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date: 30 September 2022

International Research and Development and Knowledge Sourcing by Multinational Corporationsfree

International Research and Development and Knowledge Sourcing by Multinational Corporationsfree

  • Kazuhiro AsakawaKazuhiro AsakawaGraduate School of Business Administration, Keio University
  •  and Jaeyong SongJaeyong SongGraduate School of Business, Seoul National University

Summary

Internationalization of R&D facilitates knowledge sourcing of multinational corporations (MNCs) on a global scale. As MNCs internationalize R&D, they not only engage in domestic-driven R&D but are actively involved in overseas-driven R&D. And accordingly, the role of overseas R&D laboratories often evolves, from applying the HQ-generated innovation to local market, to innovating locally and contributing to the parent company. Within an MNC boundary, knowledge flows have become multidirectional: on top of the most typical knowledge flows from headquarters (HQ) to a subsidiary, reverse knowledge flows from a subsidiary to HQ as well as horizontal knowledge flows among overseas subsidiaries have become more salient. In addition to knowledge flows within a firm, increasing attention has been paid to external knowledge sourcing, i.e., knowledge sourcing from foreign locations outside the firm. MNCs commonly engage in local knowledge sourcing, i.e., sourcing knowledge from an overseas local environment, to tap into local hotbeds of innovation. But MNCs are also increasingly conducting global knowledge sourcing, i.e., sourcing knowledge from around the world, to practise global open innovation. Theoretically, knowledge sourcing in international R&D has often been examined from the capability and embeddedness perspectives. The effect of capability has been discussed in connection with motivation, autonomy, and mandates of subsidiaries. The effect of embeddedness has been discussed in connection with complementarity between external and internal embeddedness. As future research agenda, the following are suggested. First, cross-fertilization among the research fields of international R&D, global innovation, and open innovation deserves further attention. Second, greater research focus can be placed on managerial processes of global knowledge sourcing. Third, further research can be advanced on global knowledge sourcing at the team level. Fourth, the association between corporate governance and global knowledge sourcing can be investigated further. Fifth, much more attention needs to be paid to microfoundations of global knowledge sourcing. And lastly, further evolving patterns of global knowledge sourcing by advanced country multinationals (AMNCs) and emerging economies multinationals (EMNCs) continue to be relevant.

Subjects

  • Business Policy and Strategy
  • International Business
  • Technology and Innovation Management

Introduction

In the 21st century, multinational corporations (MNCs) have accelerated sourcing and innovation activities in the global network. Based on this trend, the objectives of this article are threefold. First, the article documents how knowledge flows and sourcing of MNCs have evolved over time. Second, it features theoretical bases for understanding knowledge sourcing by MNCs. Third, based on such observations, it proposes a set of new directions for future research regarding global knowledge sourcing—knowledge sourcing on a global scale—by MNCs.

Regarding evolving patterns of knowledge flows and sourcing of MNCs, this article observes a shift in the trend from domestic-driven R&D to overseas-driven R&D. Furthermore, while internationalization of R&D has initially taken place within an MNC boundary, increasing attention has been paid, over time, to external networks in the form of open innovation, especially since the early 2000s.

Regarding knowledge transfer and knowledge sourcing within an MNC boundary, while earlier literature mainly examined knowledge transfer within an MNC boundary, most commonly between the headquarters (HQ) and subsidiaries (Song, 2014), this article recognizes a transition from a unilateral flow from HQ to a subsidiary to bilateral flows between them, including reverse knowledge flow from a subsidiary to HQ. Furthermore, intra-firm knowledge transfer by MNCs has gone beyond the bilateral HQ–subsidiary flows to encompass horizontal knowledge flows among overseas subsidiaries.

Over time, MNCs have increasingly engaged in sourcing of knowledge from outside the MNC. MNCs often source local knowledge from overseas subsidiaries. As overseas subsidiaries gain more capability, they also play the role of global innovators instead of mere local innovators (Song et al., 2011).

Regarding theoretical perspectives on global knowledge sourcing in international R&D, this article features capability and embeddedness perspectives, among others. First, as for capability, the article features a subtle relationship between capability and motivation and stresses the importance of maintaining high levels of both capability and motivation (Song & Shin, 2008). The article also discusses associations between subsidiary autonomy and capability, subsidiary mandate and capability, as well as communication, knowledge transfer, and capability.

Second, the effect of embeddedness on global knowledge sourcing is elaborated in greater depth. The article highlights the fact that external embeddedness and internal embeddedness are complementary when it comes to external knowledge sourcing. Subsidiaries’ external embeddedness in the local environment is a necessary condition for sourcing local knowledge, given the embedded nature of knowledge. However, as overseas subsidiaries are part of the MNC, the impact of their internal embeddedness with HQ and other subsidiaries also cannot be ignored. The article summarizes both positive and negative impacts of internal embeddedness on subsidiaries’ local knowledge sourcing. In addition, subsidiaries’ strong external embeddedness in worldwide environments is necessary for sourcing global knowledge. Overseas subsidiaries’ internal embeddedness with HQ and other subsidiaries can be positive and negative in its effect on knowledge sourcing. Such a dilemma is characterized as “a paradox of internal embeddedness.”

Regarding a future research agenda, the following issues are proposed as potentially promising areas for advancing our knowledge of the field. First, we address the huge opportunity for cross-fertilizing the research fields—international R&D, global innovation, and open innovation—which are all related to one another yet the insights from these research fields have not been properly integrated and synthesized.

Second, we call for greater research focus on the managerial processes of global knowledge sourcing. Third, we point to another opportunity for deepening our understanding of research on global knowledge sourcing at the team level. Fourth, we address a further opportunity to elaborate on the role of corporate governance for global knowledge sourcing. Fifth, we point out that microfoundations of global knowledge sourcing deserve further investigation. Lastly, we note that further attention to future patterns of global knowledge sourcing by Advanced Country MNCs (AMNCs) and Emerging Economies MNCs (EMNCs) can advance our knowledge in this field.

