Inter-Subsidiary Collaboration For Knowledge: A Conceptual Model

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INTER-SUBSIDIARY COLLABORATION FOR KNOWLEDGE: A CONCEPTUAL

MODEL.
Article in Academy of Management Annual Meeting Proceedings · August 2007

DOI: 10.5465/AMBPP.2007.26523094
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Journal of International Management 15 (2009) 387–400
Contents lists available at ScienceDirect
Journal of International Management
Knowledge ties among subsidiaries in MNCs: A multi-level

conceptual model
Devi R. Gnyawalị a,⁎, Manisha Singal b,1, Shaohua “Carolyn” Mu c,2
a
R. B. Pamplin College of Business, 2106 Pamplin Hall, Virginia Polytechnic Institute and State University, Blacksburg, VA 24061-0233, United States
b
R. B. Pamplin College of Business, 362 Wallace Hall, Virginia Polytechnic Institute and State University, Blacksburg, VA 24061-0233, United States
c
Department of Management and Entrepreneurship, Hankamer School of Business, Baylor University, Waco, TX 76798-8006, United States
a r t i c l e i n f o a b s t r a c t
Article history: While ties among subsidiaries—the key players of a MNC network—are a prerequisite for the
Received 1 March 2007 formation of the network and the flow of knowledge within the organization, we know little
Received in revised form 26 February 2008 about factors influencing the formation of such ties. By building on the literature on inter-firm
Accepted 27 February 2008
networks and knowledge-based view of the firm, we develop a multi-level model consisting of
Available online 1 October 2009
subsidiary characteristics, dyadic dynamics, and salient contextual factors to explain the inter-
subsidiary collaboration for knowledge development and exchange. We bring to the fore the
Keywords:
importance of examining multiple dimensions in understanding what predicts tie formation
MNC network
and the efficacy of these ties in creating a knowledge advantage. This paper advances the notion
Knowledge
Subsidiary ties of subsidiary knowledge networking capability—the ability to form, manage, and leverage a
Collaboration network for gaining and sharing knowledge—and suggests that such capability is critical for
subsidiaries and by extension the MNC, to achieve a competitive advantage.
© 2009 Elsevier Inc. All rights reserved.
1. Introduction
A growing stream of research on multinational corporation (MNC) has viewed MNC as an inter-organizational network and examined
the role of MNC and its units in creating, disseminating, and leveraging knowledge on a world-wide basis (Ghoshal and Bartlett, 1990;
Gupta and Govindarajan, 2000; Kostova and Roth, 2003; Nohria and Ghoshal, 1997; Tsai, 2000; Zander and Kogut, 1995). A key premise in
this literature stream is that various units of the MNC are inter-connected in a web of relationships or a network, which makes it possible
for knowledge to flow from one part of the MNC to another. While ties among subsidiaries—the key players of the MNC network—are a
prerequisite for the formation of the MNC network and the flow of knowledge, we know little about factors influencing the likelihood of
formation of inter-subsidiary ties. Research in intra-MNC knowledge transfer (e.g., Gupta and Govindarajan, 2000; Hansen, 1999; Kostova,
1999) suggests that inter-subsidiary ties are important in sharing and transferring knowledge, but the antecedents and consequences of
such ties have not been explicitly examined. Also, while the literature suggests that a wide variety of mechanisms are needed for a
differentiated MNC to engage in global knowledge sourcing (Foss and Pedersen, 2002), our understanding of inter-subsidiary mechanisms
for knowledge sourcing is rather limited. This critical gap is problematic because MNCs increasingly desire to leverage knowledge created
by their various subsidiaries, and need special mechanisms and ties for knowledge to flow easily among its units particularly when this
knowledge is tacit and complex (Gupta and Govindarajan, 2000; Szulanski, 1996). Accordingly, our goal in this paper is to address two
interrelated questions: (1) what factors influence the likelihood of inter-subsidiary tie formation within a multinational corporation? And
(2) how do various contextual factors influence the effectiveness of knowledge flow between the partners?
⁎ Corresponding author. Tel.: +1 540 231 5021; fax: +1 540 231 3076.
