but actual trade-off where opportunities for innovation via external embeddedness or recombination of advantages via internal embeddedness are foregone, or subsidiary/MNE advantages compromised. The best illustration of this is given by a worst-case scenario (at least from the MNE perspective), where embeddedness in external networks at the expense of internal networks may see the subsidiary acting as a syphon of subsidiary- (or even MNE-)specific capabilities from internal to external network partners. This does not


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occur due to a substitutive effect, but rather when high levels of subsidiary embeddedness in dual networks facilitate trading-up by external partners rather than, or even at the expense of, providing MNE advantage. Evaluating the risks of potential trade-off effects warrants closer examination of the balance between networks. Theoretically at least, balanced dual embeddedness holds the most potential for advantage to the MNE, and imbalance suggests advantage foregone. In practice however, it is possible that subsidiaries actually benefit from imbalance by favouring one network over the other, particularly where isomorphic influences in the host economy or structural incompatibilities distance it from the MNE; or where balance produces a ‘syphon’ effect where advantages accrue instead to external networks. The extent to which trade-offs occur, therefore, is dependent not only on the subsidiary’s ability to balance internal responsibilities and relationships against external possibilities (Meyer et al., 2011), but also on its ability and willingness to maintain an “equilibrium between global and local considerations” [Giroud and Scott-Kennel, (2009), p.555] that ultimately benefit the MNE. Both subsidiary action and interaction (which is influenced by adopted role or assigned mandate) will not only determine the extent and outcomes of dual embeddedness, but also the appropriate managerial response. Further, to suggest that imbalance is merely substitution of one network for the other that equates to a trade-off is overly simplistic. In most cases, we would argue that imbalance is not merely substitution, but the purposeful favouring by the subsidiary of one network over the other. In this case, trade-off will be more likely at the MNE rather than the subsidiary level. Moving forward, we consider the underlying reasons for this imbalance and the tensions that undermine dual network embeddedness.

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Possible tensions creating imbalanced dual embeddedness

In the trade-off scenario, the subsidiary’s dual legitimacy in relation to both the MNE and the host country institutional environment (Kostova and Zaheer, 1999) may be jeopardised by pressures (or preferences) to favour one type of embeddedness over the other. Certainly, these may arise at the individual (person) level, as embeddedness implies ongoing, cooperative relationships based on social ties rather than arm’s-length exchange, and these ties influence social interaction between network participants1. However, although social ties may remain underlying influences, at the subsidiary level of analysis, which is the focus here, pressure is more likely to derive from tensions between the strategic priorities of the tripartite of network participants (the subsidiary, the MNE to which it belongs, and its external network partners) or from the operational constraints of the subsidiary. Pressure for achieving strategic priorities can come from either or both networks, or interaction between the two, and is influenced by the subsidiary’s autonomy, influence and importance in the MNE. Autonomy (Andersson et al., 2007) and rent-seeking behaviour (Ciabuschi et al., 2012) – both of which are encouraged by externally embedded relationships – may increase the subsidiary’s relative influence in the MNE. The subsidiary’s position within the global MNE structure is dynamic because it is dependent on the value of its capabilities to the MNE, which is closely linked to its importance (Collinson and Wang, 2012; Garcia-Pont et al., 2009). Unbalanced network behavior can occur when competences derived from the subsidiary’s ability to develop