Brief Overview of Research on International R&D

From Domestic-Driven R&D to Overseas-Driven R&D

R&D has been less internationalized than other functions such as sales, marketing, and production (Dunning, 1994), due to its heritage of being conducted in the home rather than host country locations. Early literature on international R&D and innovation thus assumed that key innovation typically takes place in the home country. Such an assumption is based on a traditional view that key knowledge is generated at home and then transferred and diffused globally to modify the products to the overseas locations (Behrman & Fischer, 1980; Buckley & Casson, 1976; Ronstadt, 1977; Vernon, 1966).

Such home-country bias in R&D has been prevalent, as documented in empirical studies (e.g., Belderbos et al., 2013; Di Minin & Bianchi, 2011; Patel & Pavitt, 1991). This reflects the staging of the internationalization of various functions within the MNC according to the prior studies; internationalization typically started from sales and manufacturing functions, then followed by local adaptation of products (Dunning, 1994; Gerybadze & Reger, 1999). The internationalization of R&D, especially basic research (R), came in at a later stage, typically around the 1980s (Gassmann & von Zedtwitz, 1999; Papanastassiou et al., 2020).

Innovation in MNCs no longer takes place only in the home country (Dunning, 1994), but takes place globally (Doz & Wilson, 2012; Murtha et al., 2001). MNCs can access external knowledge located in foreign countries through international R&D (Shan & Song, 1997; Westney, 1993). Accessing extensive international knowledge may form a basis for establishing competitive advantage (Berry, 2014; Seo et al., 2020). Critical knowledge comes not only from HQ but also from overseas subsidiaries (Filippaios et al., 2009; Papanastassiou & Pearce, 1997). Internationalizing R&D also facilitates the inflow of new ideas (Vrontis & Christofi, 2021). Knowledge sourced from the host country is conducive to innovation of the overseas subsidiary (Almeida & Phene, 2004; Phene & Almeida, 2008). For this reason, MNCs increasingly resort to foreign R&D laboratories to source knowledge and innovate globally (Cantwell, 1989; Nachum & Zaheer, 2005). Here we define “overseas R&D laboratories” as “overseas subsidiaries engaging in R&D tasks,” and “overseas subsidiaries” as “subsidiaries of MNCs located in foreign countries.”

As innovation occurs frequently in overseas locations, increasing attention is paid to an enhanced role of overseas R&D laboratories, from exploiting—i.e., leveraging and taking advantage of—already existing assets and capability in the home country to exploring—i.e., searching for—potentially relevant assets and capability globally (Cantwell & Mudambi, 2005; Kuemmerle, 1997).

As globalization of R&D has taken place more actively since the 1980s (Gassmann & von Zedtwitz, 1999; Gerybadze & Reger, 1999; Papanastassiou & Pearce, 1994), the role of overseas subsidiaries of MNCs has evolved (Asakawa, 2001b; Pearce & Papanastassiou, 1999). The overseas R&D laboratories engage in innovation not only for the host-country market but also for the global market. Such transitions have manifested as shifting from local to global innovation (Ambos et al., 2006; Birkinshaw et al., 1998; Nobel & Birkinshaw, 1998; Singh, 2007), from “home-base exploiting” (HBE) to “home-base augmenting” (HBA) (Kuemmerle, 1997, 1999), from competence exploiting to competence creating (Cantwell & Mudambi, 2005), and from exploitation to exploration (Asakawa, 2001a; Frost et al., 2002; Makino et al., 2002; Shan & Song, 1997).

Overseas R&D laboratories used to source knowledge mainly from the HQ (Behrman & Fischer, 1980; Ronstadt, 1977), for they primarily adapted existing products to local markets by sourcing key knowledge from HQ (Ronstadt, 1977), As the subsidiaries engaged in innovation for global markets, they began sourcing knowledge from around the world (Contractor et al., 2011; Doz et al., 2001; Pedersen et al., 2013) to meet the demand of the worldwide customers.

International R&D Within an MNC Boundary

The advantages of MNCs’ internationalizing R&D within the firms’ boundaries are manifold: building capability, transferring tacit knowledge across national borders, and protecting intellectual property rights (IPR), among others.

Building Capability

Compared with domestic firms, MNCs are more suitable for internationalizing R&D given their extensive networks across the world. R&D often deals with complex knowledge that is dispersed around the world. Mobilizing and sharing such knowledge across national borders takes organizational capability to absorb, transfer, and leverage such locally-embedded knowledge (Doz et al., 2001). An MNC is in a better position relative to a domestic firm to develop its own internal R&D capability by accessing, absorbing, and transferring globally-dispersed knowledge through its own overseas subsidiaries instead of market transactions or alliances (Kogut & Zander, 1993). Setting up its own R&D laboratory in a foreign location provides a firm with an opportunity to nurture its capability, although it may seem inefficient in a short run (Belderbos, 2003). Regular and frequent interactions, or “R&D co-practice,” within a firm enhances the absorptive capacity, i.e., ability to obtain and leverage new knowledge (Frost & Zhou, 2005). Such interactions within a firm facilitates shared values and mutual understanding among organizational members which provide the basis for sharing complex and distant knowledge.

Transferring Tacit Knowledge

MNCs with foreign subsidiaries are superior to market transactions in terms of transferring tacit knowledge across national borders (Kogut & Zander, 1993), for the former have the advantage of transferring knowledge within an organizational boundary. While tacit knowledge is difficult to mobilize across distances, doing so within a firm boundary may ease such difficulty by direct human interactions (Almeida et al., 2002) as well as shared values, norms, and culture within a firm. MNCs have the ability to mobilize knowledge dispersed around the world, by flexibly coordinating their subsidiaries to facilitate knowledge flows across distances (Doz & Wilson, 2012; Graf & Kalthaus, 2018; Kafouros et al., 2012). Sticky, locally-embedded knowledge, which is difficult to mobilize, can be transferred across borders more efficiently within MNCs, for MNCs can better transfer tacit locally-specific knowledge across geographic distance within the firms (Almeida et al., 2002; Kogut & Zander, 1993; Martin & Salomon, 2003).

