Multinational Enterprises and Competence-Creating Knowledge Flows: A Theoretical Analysis

Historically, multinational enterprises (MNEs) located R&D in their subsidiaries abroad mainly for the purposes of the adaptation of products developed in their home countries to local tastes or customer needs, and the adaptation of processes to local resource availabilities and production conditions. In this situation subsidiaries were dependent on the competence of their parent companies, and so their role was essentially just competence exploiting, or in the terminology of Kümmerle (1999) their local R&D was ‘home-base exploiting’. In recent years instead, linked to the closer integration of subsidiaries into international networks within the MNE, some subsidiary R&D has gained a more creative role, to generate new technology in accordance with the comparative advantage in innovation of the country in which the subsidiary is located (Cantwell, 1995; Papanastassiou and Pearce, 1997; Cantwell and Janne, 1999; Pearce, 1999; Zander, 1999). This transformation has led to a quantitative increase in the level of R&D undertaken in at least those subsidiaries that have acquired this kind of competence-creating mandate, and in these subsidiaries there has been a qualitative upgrading in the types of research project away from the purely applied towards the more fundamental; although the research undertaken is generally of an (increasingly) specialized kind, to take advantage of the particular capability of local personnel and the other local institutions with which the subsidiary is connected.