E-mail addresses: devi@vt.edu (D.R. Gnyawalị), msingal@vt.edu (M. Singal), zhoumu_617@yahoo.com (S.“C.” Mu).
1
Tel.: +1 540 231 4075; fax: +1 540 231 3076.
2
Earlier version of this paper was written while she was at Baylor University. Currently, she has taken a break from academia and lives in Chicago, IL.
1075-4253/$ – see front matter © 2009 Elsevier Inc. All rights reserved.
doi:10.1016/j.intman.2008.02.003
388 D.R. Gnyawalị et al. / Journal of International Management 15 (2009) 387–400
We develop a conceptual model by building on the social network theory and the knowledge-based view of the firm. With
respect to the first question, we take a focal subsidiary perspective and suggest that the likelihood of a focal subsidiary forming ties
with other peer subsidiaries is influenced by three key factors: motivation of the focal subsidiary, attributes of its potential
partners, and dyadic dynamics between the focal subsidiary and the potential partners. Two critical subsidiary-specific forces that
influence the focal subsidiary's motivation are entrepreneurial orientation of the subsidiary (a proactive force), and strategic
vulnerability felt by the subsidiary (a reactive force). We contend that a subsidiary motivated to search for potential partners is
inclined to form a tie with those that possess high levels of intellectual capital and social capital. Moreover, we suggest that the
likelihood of collaboration between two potential partners increases with greater goal congruity and proximity. Regarding the
second question on the role of contextual factors for tie effectiveness, we suggest that the level of support from the headquarters
for a particular tie and the match between the nature of knowledge and tie strength are the two critical moderating factors that
will determine the effectiveness of a particular inter-subsidiary tie in knowledge creation and exchange.
This paper contributes to the literature in several ways. First, our deeper examination of inter-subsidiary tie formation—the
foundation of any MNC network—provides a basis for concretely advancing research on MNC networks and learning for
competitive advantage. Our framework suggests that a subsidiary with high knowledge networking capability defined as the
ability to form, manage, and leverage a network for creating a knowledge advantage, is likely to achieve a corresponding
competitive advantage. Our framework provides a basis to understand how multi-level factors determine whether and to what
extent a subsidiary can achieve knowledge advantage. Second, we contribute to the knowledge-based literature by identifying and
examining factors that help subsidiaries to engage in mutual learning and in turn advance the overall knowledge base of the MNC.
We bring to the fore the importance of autonomous motivation of subsidiaries in forming ties, which is particularly important in
knowledge exchange. Examining knowledge exchange in the MNC subsidiary context is particularly fruitful as it combines the
elements of inter-organizational and intra-organizational knowledge flow simultaneously because while subsidiaries may be
autonomous and may have their independent charter (Birkinshaw and Hood, 1998), they are administratively part of the MNC
organization. This paper responds to the call by Easterby-Smith et al. (2008) for taking a comprehensive view of knowledge
transfer that considers both inter and intra-organizational learning at the same time, and Zhao and Luo's (2005) assertion
regarding the need to examine factors influencing how a focal subsidiary shares knowledge with different peer subsidiaries under
different contexts. Third, our multi-level model helps to develop a holistic view of inter-subsidiary tie formation by incorporating
the role of the several entities: the headquarters, the focal subsidiary, a pair of subsidiaries, in addition to contextual factors. Much
of current research focuses either on subsidiary partners (e.g. Hansen, 1999, 2002; Tsai, 2000), or subsidiary–headquarters
relationship (e.g., Bouquet and Birkinshaw, 2008; Kostova and Roth, 2003). Finally, the conceptual framework we develop
provides guidance to managers of MNCs in their efforts to develop effective network of relations in the MNC and effectively
manage knowledge flows.