Protecting IPR

Third, internationalizing R&D within an MNC’s boundary presents an advantage for protecting IPR by reducing the chance of technological spillovers. Setting up overseas R&D laboratories allows the MNCs to transfer core proprietary knowledge across national borders within the firms’ boundaries without much concern about the leakage of the knowledge to the outside.

Li and Xie (2011) found that, in host countries with weak intellectual property (IP) regimes, wholly-owned R&D laboratories allow MNCs to protect IP. However, internalizing knowledge within an MNC’s boundary does not offer perfect protection for IP. Spreading the key knowledge across multiple locations within the MNC boundary can be effective as a further device to protect IP (Gooris & Peeters, 2016; Kim, 2013). By dispersing the key knowledge within the firm, outsiders find it much harder to copy any critical knowledge from any single location, for no one place has all of the knowledge (Kim, 2013). While R&D scientists often need the whole set of knowledge to create innovation, MNCs allow them to access the set of dispersed knowledge through various measures such as research collaborations, mutual visits, and informal information sharing. For such reasons, dispersing key knowledge in different locations within an MNC makes it highly effective to protect IPR.

Knowledge Transfer and Knowledge Sourcing by MNCs

Knowledge Transfer Patterns Within an MNC Boundary

In earlier phases of internationalization of R&D, in the 1970s and 1980s, centrifugal flow of knowledge from HQ to overseas subsidiaries was common, as Ronstadt (1977) documented. Overseas R&D laboratories mainly received knowledge from HQ in order to adapt the product to local demand; thus, the subsidiaries played the role of technology transfer units (TTUs) (Ronstadt, 1977). When MNCs engage in center-for-global innovation (Bartlett & Ghoshal, 1989), in which key knowledge is created in the home countries and transferred to overseas subsidiaries, overseas subsidiaries are typically classified as the HBE type, thus leveraging capability and resources residing in the home country for local use (Kuemmerle, 1997). Such a pattern is prevalent in the case of MNCs adopting market-seeking R&D foreign direct investment (FDI) (Dunning, 1994).

Over time, knowledge flow starts to occur more frequently from overseas subsidiaries back to HQ. Such reverse knowledge flow (Ambos et al., 2006) is also described as local-for-global innovation within the MNC (Bartlett & Ghoshal, 1989). Overseas subsidiaries play a critical role in HBA (Kuemmerle, 1997), in which a parent company in the home country gains competencies from the knowledge obtained from the overseas subsidiaries. Such a pattern is manifested by technology/competence-seeking FDI (Dunning, 1994). HQ can learn from foreign subsidiaries (Ambos et al., 2006). More specifically, HQ benefits from a subsidiary’s knowledge especially when the subsidiary is globally integrated in terms of innovation, while knowledge from independent, isolated subsidiaries are perceived as less beneficial (Ambos et al., 2006), because isolated subsidiaries are less informed of the HQ’s needs and thus less likely to provide relevant knowledge which HQ would find of value (Asakawa, 2001a). HQ is increasingly learning from the competent overseas subsidiaries to complement its own capabilities (Frost et al., 2002).

More recently, emerging economy multinationals (EMNCs) have been observed to establish overseas R&D laboratories in advanced countries from which advanced technologies are sourced and transferred to HQ (Awate et al., 2015). They source sophisticated knowledge from their overseas R&D centers in developed countries as a way to rapidly catch up with advanced economy multinationals (AMNCs).

As is the case of EMNCs, the lack of a home country advantage drives a firm to source knowledge from the foreign environment. Foreign R&D becomes a major source of technology when a firm’s home country advantage falls behind the global technological frontier, whereas domestic R&D becomes a major source of technology when home country strength is evident (Belderbos et al., 2015). Prior studies show that MNCs benefit from sourcing knowledge from host countries with technological superiority relative to the home country (Frost, 2001; Song & Shin, 2008; Song et al., 2011). Such a knowledge sourcing strategy can compensate for the weakness of a firm’s home country (Belderbos et al., 2015; Lehrer et al., 2011).

Furthermore, knowledge is also shared among overseas subsidiaries, directly and indirectly. MNCs access knowledge dispersed around the world through their overseas subsidiaries. However, subsidiaries do not always share knowledge among themselves. To facilitate knowledge sharing, HQ can play the role of knowledge broker, coordinating knowledge sharing among subsidiaries (Ciabuschi et al., 2012), for it may have the best understanding of where the key knowledge resides (Dellestrand & Kappen, 2011).

Subsidiaries can also share knowledge directly with other peer overseas subsidiaries, without going through HQ (Meyer et al., 2011). While direct knowledge sharing seems more efficient, such knowledge sharing is usually confined to interactions among subsidiaries that are already familiar to one another.

External Knowledge Sourcing

As MNCS internationalize R&D, they often seek to source knowledge from overseas locations where key innovation takes place. External knowledge sourcing can be done in various ways: MNCs source overseas knowledge through mergers and acquisitions (M&A) arrangements, through informal personal contacts, or through their own overseas R&D laboratories. Such external knowledge sourcing is a form of open innovation, i.e., innovating through acquiring and leveraging externally-based knowledge (Chesbrough, 2003), which is contrasted with closed innovation, i.e., innovating based on the firm’s internal knowledge.

