The geographic sources of innovation in the multinational enterprise : U.S. subsidiaries and host country spillovers, 1980-1990
Author(s)Frost, Anthony S. (Anthony Stephen), 1961-
D. Eleanor Westney.
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This dissertation is about multinational firms and the geography of technological innovation. It addresses a series of questions about the spatial location of the knowledge sources that underpin and inform innovations developed by foreign subsidiaries. Where foreign subsidiaries draw their scientific, technical, and commercial ideas from during the process of generating knowledge is a central concern in current debates about the nature of foreign direct investment and the multinational enterprise. An emerging notion in the literature is that the multinational firm may be evolving toward an institution specializing in the assimilation, diffusion, and, ultimately, creation, of knowledge on a worldwide scale. A key conjecture in this perspective 1s that what makes the multinational unique as a learning organization is its structural position spanning heterogeneous institutional environments. To date there exists little in the way of systematic evidence that foreign subsidiaries assimilate knowledge originating in the host countries in which they are located - much less that this knowledge is actually being utilized, either locally by the subsidiary or elsewhere within the multinational firm. This study seeks to advance this debate through an empirical investigation of the subsidiary-environment interface in the context of technological innovation. Three research questions are addressed: 1. Where, geographically, do foreign subsidiaries derive their scientific and technical ideas from during the process of technological innovation? 2. Under what conditions do innovations generated by foreign subsidiaries build upon sources of science and technology in the home and/or host country? 3. To what extent and under what conditions do other parts of the multinational firm derive a learning benefit from a foreign subsidiary's capacity to assimilate knowledge in its local environment? New insights often come from new data and the development of new methods to use those data. In this study, I take advantage of a unique source of subsidiary-level innovation data derived from U.S. patent records. Briefly, for every patent issued to U.S.- based subsidiaries of foreign multinationals between 1980 and 1990 - over 16,000 patents - I have assembled a variety of geographic, organizational, and technological indicators. Most importantly, this patent database contains detailed information on the reference "citations" to prior patents listed on every subsidiary patent record. These citations represent the technological antecedents of the patented invention. In the empirical analysis, I use the geographic information contained in these citations to draw inferences about the extent and conditions under which innovating subsidiaries are drawing upon home or host country sources of science and technology, and the extent to which this knowledge is eventually diffused to other parts of the multinational network. The patent citation methodology is modeled on the pioneering work of Jaffe, Tratjenberg and Henderson (1993). This study is explicitly inter-disciplinary in its theoretical orientation. In addition to the multinational literature, I draw upon concepts and ideas originating in the literatures on innovation and economic geography. The argument has two main steps. First, drawing on March (1991), I argue that the innovative activities of foreign subsidiaries can be categorized into two broad "logics": a logic of exploitation and a logic of exploration. Exploitation - "the refinement and extension of existing competencies, technologies and paradigms" (March, 1991: 85) - is hypothesized to be associated with sources of knowledge in the home base of the firm, most fundamentally from within the parent firm itself Exploration -- "experimentation with new alternatives" (1991: 85) - is hypothesized to be associated with knowledge sources originating in the subsidiary's host country locale. Second, drawing on what I term the "embeddedness" perspective on external innovation networks, I argue that the ability of subsidiaries to participate effectively in local knowledge sharing networks will be conditioned on a set of subsidiary and parent-level factors influencing the credibility and legitimacy of the subsidiary within those networks. In short, the argument is that agency - the logic or strategy of subsidiary innovation - will be moderated by structure, the social and institutional obstacles to the subsidiary's effective participation in external innovation networks. Important findings emerging from this study include: -- A substantial amount of evidence that U.S. subsidiaries assimilate localized spillovers of technical knowledge during the process of technological innovation. The results are especially strong at micro geographic levels - host state and region. -- This finding is quite robust over the 1980 to 1990 time period and is not driven by the presence of acquired U.S. firms in the subsidiary sample. Greenfield subsidiaries also show considerable evidence of being able to "tap into" localized sources of knowledge. -- U.S. subsidiaries also build importantly upon sources of knowledge originating in their home country, most fundamentally upon knowledge generated by the parent organization itself, a finding that is consistent with a more conventional view of the multinational firm than is implied by the above results. -- Some evidence is also found that other parts of the multinational firm derive a learning advantage from having a subsidiary that is geographic.ally proximate to sources of knowledge in the host country.-- Supporting the hypotheses developed in the study, structural characteristics of subsidiaries as well as specific features of their innovations are found to be important predictors of the location of the knowledge sources that underpin subsidiaries' innovations. Some of these factors also influence the likelihood of local knowledge being diffused through the multinational network. Findings from this research have important implications for theory and practice. Perhaps the study's most fundamental theoretical implication is the doubt it casts on the notion - frequently advanced in the multinational literature -- that there is a single "model" of innovation in the multinational firm, or even that firms are converging toward a panicular model. The empirical results contained in this thesis show important and sustained variation across, and even within, particular subsidiaries in the geographic underpinnings of their technological innovations. For managers, the most far reaching implication of this study is the evidence it provides of the importance of location (and all that term implies) to the process by which firms generate new and valuable technical knowledge.
Thesis (Ph.D.)--Massachusetts Institute of Technology, Sloan School of Management, February 1999.Includes bibliographical references (p. 374-387).
DepartmentSloan School of Management
Massachusetts Institute of Technology
Sloan School of Management