2. Conceptual background
2.1. Role of inter-subsidiary ties for knowledge flow
We define inter-subsidiary knowledge ties as direct collaborative relationships between two subsidiaries within the MNC
involving creation, transfer, and/or exchange of valuable knowledge. Inter-subsidiary ties can be formal or informal, strong or
weak, and can result in unidirectional knowledge flow when knowledge is just acquired by one subsidiary from another or bi-
directional when there is reciprocal sharing or development of new knowledge. Illustrative examples of inter-subsidiary
knowledge ties are collaborations in basic and applied R&D, joint product development, development of new technologies, or
informal teams set up to transfer best practices. Monteiro et al. (2008) provide empirical evidence of subsidiaries working together
to share best practices and marketing knowledge. Two subsidiaries can voluntarily collaborate to conduct research and introduce
new products or pursue basic technical development and create a common body of knowledge. They may form a tie for co-
specialized activities such that subsidiary A specializes in basic research and technical development while subsidiary B pursues
prototype development and pilot testing. Such knowledge ties are formed voluntarily via mutual consent with or without the
support of the headquarters. As we shall discuss later, headquarters support can enhance tie effectiveness but is not a pre-
condition to tie formation. The flow of knowledge can occur through formal (such as contractual agreements) and informal (such
as knowledge sharing routines) mechanisms (Dyer and Singh, 1998). We focus on lateral ties among peer subsidiaries as opposed
to vertical ties between a subsidiary and HQ, because subsidiaries have been increasingly recognized as players of strategic roles in
MNCs (Nohria and Ghoshal, 1997), especially in creating knowledge by learning from their local country environments and
sharing knowledge with the rest of the MNC. Further, optimizing the resource allocation among subsidiary units is critical to
multinational firms that have evolved into complex, yet flexible, organizations who seek economic gains and efficiencies of
operations. These gains accrue due to facilitating conditions for the flow of knowledge from subsidiaries and by integrating local
knowledge of various subsidiaries to create a holistic, MNC-wide, body of knowledge (Mu et al., 2007).
We focus on knowledge ties because such ties are very important for several reasons: First, as pointed out earlier the topic of
knowledge flows within the MNC has received increased attention in recent years as it is commonly accepted that MNCs create
value from their knowledge assets which are developed simultaneously in different locales and contexts via subsidiaries. We
suggest that examination of knowledge ties among subsidiaries is a very important step to enhance our understanding of whether
and to what extent knowledge flow occurs among the MNC units. We conceptualize that initiating, developing, and nurturing a
knowledge tie is a process, while knowledge transfer is the desired outcome. A tie is considered effective when it results in easy,
D.R. Gnyawalị et al. / Journal of International Management 15 (2009) 387–400 389
speedy, and high quality knowledge exchange. Second, MNC units not only acquire knowledge from each other but also engage in
joint creation of knowledge. Yamin and Otto (2004) showed that MNC innovative capabilities were enhanced when various units
of the MNC pursued joint research and co-authored the generated patents. Since knowledge creation involves major resource
commitments on a continual basis, the task of joint knowledge creation requires the units to establish working relationships with
each other. Thus, understanding inter-subsidiary ties will also help to advance research on joint knowledge creation and transfer.
Third, it is well established in the learning literature that the greater the complexity, tacitness, and specificity of knowledge, the
more difficult it is to transfer knowledge between units (Simonin, 1999; Szulanski, 1996). Less codifiable and harder to teach
technologies that require extra efforts to transfer to another entity (Kogut and Zander, 1992, 1993). Zhao and Luo (2005: 75)
clearly suggest that strategic links are important because knowledge sharing “is not a spontaneous nor exogenous event. Rather it
is a deliberate yet variable action, requiring architecturally coupling with strategic and infrastructural contexts.” While transfer of
information and explicit knowledge is facilitated by the growth of world-wide web, wireless telecommunication, and intranets,
transfer of complex and tacit knowledge requires mutual commitment and long-standing relations among the units. Finally, the
notion of MNC as an inter-organizational network clearly suggests the need to understand and examine ties among subsidiaries as
they are the basic elements of the MNC network. Moreover, recent research (Holm and Sharma, 2006) suggests that the use of a
subsidiary's knowledge helps the MNC as a whole improve its performance by developing the technological capabilities of other
subsidiaries' often enabling the expansion of markets. Our examination of inter-subsidiary ties therefore facilitates the study of the
MNC network and to systematically investigate knowledge transfer across subsidiaries, as well as joint creation of knowledge by
the subsidiaries. Overall, we suggest that understanding of inter-subsidiary tie formation is critical to advance research on MNC
network and knowledge flows. This issue will be even more critical as MNCs increasingly recognize the importance of knowledge
and learning to enhance competitive advantage on a global basis.