Doz and Wilson (2012) presented three patterns of external knowledge sourcing: experiencing, foraying, and attracting. Regarding experiencing, MNCs establish their own brick-and-mortar R&D laboratories to source locally-specific, complex knowledge. In foraying, MNCs may choose to visit, short-term, a hotbed of innovation and to contact knowledge holders to source a particular piece of knowledge, if they know who owns it. For attracting, MNCs may resort to open innovation solutions by posting on the firm’s website a specific type of knowledge they are seeking. When they are not seeking particularly high-contextual knowledge, inviting the knowledge holders through the website is effective, instead of visiting overseas locations to source that knowledge (Doz & Wilson, 2012). These modes of external knowledge sourcing can be effective when aligned with the particular situation.

Local Knowledge Sourcing

In contrast to adapting home-developed technologies to foreign production conditions and market demands (Håkanson & Nobel, 1993), MNCs are exploring and developing new technologies overseas (Shan & Song, 1997). A growing number of overseas R&D laboratories are classified as “HBA R&D labs” which seek knowledge in host locations to help strengthen the home-base technological competencies (Kuemmerle, 1999). In other words, overseas R&D laboratories have been shifting their orientation of learning from “exploitation” to “exploration” (Cantwell & Janne, 1999; Frost et al., 2002; Shan & Song, 1997).

Such knowledge-seeking subsidiaries are prevalent in advanced economies, where subsidiaries of foreign MNCs gain significantly more than they contribute in terms of knowledge (Awate et al., 2015; Singh, 2007).

One major objective of MNCs to set up their overseas R&D laboratories is to tap into local innovation sources. MNCs source knowledge from innovative regions such as Silicon Valley by locating there, most typically through establishing subsidiaries. MNCs engage in R&D in foreign countries to source complementary knowledge from local scientific and technical communities (Florida, 1997). Such a pattern is salient, especially when firms intend to source tacit, sticky knowledge which is located within narrow geographic areas (Almeida, 1996; Almeida et al., 2002; Jaffe et al., 1993).

It has been suggested that MNCs locate in centers of innovation to broaden their knowledge bases (Cantwell, 1989). In the semiconductor industry, foreign MNCs’ U.S. subsidiaries use knowledge from the regions where these subsidiaries are located far more than local U.S. firms from the same region (Almeida, 1996). Similarly, in the biotechnology industry, foreign MNCs invest in technology-intensive U.S. biotechnology firms to source technological knowledge (Shan & Song, 1997).

Global Knowledge Sourcing

Global knowledge sourcing differs from local knowledge sourcing. The latter concerns knowledge sourcing from a host country location (Song et al., 2011), the former concerns knowledge sourcing from a wide range of countries beyond the host country location (Asakawa et al., 2018).

Global knowledge sourcing has attracted attention of scholars, as the role of overseas subsidiaries evolve from local innovators to global innovators (Bartlett & Ghoshal, 1989; Cantwell & Mudambi, 2005). Factors that influence subsidiaries’ global knowledge sourcing include capability of the subsidiary, and the subsidiary’s internal and external embeddedness, i.e., close relationship with parties internal and external to the firm, among others.

Over time, as its overall capability increases, a subsidiary is able to increase the sourcing of knowledge globally (Song et al., 2011). Competent subsidiaries are not satisfied with being local innovators exclusively sourcing knowledge from the local environment, for they are capable of identifying and sourcing knowledge around the world. Linkages with external parties around the world may foster a subsidiary’s global knowledge sourcing, whereas linkages with external parties in the host country, in contrast, may further embed an overseas subsidiary in a particular local context to the detriment of global knowledge sourcing (Asakawa et al., 2018).

Theoretical Perspectives on Knowledge Sourcing in International R&D

Capability

Capability and Motivation

Capability and motivation are driving forces for MNCs’ knowledge sourcing. Capability is an important factor for leveraging foreign R&D, especially for knowledge sourcing. The absorptive capacity improves as they gain more experience over time (Song, 2014). The same can be applied to knowledge sourcing by overseas subsidiaries, in which capability and motivation are facilitators of subsidiaries’ knowledge sourcing. Munificence of external resources in the host country, such as locally-specific knowledge and technologies which they have accessed, also contributes to subsidiary absorptive capacity (Song & Shin, 2008). Moreover, knowledge transferred from other intra-firm units, such as HQ and other subsidiaries, are also likely to enhance the absorptive capacity of subsidiaries (Miao et al., 2011), for subsidiaries can gain firm-specific knowledge which can enhance absorptive capacity.

Overseas R&D laboratories’ absorptive capacity, as well as that of HQ, are important conditions for external knowledge sourcing by overseas R&D laboratories (Frost, 2001; Song et al., 2011). MNCs with sufficient absorptive capacity at HQ and/or the overseas lab are ready to source and leverage knowledge from host locations. Penner-Hahn and Shaver (2005) found that firms benefit from existing technological capabilities when they engage in international R&D. The absorptive capacity view implies that the MNC sources more knowledge from host locations when it has strong technological capabilities, both at HQ and subsidiary levels.

When overseas subsidiaries have weak technological capabilities, they are typically more motivated to source external knowledge. In contrast, when overseas subsidiaries have strong technological capabilities, the subsidiaries are not as motivated to source the external knowledge due to the complacency and Not Invented Here (NIH) syndrome. There is thus a trade-off between capability and motivation, as presented in terms of the paradox of capability and motivation by Song and Shin (2008).