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innovative capabilities through external relationships increase its influence or power to the detriment of the parent MNE. Further, Yamin and Andersson (2011) conclude that when internal and external embeddedness interact with each other, the latter no longer has a positive role in explaining the subsidiary’s importance in the MNE. This supports the suggestion that internal rather than external networks remain the priority of the MNE. Further, if external networks exert greater influence over subsidiary behaviour, headquarters may attempt to moderate or prevent behaviours inconsistent with the MNE’s overall strategy and to correct the imbalance between internal and external network embeddedness in favour of the internal network. Another source of tension relates to an apparent contradiction, highlighted by Narula (2014) when referring to the principal-agent problem, where a subsidiary (as an individual agent) does not always act in the best interest of the MNE (as the parent principal). Naturally, this creates an issue because the MNE’s competitive advantage via subsidiary dual embeddedness and innovation is only possible when the subsidiary is willing to share these local resources internally (Dörrenbächer and Gammelgaard, 2010). Thus, imbalance is not only created by the innovation-integration dilemma, but also exacerbated by subsidiaries which are externally embedded in their host country with greater capacity to access and create competences useful to the wider MNE, but which contradictorily become less willing to do so (Andersson et al., 2007). There are several possible reasons why this might be the case. First, strong local embeddedness can influence the subsidiary into becoming unduly self-focused and less attentive to its position within an international network. Second, through its local linkages a subsidiary also has the ability to obtain (and retain) knowledge that is largely hidden or inaccessible to its parent (Yamin and Sinkovics, 2007). Third, as Yamin and Andersson (2011, p.161) suggest, in the ‘struggle to gain influence’ a subsidiary’s own competences may be more significant than its internal visibility within the MNE. Fourth, external embeddedness shields subsidiaries from headquarters’ control and influence, whilst orienting them toward the benefits of the external network. This outward orientation further limits their potential to contribute to firm-level competitive advantage (e.g., Mudambi and Navarra, 2004; Boehe, 2007; Mu et al., 2007). Thus, a subsidiary in a position of knowledge superiority may seek to amplify this position by retaining key knowledge, creating rivalry within the MNE (Athreye et al., 2014) or fuelling strategic tensions between internal and external networks. We reiterate that this is not due merely to substitutive network interaction effects, but also to more purposeful attempts at ‘tipping the scales’ in favour of the subsidiary itself or its external networks, rather than the MNE. Such a scenario can engender both trade-up (at the subsidiary level) and trade-off (at the MNE level). Should such conflict between the interests of the centralised parent company and the subsidiary’s local interests and autonomy continue (Gammelgaard and Pedersen, 2010; Meyer et al., 2011; Narula, 2014), deeply embedded relationships with external business partners may begin to undermine the very fabric of the MNE. For example, Forsgren et al. (2005) find that dual network embeddedness by the subsidiary can create a quandary when there is conflict between the business interests of each network, causing a managerial dilemma and frequently trade-off between external and internal networks to the detriment of the MNE (Gammelgaard and Pedersen, 2010; Helble and Chong, 2004; Meyer et al., 2011). This may occur gradually as the subsidiary’s power and influence begin to outweigh those of the parent, or may be more immediate, for example where recently acquired subsidiaries retain existing externally embedded relationships but have


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only limited internal embeddedness within the acquiring MNE. Kristensen and Zeitlin (2005) found evidence of such power struggles arising post-merger and acquisition, where newly acquired ‘subsidiaries’ enjoyed competitive dominance prior to acquisition, or were near (or equal) to the size and strength of acquiring ‘parent’ firms. This is consistent with the view of the federative MNE as being characterised by an ongoing power contest between dominant firms (or units) (Narula, 2014; Ambos et al., 2010; Najafi-Tavani et al., 2014). Regardless of this, and in line with theoretical underpinnings, pressures from headquarters to prioritise internal networks usually outweigh those from the local community (Ho, 2014). Although there is literature demonstrating the rise in the power of subsidiaries (Ambos et al., 2010), for the most part headquarters will still retain power over decisions related to subsidiary management, structure of the MNE-wide network (Ciabuschi et al., 2012; Nohria and Ghoshal, 1997) and knowledge flows across various sub-units of the MNE (Hong et al., 2009; Mudambi and Navarra, 2004). This suggests that high internal/high external embeddedness would favour the MNE. But as we have argued, the alternative, less desirable scenario is that dual high embeddedness prioritises external partners instead and this is even more likely where strategic conflict arises within the MNE. Taking this argument further, we propose that where the subsidiary strengthens its embeddedness in the host country environment to a degree that threatens the internal consistency in the MNE, headquarters will try to exert even greater influence over subsidiary behaviour, attempting to moderate or prevent behaviours inconsistent with the MNE’s overall strategy and to correct the imbalance between dual network embeddedness in favour of internal rather than external networks. Conversely, as subsidiaries are forced to forego internal opportunities this may actually go against re-balancing embeddedness. Putting it another way, subsidiaries may not (be allowed to) benefit to the same extent from knowledge from internal sources (and particularly from headquarters), when it is feared that externally embedded relations between the subsidiary and its local business partners risk unintentional knowledge leakage (Luo, 2003). This represents a strategic response to, and potential outcome of, the possible ‘syphon’ effect associated with dually embedded subsidiaries. At the operational level, the subsidiary also faces resource constraints which can prompt trade-offs between the strength of its local linkages and internal information connectivity to the rest of the MNE (Andersson and Forsgren, 1996; Boehe, 2007). Transferring know-how from the subsidiary to the rest of the MNE requires a considerable investment in terms of time and effort to nurture transmission channels and transfer routines (Szulanski, 1996). If the coordination costs of balancing relationships in both the internal and the external networks are overly large, then a focus on one network instead of the other may result (Ciabuschi et al., 2014). Evidence of this is given by Gammelgaard and Pedersen (2010) who find a nonlinear relationship between external and internal knowledge sourcing by subsidiaries; the complementary nature of the relationship being transformed into a substitutive one when the subsidiary’s resource constraints became predictable and binding, and predominant relations occurred with only one of the two networks. In sum, in order for the MNE to derive firm-specific advantages from the externally embedded relationships of its foreign subsidiaries, the subsidiaries must be able to understand and implement their positions in both the MNE and their local communities simultaneously (Pearce, 1999). This requires not only a complementary relationship