While much of the conceptual arguments and propositions we develop could be relevant to any MNC and its subsidiaries, they
are likely to be most relevant in three contexts. First, consistent with Birkinshaw and Hood (1998), our theory is most relevant to
subsidiaries that are dominantly owned and wholly owned subsidiaries. Second, the implicit assumption in this paper has been
that subsidiaries have the autonomy to pursue their interests. Thus, the model will apply more to the subsidiaries that are
considered as “active subsidiaries” and “autonomous subsidiaries” (Taggart, 1998), i.e., where subsidiaries have the autonomy to
pursue their interests and enhance their outcomes. Finally and more broadly, the conceptual arguments and propositions
developed in this paper are most applicable to MNCs that are transnational in nature, i.e., those that simultaneously emphasize
global integration and local responsiveness (Bartlett and Ghoshal, 1988). Local responsiveness may foster learning from local
environment and global integration will stimulate sharing of relevant locally created knowledge and development of more
integrative body of knowledge by combining various aspects of knowledge.
3. Conceptual model and propositions
Fig. 1 depicts our conceptual model. This multi-level model incorporates factors at the focal subsidiary level, the dyadic level,
and the MNC level in explaining formation of knowledge ties and efficacy of knowledge flow between subsidiaries. A multi-level
model is particularly useful as it provides a richer and deeper portrait of organizational phenomena (Klein et al., 1999) and allows
an integrated inquiry on the complex topic (Kostova, 1999). The model suggests that a subsidiary's motivation to look for
Fig. 1. A multi-level conceptual model of knowledge ties among subsidiaries.

collaboration opportunities with its peer subsidiaries stems from its entrepreneurial orientation and strategic vulnerability.
Once the motivation is established, the search for a partner starts. We argue that the focal subsidiary is inclined to form ties with
sister subsidiaries that posses high levels of intellectual capital and social capital. We suggest that congruence of goals and
proximity of partners are additional dyadic determinants of tie formation because they increase the odds of realizing the
potential benefits from the tie. When the tie is formed, contextual factors will determine its sustenance and effectiveness.
Support from headquarters for the particular tie and the match between the nature of knowledge and strength of tie will
establish the ease, speed, and quality of knowledge transfer. The core constructs and their relationships in the form of
propositions are described below.
3.1. Subsidiary motivation to form inter-subsidiary ties
A subsidiary's motivation to form ties with other subsidiaries and learn from them could stem from various factors. First and
foremost, both the mainstream organizational literature (Gnyawali and Stewart, 2003; Grant, 1996; Nonaka, 1994) and recent
MNC literature (Andersson et al., 2002; Doz et al., 2001; Foss and Pedersen, 2004; Özsomer and Gençtürk, 2003) suggest that
learning and creation of knowledge are key to the creation of competitive advantage. This idea, combined with the idea of
knowledge being a critical determinant of subsidiary bargaining power in the MNC (Mudambi and Navarra, 2004) suggests that
subsidiaries will be greatly motivated to learn from other subsidiaries and enhance their bargaining power and advantages.
Second, the literature on knowledge flow suggests that knowledge sharing mechanisms are needed in order for knowledge flow to
occur especially when the knowledge is tacit and complex (Gupta and Govindarajan, 2000; Simonin, 1999). A subsidiary can
obtain help from its peers via formal and informal ties when it identifies knowledge that requires effort to be moved from the
source unit to be incorporated for use into its own project. Direct relations are helpful when a team is experiencing transfer
difficulties or needs to spend significant time in extracting, moving, and incorporating knowledge from other subunits (Hansen,
2002).
Motivation of a subsidiary could stem from both proactive and reactive reasons. The proactive reason is to advance its own
competitive position and gain greater bargaining power in the relationship and the reactive reason is to reduce its strategic
vulnerability in the local market and MNC setting.