Capability and Subsidiary Autonomy

Prior studies identified a positive relationship between subsidiary autonomy and the subsidiary’s capability. Autonomy and control influence the level of a subsidiary’s innovation, capability, and learning (Ghoshal & Bartlett, 1990; Song et al., 2011). Centralized control imposed by a parent company has the potential to diminish the motivation of subsidiary employees to learn, limit initiatives for innovation by hindering autonomous searching and learning activities, and thus ultimately prevent development of new capabilities applicable to local markets (Birkinshaw et al., 1998; Frost et al., 2002; Miao et al., 2011). Thus, excessive control exercised by HQ often interferes with a subsidiary’s autonomous knowledge sourcing behavior (Ambos et al., 2006; Miao et al., 2011), which in turn blocks the subsidiary’s capability building (Birkinshaw et al., 1998; Frost et al., 2002). By contrast, a high level of autonomy allows subsidiaries to achieve more than simply running current business operations by developing new, innovative ways of improving their performance in the foreign environment (Ghoshal & Bartlett, 1990). A subsidiary with high autonomy can explore new opportunities in a way suitable for each location, which is likely to enhance performance (Garvin, 2000) and capability (Birkinshaw et al., 1998). Thus, subsidiaries with high autonomy may obtain valuable knowledge and have more influence on the level and direction of knowledge transfer within an MNC (Birkinshaw et al., 1998; Song, 2014).

Capability and Subsidiary Mandate

Subsidiary mandates, i.e., “a business, or element of a business, in which the subsidiary participates and for which it has responsibilities beyond its national market” (Birkinshaw, 1996, p. 467), may also affect the degree of knowledge transfer (Song, 2014). The way an overseas subsidiary engages in knowledge transfer internal and external to the firm is largely influenced by the type of mandate assigned to it. While subsidiary mandates are typically assigned by HQ (Birkinshaw et al., 1998), the subsidiaries which are assigned particular mandates often start demonstrating specific patterns of knowledge transfer. For example, once a subsidiary is assigned a particular mandate, such as home-base augmentation or exploitation of R&D labs (Kuemmerle, 1999), it can be observed to manifest differing knowledge transfer patterns, i.e., from subsidiary to HQ or from HQ to subsidiary, depending on the mandate assigned (Song et al., 2011).

Different patterns of knowledge transfer between the subsidiaries and other parties inside and outside the firm arguably affect the capability of the subsidiaries. For example, a subsidiary with a HBE mandate tends to receive knowledge from HQ that is necessary to adapt the HQ-driven technologies and products to the host country location. Therefore, subsidiaries with HBE mandates are more likely to develop the capability to adapt to the local environment. In contrast, subsidiaries with HBA mandates tend to source advanced knowledge from the advanced locations to develop their capability, so that they can contribute to the knowledge base of the HQ. Therefore, they are more likely to develop the capability to source external knowledge and create advanced knowledge.

Embeddedness

The embeddedness perspective (Bourdieu, 1986; Granovetter, 1985; Uzzi, 1996) has been used to explore the impact of external and internal embeddedness on external knowledge sourcing. Embeddedness is defined here as closeness at relational, structural, and cognitive levels based on which sharing of resources can be facilitated (Song et al., 2011; Uzzi, 1996). Two key social networks have been identified in which overseas subsidiaries are embedded: (1) an external network in the host location, and (2) an internal network within the MNC (Meyer et al., 2011; Song et al., 2011).

Complementarity between External and Internal Embeddedness

Overseas subsidiaries are embedded in both the external environment and the internal subunits within an MNC (Meyer et al., 2011), representing a form of dual embeddedness (Andersson & Forsgren, 2000; Andersson et al., 2002; Meyer et al., 2011; Nell & Ambos, 2013; Song et al., 2011). More specifically, the external environment includes the host country (Andersson et al., 2002; Nell & Ambos, 2013; Santangelo et al., 2016; Song et al., 2011) as well as other countries (Asakawa et al., 2018). Internal networks include relations with HQ and with other subsidiaries (Andersson & Forsgren, 1996; Asakawa et al., 2018; Nell & Ambos, 2013). Both are considered important relationships that affect sourcing and leveraging of external knowledge by overseas subsidiaries (Cantwell, 2017; Song et al., 2011).

These types of embeddedness are effective in their own right: external embeddedness for absorbing external knowledge (Frost, 2001) and internal embeddedness for sharing the acquired external knowledge within a firm (Doz et al., 2001). Also, an extensive external network is better for sensing and accessing external knowledge, but weaker in linking to intra-firm units. Conversely, an internal network is better suited for integrating intra-firm units while less effective at connecting to external networks. In that respect, external and internal embeddedness are complementary to each other (Cantwell, 2017; Castellani & Zanfei, 2006; Phene & Tallman, 2018).

External Embeddedness and Knowledge Sourcing

Because cooperating in innovation with external parties is likely to be particularly beneficial for the firms located in a knowledge-intensive region (Tojeiro-Rivero & Moreno, 2019), MNCs often choose to set up overseas R&D laboratories in innovative locations to collaborate with external parties such as universities, research institutes, and others as ways to source external knowledge (Andersson et al., 2002).

As key knowledge is often localized, tapping into locally concentrated knowledge which is tacit and locally contextual (Castellani, 2018) is strategically important for firms. Tacit knowledge is often agglomerated in a cluster where geographic proximity allows firms to share and source tacit knowledge locally (Blanc & Sierra, 1999; Chung & Song, 2004).

MNCs can source knowledge from around the world through their overseas subsidiaries being embedded in local networks in different host countries, thereby exposed to a wide variety of knowledge stocks (Andersson et al., 2002; Dellestrand & Kappen, 2012). Such overseas subsidiaries are often granted specific mandates for sourcing valuable external knowledge (Birkinshaw, 1996; Birkinshaw & Hood, 1998; Doz et al., 2001).

Internal Embeddedness and Knowledge Sourcing

In contrast to external embeddedness, the literature has paid relatively scant attention to the impact of internal embeddedness on external knowledge sourcing by overseas subsidiaries in the cross-border context (Asakawa et al., 2018).