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between the subsidiary’s external embeddedness and its capabilities for innovation, but also a balance between this external involvement and internal interaction with other units of the MNE. However, as our discussion suggests, balance in dual network embeddedness may be compromised, not only by social ties and substitutive effects, but also by strategic tensions and operational constraints.

5

Conclusion and implications

Our analysis has problematised the often advocated but seldom unpacked ideal of an optimal balance between subsidiary internal and external embeddedness. To be clear, there is consensus in the literature to-date that dual embeddedness is fundamental to MNE success and that the interaction between location-specific and firm-specific factors together influence recombination and re-application of subsidiary and MNE competitive advantages. This is because dual embeddedness facilitates the global transfer of knowledge and innovation (Ciabuschi et al., 2014; Mudambi and Swift, 2012), enabling the MNE to “effectively harness the potential of its multiplicity of local contexts as well as to add new contexts to its network” [Meyer et al., (2011), pp.247–248]. Internal and external embeddedness are interdependent, and both can be important for developing and transferring MNE knowledge advantages (Figueiredo, 2011). The assumption (or implicit expectation) that optimal embeddedness requires balance between dual networks is not always supported by the empirical literature (see for example, Forsgren et al., 2005; Ferraris, 2014; Meyer et al., 2011). Rather, embeddedness is highly contextualised, and is influenced by a myriad of factors, including social ties, structural relatedness, opportunities for network embeddedness, host economy conditions, as well as the strategy of the MNE and the role and existing competences of the subsidiary (Andersson et al., 2002; Giroud and Scott-Kennel, 2009; Nell and Andersson, 2012; Narula, 2014), to mention but a few. Therefore, rather than postulating that subsidiaries (and the MNEs to which they belong) benefit from a simultaneous high level of embeddedness in internal and external networks, it makes sense to specify under what exact circumstances this is the case and to allow for scenarios where such a balance may not be optimal. We see the need for studies of that nature in the future – studies that are more precise and prescriptive, specifying if/then relationships between combining internal and external embeddedness and particular outcomes these combinations can lead to. In this paper we have focused on subsidiary (rather than MNE) embeddedness. We also see potential in exploring interaction effects and tensions of the type we have addressed at the level of the MNE. For the MNE, embeddedness implies taking advantage of multinationality with the added complexity of also managing diverse, geographically dispersed external subsidiary networks for global competitive advantage and deciding which of these are more valuable than others. Thus, the multiple embeddedness of the MNE extends much further than the dual networks of the subsidiary. Multiple embeddedness explains the knowledge integration role of the ambidextrous MNE, balancing exploration through search, acquisition and attraction of external resources, with exploitation through efficient and effective processes increasing and extending usage of existing assets internal to the firm (Hsu et al., 2013). Thus, the MNE gains the advantages of insider status via multiple subsidiary networks (Narula, 2014). It follows, however, that the effect of the subsidiary’s relational embeddedness on