3.1.1. Entrepreneurial orientation

Entrepreneurial orientation of a subsidiary refers to the extent to which the subsidiary proactively engages in enhancing its
capability (Birkinshaw and Hood, 1998) and bargaining power in the MNC (Mudambi and Navarra, 2004) and pursues avenues to
achieve competitive advantage. An entrepreneurial orientation in this context can be construed as the proclivity of the subsidiary to be
responsive to new opportunities and develop new capabilities. In the network perspective of the MNC (Ghoshal and Bartlett, 1990), a
subsidiary is a node embedded both in the local network in its host country and in the network of the MNC. Its role in both networks
is interdependent and can result from its own strategic choice (Birkinshaw and Hood, 1998). As the subsidiary evolves from being
an implementer of HQ policies to acquiring a global mandate through its strategic choice, it can develop its own specific capabilities
with regard to acquiring, creating, and disseminating knowledge. Birkinshaw (1997) defines this entrepreneurial orientation as
subsidiary initiative—“a discrete proactive undertaking that advances a new way for the corporation to use or expand its resources”. As
the subsidiaries increase their initiatives to acquire, create, and build unique capabilities through ties with peer units, and then
disseminate these capabilities to other units of the MNC, who may in turn recombine this knowledge to create further capabilities, the
raison d'être of the MNC is realized. While our focus in this paper is on intra-MNC ties, it is important to note here that entrepreneurial
subsidiaries also proactively engage in tie formation with firms in their local environment and enhance their knowledge and
capabilities by learning from them (Mu et al., 2007).
Subsidiaries differ in their entrepreneurial orientation and initiative-taking behavior depending upon their size, age, and resource
availability (Birkinshaw 1997). Moreover, subsidiaries that are more autonomous, have fewer controls imposed on them by HQ,
experience sophisticated demand conditions in local markets, and face complex or hostile domestic environments, are more likely to
develop an entrepreneurial orientation than subsidiaries that are not subjected to these conditions (Birkinshaw, 1997; Dorrenbacher
and Gammelgaard, 2006; Porter, 1985, 1996).
We posit that a subsidiary's entrepreneurial orientation will lead to its seeking ties with peer subsidiaries for several reasons.
First, a subsidiary's bargaining power is high when its stock of knowledge and its knowledge creation capability are high
(Mudambi and Navarra, 2004). Since subsidiaries are an important source of knowledge (Gupta and Govindarajan, 2000), it is
logical that a focal subsidiary will attempt to tie up with other subsidiaries to access their knowledge or create new knowledge
with them. Second, research by Almeida and Phene (2004) and the notion of absorptive capacity (Cohen and Levinthal, 1990)
suggest that the greater a subsidiary's knowledge, the more likely that it can benefit in the future by learning from the MNC's
knowledge richness and host country's knowledge diversity. Thus, building of a body of knowledge is critical for subsequent
learning and creating a knowledge advantage. Finally and more broadly, a subsidiary with high entrepreneurial orientation will
likely, by definition, be proactive and engage in innovative projects, which will call for more knowledge-seeking and
knowledge-building initiatives.
Not only will a focal subsidiary with an entrepreneurial orientation seek knowledge acquisition ties with other subsidiaries
but it will also seek to share its own knowledge in a strategic manner. A subsidiary that contributes knowledge to other units will
reap the benefits of reciprocity and thus can be an active recipient of knowledge from other units (Kim and Mauborgne 1998).
This receipt of new knowledge from other units can in turn be combined with its own existing knowledge for innovation (Foss
and Pedersen, 2002). Research by Mahnke et al. (2006) shows the benefits of knowledge sharing as it is positively related to firm
performance. Recognition by other units as a source of knowledge may provide some intrinsic motivation to the employees to
share the knowledge. Thus subsidiaries are likely to share knowledge for long term advantage even if immediate gain may not be
apparent. As noted earlier, a subsidiary's ties with suppliers, customers, and research institutions in its local environment help
the subsidiary in learning and innovation (Mu et al., 2007); the peer to peer ties will facilitate the transfer of the knowledge
gained from the local environment.
Previous research has looked at such subsidiary venturing in the form of local market (within the host country), internal
market (within the MNC), and global market (world-wide) initiatives mainly with respect to supplier network and product
market opportunity (Birkinshaw, 1997). As knowledge and learning capabilities assume importance, and subsidiaries of their
own volition adopt a global mandate, we posit that those with an entrepreneurial orientation will seek to increase their
knowledge networking capability and pursue ties with peer subsidiaries that may be repositories of knowledge and other
assets. Thus,
Proposition 1. The greater the entrepreneurial orientation of the focal subsidiary, the greater the likelihood that the subsidiary
will be motivated to form a tie with other subsidiaries, ceteris paribus.