The relationships of overseas subsidiaries with other units within a firm, especially with HQ, may affect local knowledge sourcing both positively and negatively. On the one hand, it may be positive because subsidiaries with sufficient levels of internal embeddedness with HQ are more likely to be trusted by HQ and, as a result, more likely to be granted higher degrees of autonomy, allowing them to explore external knowledge more flexibly (Ambos et al., 2011; Asakawa, 1996). Internal embeddedness with HQ also provides overseas subsidiaries with useful knowledge that enhances the absorptive capacity necessary for local knowledge sourcing (Cantwell, 1989; Cantwell & Mudambi, 2011; Song et al., 2011), for HQ can offer broader technological knowledge which serves as a basis for sourcing external knowledge. Subsidiaries can gain globally-dispersed knowledge through HQ, which acts as a knowledge broker mobilizing and sharing knowledge held by overseas subsidiaries (Dellestrand & Kappen, 2011).

On the other hand, it may be negative because overseas subsidiaries’ external knowledge search is influenced by the cognitive patterns of its actors, in that excessive internal embeddedness with the HQ may reinforce cognitive lock-in (Grabher, 1993), which leads the subsidiaries to isolate themselves from the external environment (Gargiulo & Benassi, 2000). Overseas subsidiaries with strong embeddedness with HQ may suffer from the HQ’s strong tendency to “selective attention” (Monteiro, 2015), i.e., its tendency to focus on searching certain types of knowledge at the exclusion of others, according to a particular preconceived notion that HQ associated with a particular location. Extant empirical studies seem to suggest such a negative impact (Ambos & Reitsperger, 2004; Asakawa, 2001a; Kurokawa et al., 2007).

Such a problem is also described as the “innovation–integration dilemma” (Mudambi, 2011), where too much integration into corporate norms may impede subsidiary innovation. In the worst case, subsidiaries strive to fight the corporate immune system, i.e., the corporate’s resistance to changes by preserving the status quo, in vain (Birkinshaw & Fry, 1998). As Hansen (1999) pointed out, strong interunit ties put constraints on actors who are totally immersed in the existing network, and these constraints are likely to prevent them from searching for knowledge outside their existing contacts. To alleviate such a negative effect, subsidiaries may choose to isolate themselves, entirely or at least partially, from this internal embeddedness (Asakawa, 2001a; Decreton et al., 2021; Monteiro, 2015).

This is a syndrome referred to as “paradox of internal embeddedness” (Asakawa et al., 2018), which suggests that internal embeddedness can be both helpful and harmful for a subsidiary’s external knowledge sourcing. It implies that external knowledge sourcing is affected both positively and negatively by the vertical embeddedness between HQ and overseas subsidiaries.

Future Research Agenda

Cross-Fertilizing Research Fields Among International R&D, Global Innovation, and Open Innovation

The topic of this article cuts across the research fields of international R&D management, global innovation, and open innovation, which are all related to one another yet largely belong to separate academic communities. As a result, the overlaps among these research fields have not been properly integrated and synthesized. These related fields can mutually benefit from sharing their insights with one another.

International R&D and Global Innovation

The conventional literature on international R&D has been criticized as being too phenomenological and atheoretical, detached from mainstream management research. Traditionally, the main outlets for this research field have been limited to a rather small number of specialized technology innovation journals, with some exceptions in management journals. While R&D is an important element of innovation, international R&D literature predominantly highlighted the R&D aspect of global innovation, thus leaving non-R&D related innovation aside, such as the aspects of marketing and commercialization. However, in reality, narrowly focused attention to mere R&D-related phenomena may neglect a broad range of issues on global innovation.

Literature on global innovation is a more recent research stream featuring knowledge and innovation in a much broader context than only R&D. Global innovation research encompasses a much wider range of functions than R&D, including marketing and sales. This literature is better connected to the knowledge-based view, the dynamic capabilities perspective, and the attention-based view, among others, which are central domains in management research. As a result, the literature on global innovation tends to regard international R&D research as a much narrower field; it was not considered important for both fields to seek synergy between the fields. Future research efforts can gain a great deal from cross-fertilizing these two neighboring fields.

International R&D/Global Innovation and Open Innovation

Based on our common understanding that closed, domestic innovation is of limited utility in today’s global competitive environment, the literature has been discussing two ways to break free from it: international R&D/global innovation on the one hand, and open innovation on the other.

As the primary focus of the international R&D/global innovation literature has been on innovation generated across national boundaries, limited attention of the international R&D/global innovation literature has been given to innovation generated across organizational boundaries. However, because MNCs engaging in global innovation are often interacting with actors outside the firm, there is much to learn from the open innovation literature. Indeed, far more synergy between international R&D/global innovation literature and open innovation literature is needed in the future.

The open innovation literature (Chesbrough, 2003) primarily concerns innovation across the firm’s boundary, regardless of geographic location. More specifically, research on open innovation examines the way firms innovate through acquiring and leveraging externally-based knowledge (Chesbrough, 2003), rather than innovating based on the firm’s internal knowledge. Nevertheless, the open innovation research has not considered the international dimension of open innovation as a main focus (Asakawa et al., 2014).

As global open innovation is a complex issue that deals with challenges and opportunities of crossing national and organizational boundaries, a broad range of perspectives that capture these dimensions needs to be incorporated in the analysis. Therefore, cross-fertilization of these related research fields can further advance our knowledge on global R&D and innovation by MNCs.

Managerial Processes of Global Knowledge Sourcing

Global knowledge sourcing by MNCs has been examined largely by quantitative analysis of patent citations, and related methods. In contrast, a managerial approach to global knowledge sourcing remains underrepresented in the literature. What matters here is the “how” question. Most typically, how do MNCs identify key knowledge dispersed around the world, and access, transfer, and leverage it? Such questions have been explored by Bartlett and Ghoshal (1989), who illustrated the sensing-linking-bonding processes of global knowledge by MNCs. Doz et al. (2001) examined how MNCs orchestrate globally-dispersed knowledge by sensing, integrating, and leveraging it. They went beyond the argument about the organizational structure of MNCs by observing managerial processes of global knowledge mobilization in a dynamic way. Doz et al. (2001) and Doz and Wilson (2012) illustrated such global knowledge orchestration at the individual and managerial levels.