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its contribution to the MNE might be contingent on the headquarters’ own relationships and the structure of the MNE network (Nell et al., 2010). These (and other) observations contribute to the analysis of how different types of embeddedness interact with each other. There is already work that explicitly relates subsidiary dual embeddedness to MNE multiple embeddedness. Examples are Figueiredo’s (2011) study on relational embeddedness and Marin and Bell’s (2010) examination of structural embeddedness. While the IB literature has accumulated sufficient knowledge about various embeddedness types and their (mainly separate) effects on a number of outcome variables, we know much less, and need to know much more, about how these types interact and with what consequences. In the spirit of advocating for stronger functional utility of conceptual analyses as we have put forward in the introduction to this paper, we outline some important implications for practitioners. While globalisation promotes the convergence of cultures and markets and prompts finer slicing of global value chains, local contexts not only remain but become even more essential to the success of MNEs (Buckley, 2009, 2011; Ghemawat, 2007). Such success depends on their capacity to interact with different actors in different contexts and to embed themselves to ensure both integration and responsiveness (Bartlett and Ghoshal, 1988). Maintaining flexibility in multi-embedded organisations is a dynamic capability that is based on shaping and deliberately designing intra-firm and inter-firm networks (Lorenzoni and Lipparini, 1999; Michailova and Zhan, 2015). As work emerging on boundary spanning suggests (see Schotter et al., forthcoming), it is clear that trade-off between the subsidiary’s external embeddedness and its internal embeddedness raises significant strategic and operational challenges for managers as they grapple with external and internal embeddedness simultaneously. The boundary-spanning role is essentially associated with structural holes and bridging ties and reduction of the trade-off between external and internal embeddedness. As we have argued, dual embeddedness is difficult to achieve because of the strategic and operational tensions that develop as a result of the subsidiary’s position between host location and parent MNE (see also Narula and Dunning, 2010). Further, even if a balance is achievable, it may not be desirable. There are several reasons for this, which may explain why practitioners are not well served by the numerous existing analyses that scholars have so far put forward. One reason is cost. Achieving and maintaining a high level of both internal and external embeddedness can be very expensive. It is certainly costly to pay attention to, and manage, forces that are not only different, but often competing and contradictory. It is also costly to learn how to do so. Maintaining and developing well-functioning relationships with the headquarters and peer subsidiaries on the one hand and with important actors in the local environment on the other requires time, human capital and often financial resources. The cost issue needs more emphasis in empirical work, as underestimating the cost implications of dual embeddedness is not helpful to practitioners (Ciabuschi et al., 2014). Another reason is the complexity associated with the fact that the subsidiary is often expected to act as an independent actor in the local market, yet is nested in the complex MNE network. The managers of MNEs need to retain a level of flexibility and reactivity by intentionally facilitating the positive interaction effects between internal and external networks conducive to accumulating innovative capabilities and other positive outcomes at the focal subsidiary. This relies on competent managerial efforts at both MNE and

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subsidiary level. Thus the creation of subsidiary-specific advantages in the host country and subsequent firm-specific advantages across national boundaries through the recombination capabilities of both headquarters and subsidiaries represents an ideal that can only be achieved if there are no tensions between the focal subsidiary and the MNE, a scenario that is unlikely in the majority of situations. Yet an additional layer of complexity is added by the fact that as MNEs operate in a constantly changing environment in many diverse contexts, the strategy and structure of MNE networks are dynamic, making the management of network relationships and the tensions between them a moving target. A third reason for why ‘more of both’ types of embeddedness may not be a scenario to strive towards is the dark side of embeddedness. While we know more about the advantages and benefits of internal, external and dual embeddedness, potential disadvantages remain far less explored. There are well-documented tensions and paradoxes in networks, and we suspect that practitioners are exposed to them much more frequently than scholars’ analyses suggest. Simply viewing dually embedded relationships as complementary or substitutive is overly simplistic and does not capture the complexities of interaction effects, for instance differences in operational and strategic priorities between subsidiaries and the MNEs they belong to; and tensions arising over potential loss of proprietary knowledge through a subsidiary ‘syphon’ effect. Considerable experience needs to be accumulated over time before such tensions can be resolved efficiently in everyday management and operational situations. This, in turn, should be associated with designing mechanisms that can cope with such complexity and capture the benefits of dynamic dual embedded relations.

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Notes 1

This idea is not new and is not the focus of our paper. Uzzi’s (1997) notion that economic action is embedded in social structure has revived debates about the positive and negative effects of social relations on economic behaviour, specifically whether social ties contribute to, or undermine, economic action, echoing the work of Granovetter (1985) whose arguments sought to join sociological and economic approaches to organisational theory.

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