Monteiro (2015) shed light on the way an overseas subsidiary manages to source knowledge globally by gaining the attention of HQ. Decreton et al. (2021) illustrated how MNCs source external knowledge from the overseas innovation ecosystem through their innovation outposts, which are defined as “internal teams located in entrepreneurial ecosystems that help their companies manage open innovation (i.e., inflows and outflows of knowledge that foster innovation both inside and outside the company” (Decreton et al., 2021, pp. 94–95). This line of research has huge potential for advancing the managerial insights into the practice of global knowledge sourcing by MNCs. For example, future study may shed light on how subsidiary managers sense potential knowledge dispersed around the world effectively, how subsidiary managers overcome the defensiveness of corporate HQ vis-à-vis any new knowledge which does not conform to the firm’s familiar norms and values (Birkinshaw & Fry, 1998; Birkinshaw & Ridderstråle, 1999; Monteiro, 2015), and how managers at top, middle, and frontline levels interact effectively to realize successful mobilization of globally dispersed knowledge.

Such global knowledge sourcing requires much closer investigation than local knowledge sourcing, for complex, tacit knowledge is typically difficult to transfer across cultural, geographic, and institutional contexts; thus, much more sophisticated mechanisms are necessary (Doz & Wilson, 2012; Doz et al., 2001). Similarly, Seo et al. (2020) argue that valuable knowledge remains unevenly distributed across geographic regions and is much more difficult to acquire from outside a given location (Audretsch & Feldman, 1996; Iwasa & Odagiri, 2004). A meticulous investigation as to how firms and managers get to source globally dispersed distant knowledge is needed in the future.

Research on Global Knowledge Sourcing at Team Level

Another underexplored issue pertaining to global knowledge sourcing by MNCs relates to team-level factors. Compared with macro-organizational and subsidiary level factors, team-level factors have received only scant attention in the literature.

Seo et al. (2020) investigated the way the geographic diversity of cross-border R&D teams affects innovation performance, with a particular attention to the moderating role of team composition. They found the importance of technical and social relations among researchers in sourcing and integrating location-specific knowledge and improving team performance. The reason why geographic diversity of research teams is important is that such geographically diverse teams can access and leverage location-specific knowledge (Berry & Kaul, 2015; Cantwell, 1989; Seo et al., 2020). On the contrary, geographically dispersed teams also face costs of knowledge integration (Lahiri, 2010; Seo et al., 2020).

Team configuration, such as imbalance and isolation, is also found to affect global knowledge sharing (Ambos et al., 2016). Future research can benefit the field by shedding light on how various natures of teams, such as composition, configuration, and geographic dispersion, facilitate or impede global knowledge sourcing.

Knowledge sourcing and transfer can also be influenced by team composition at the top management level. Because global knowledge sourcing entails risk and strategic decision making, diversity and geocentric mindset of top management team members may facilitate global knowledge sourcing beyond the conventional scope of knowledge searching by MNCs.

Corporate Governance and Global Knowledge Sourcing

Global knowledge sourcing often requires the unconventional practice of knowledge management processes by MNCs. As valuable knowledge is often tacit and sticky, reaching out to the locus of such knowledge involves substantial efforts, investments, and risk-taking behaviors on the part of the firm. This is especially tough for MNCs with a strong orientation to home country-driven, ethnocentric approach to management of innovation. Firms with such strong domestic orientation in management are typically tied to conservative stakeholders including executive board, shareholders, government, labor union, and employees, who put priority on the domestic issues that are of greater interest for them. In order for top management and the team to break free from such inertia, transformation of corporate governance from ethnocentric to geocentric orientation offers a promising solution, along with changes in organizational structure, process, and mindset (Korine & Asakawa, 2018; Korine et al., 2020).

Microfoundations of Global Knowledge Sourcing

Bridging the levels of analysis regarding global knowledge sourcing deserves further exploration. While international R&D and global knowledge sourcing involve various concepts and issues that can be reduced to the level of microfoundations, such an attempt remains underexplored in the extant literature. International R&D and global knowledge sourcing present an appropriate context in which microfoundations of global innovation need to be developed further (Foss & Pedersen, 2019).

Cognitive processes of subsidiary managers trying to identify and access external knowledge are closely linked to the process of global knowledge sourcing, for managers’ absorptive capacity with respect to new, unfamiliar knowledge and their willingness to learn new things are major components of new knowledge absorption. However, such microlevel variables are not usually interpreted in the context of the more macrolevel of global knowledge sourcing. In a similar vein, the role of knowledge brokers and boundary spanners who relay externally acquired knowledge to potential users of knowledge within an MNC deserves much closer attention in the more macrolevel study of global knowledge sourcing. There are a few pioneering studies which examined the macrolevel facilitators and inhibitors of global knowledge sourcing at the micro, individual level, including the role of “scouts” who influence HQ managers’ attention to global knowledge sourcing (Monteiro, 2015) and the way managers fight against the corporate immune system for global knowledge sourcing (Birkinshaw & Fry, 1998; Birkinshaw & Ridderstråle, 1999). Despite such efforts, far more attempts to develop microfoundations of macrolevel global knowledge sourcing deserve further attention.

Future Patterns of Global Knowledge Sourcing by AMNCs and EMNCs

Advanced Country MNCs (AMNCs) and Emerging Economies MNCs (EMNCs) often engage in global innovation and R&D in different ways. Thus, researchers should investigate similarities and differences between AMNCs and EMNCs in terms of overseas knowledge sourcing.

AMNCs

AMNCs often differentiate their R&D tasks in advanced and emerging economies, reflecting the location-specific comparative advantage these locations could offer. AMNCs traditionally source advanced knowledge and technology from host locations with an advanced level of technological capability (Song & Shin, 2008), while they set up R&D laboratories in emerging economies to promote local sales and manufacturing (von Zedtwitz, 2004). More recently, AMNCs also source knowledge with location-specific advantage, including low cost, from emerging economies (Demirbag & Glaister, 2010; von Zedtwitz, 2004). AMNCs also seek to source competent staff from emerging economies at lower cost (Liu & White, 2001).

Therefore, a general tendency in AMNCs is for knowledge to be sent from HQ in advanced countries to subsidiaries in emerging countries. Here HQ often plays the role of knowledge source for the subsidiaries in emerging countries, and overseas R&D laboratories can play the role of both competence exploitation and competence creation (Awate et al., 2015).

EMNCs

R&D internationalization of EMNCs is a more recent trend (von Zedtwitz, 2004). Most notably, EMNCs began to conduct R&D in advanced economies to augment their competencies (Awate et al., 2015; Elia & Santangelo, 2017). That is, EMNCs explore advanced and complementary knowledge in the developed economies as a way to more rapidly catch up with the level of advanced economies (Miao et al., 2018; von Zedtwitz, 2004). HQ of the EMNCs accumulate capabilities by sourcing advanced knowledge from overseas R&D laboratories located in advanced economies. Overseas R&D laboratories in advanced economies can be a primary source of advanced knowledge for HQ located in emerging countries (Awate et al., 2015). Moreover, leading EMNCs acquire overseas firms in advanced economies for the purpose of absorbing advanced knowledge (Awate et al., 2015; Doz & Wilson, 2012).

Future studies can investigate the following. First, we still need to understand how EMNCs source knowledge from other emerging countries. Relative to the knowledge sourcing from advanced countries, scant attention has been paid to this aspect of knowledge sourcing. Second, future studies can explore variation within EMNCs across different home countries. The level of heterogeneity across different home countries makes it increasingly difficult to characterize them under the same category of EMNCs. Third, future studies can investigate the extent to which AMNCs and EMNCs are converging (or not) in terms of global knowledge sourcing. For example, while AMNCs have been sourcing advanced knowledge mostly from advanced economies, the rapid technological development of a few emerging countries in certain technological categories has changed the picture such that AMNCs occasionally source advanced knowledge even from emerging economies.

Conclusions

As a brief overview of research on international R&D, a shift from domestic-driven R&D to overseas-driven R&D has been surveyed. Accordingly, an evolving role of overseas R&D laboratories within MNCs is discussed. Internationalization of R&D has initially taken place within the MNC boundary. Such intra-firm R&D internationalization has a number of advantages including building capability, transferring tacit knowledge, and protecting IPR. Over time, an increasing attention to external networks became salient, as international R&D went beyond overseas R&D laboratories within an MNC boundary.

Regarding knowledge transfer and sourcing by MNCs, earlier literature focused on knowledge transfer within an MNC boundary, most dominantly between the HQ and subsidiaries. HQ–subsidiary knowledge flow has manifested a transition from a unilateral flow from HQ to a subsidiary to a bilateral flow between them, including a more recent pattern of reverse knowledge flow from subsidiary to HQ. Furthermore, intra-firm knowledge transfer by MNCs has gone beyond the bilateral HQ–subsidiary relation to encompass horizontal knowledge flow among overseas subsidiaries reflecting the current patterns of knowledge flows within an MNC.

Over time, MNCs have engaged more in external knowledge sourcing, and accordingly an increasing attention is paid to external knowledge sourcing in the literature on international R&D and global innovation. External knowledge sourcing is done typically by overseas subsidiaries, and thus, local knowledge sourcing from the host location became a common phenomenon. Subsidiaries’ external embeddedness in the local environment is a necessary condition for sourcing local knowledge, given its embedded nature. However, as overseas subsidiaries are part of MNCs, the impact of their internal embeddedness with HQ and other subsidiaries also cannot be ignored. Both positive and negative effects of internal embeddedness on subsidiaries’ local knowledge sourcing were summarized.

Furthermore, as overseas subsidiaries gain more capabilities, they become global innovators instead of mere local innovators (Song et al., 2011). Accordingly, overseas subsidiaries are increasingly engaging in global knowledge sourcing. For global knowledge sourcing, a strong absorptive capacity of overseas subsidiaries as well as the HQ is a prerequisite. And subsidiaries’ strong external embeddedness in a wide range of countries beyond the host country location is necessary for sourcing global knowledge. Overseas subsidiaries’ internal embeddedness with the HQ and other subsidiaries can have both positive and negative effects on knowledge sourcing. It is positive because they can obtain knowledge and information regarding the locus of knowledge around the world and the way they can be sourced. It is negative because it can put constraints on the subsidiaries’ autonomous knowledge search and sourcing behavior. Such a dilemma has been characterized as “a paradox of internal embeddedness.”

Various theoretical perspectives on global knowledge sourcing in international R&D were then discussed. As for capability, a subtle relation between capability and motivation was featured, stressing the importance of maintaining high levels of both capability and motivation (Song & Shin, 2008). Associations between subsidiary autonomy and capability, subsidiary mandate and capability, as well as communication, knowledge transfer, and capability were also discussed.

The effect of embeddedness on global knowledge sourcing was elaborated in greater depth. The fact that external and internal embeddedness are complementary when it comes to external knowledge sourcing was highlighted.

The article concluded with a future research agenda. First, the opportunity for cross-fertilizing research fields among international R&D, global innovation, and open innovation was addressed. Second, a greater research focus on managerial processes of global knowledge sourcing was called for. Third, another opportunity for deepening our understanding of research on global knowledge sourcing at the team level was discussed. Fourth, a further opportunity to elaborate on the role of corporate governance for global knowledge sourcing was addressed. Fifth, it was pointed out that microfoundations of global knowledge sourcing deserve further investigation. And lastly, it was discussed that further attention to future patterns of global knowledge sourcing by AMNCs and EMNCs can advance our knowledge in this field.

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