3.1.2. Strategic vulnerability

We define strategic vulnerability as susceptibility of the subsidiary to succumb to any threat it may face, either to its
performance or its continued existence. In other words, the focal subsidiary is considered vulnerable when it is being challenged
with a reduction in its competitive advantage that may endanger its profitability and reputation in the short run and/or its sustained
survival in the long run.
Strategic vulnerability can stem from both external and internal sources. Internal strategic vulnerability can occur due to poor
performance relative to targets set by the subsidiary for itself, or targets set for the subsidiary by HQ relative to other subsidiaries
(Birkinshaw et al., 1998). Poor performance could be measured in terms of decrease in sales, revenue, repatriation of profits to HQ,
or other metrics like innovation and expansion in geographic and product markets. Vulnerability can be in both absolute and
relative terms. A subsidiary may not be able to achieve its intended or specified performance outcomes (absolute vulnerability) or
the performance may be worse than its peer subsidiaries or worse than its own prior performance (relative vulnerability). Since
each subsidiary operates in unique local environments, the dynamics of local competitors, suppliers, customers, or other industry
factors create pressures that are exogenous to the MNC as a whole but endogenous to the subsidiary—such that these factors play a
key role in affecting the performance of the focal subsidiary.
External strategic vulnerability can stem from environmental turbulence such as regime changes, political disturbances,
technological change, or changes in salient rules or laws of the country. Often subsidiaries are faced with revaluation of local currency,
changes in host country laws regarding repatriation of profits, changes in tax rules, or even changes in ownership structures when a
subsidiary is forced to accept governance mechanisms it did not anticipate. As a result, the subsidiary is forced to look for collaboration
opportunities to address such challenges. External strategic vulnerability can also stem from new competitors entering the market or
when the firm itself is trying pioneering technologies (Eisenhardt and Schoonhoven, 1996). Luo (2006) outlines several sources of
opportunism in emerging markets where wholly owned subsidiaries of western MNCs unfamiliar with the culture may face
contractual violations, bribery, cheating, or expropriation of technological know-how in dealings in inter-firm exchanges. Solutions to
exigencies arising out of external events localized in one country can afford opportunities for learning from subsidiaries in other
countries that may face similar problems at another point in time. For example PepsiCo India was facing extreme criticism and protests
from local NGOs for using heavy pesticides for growing their oranges and potatoes for producing juice and snacks. It handled the
situation deftly pacifying protestors and communicating with various stakeholders via public relations efforts. Other PepsiCo
subsidiaries in emerging markets that face a similar problem can seek help from and learn from the Indian subsidiary how the issue
was handled, accumulate knowledge and disseminate “best practices” on this issue to the rest of the MNC. Thus, as the economic
landscape becomes more complex, more competitive and global in nature, there exists a need to reduce uncertainty which serves as an
impetus for organizational action and can predict tie formation.
When strategic vulnerability is high, a subsidiary may decide to focus on its task on hand by streamlining internal systems and
instituting additional controls to improve performance. However when faced with a problem, or when faced with a non-optimal solution
to a problem, a firm is also likely to conduct “a problemistic search” where a simple solution may be simply to seek a new partner that may
help resolve the problem (Cyert and March, 1963; Monteiro et al., 2008), to mitigate threats, and improve its strategic position. The bulk of
literature on strategic alliances suggests that partnerships will help firms mitigate risks, provide access to strategic and operational know-
how, and improve innovative capabilities (Baum et al., 2000). Similarly, all else being equal, partnerships with sister subsidiaries as
opposed to any other local firms are likely to be more beneficial, because the chance of defection and cheating will be lower with sister
subsidiaries and “common benefits” are likely to be enhanced (Gulati et al., 2000). Based on the above reasoning, we propose that:
Proposition 2. The greater the strategic vulnerability felt by the focal subsidiary, the greater the likelihood that the subsidiary will
develop a tie with other subsidiaries, ceteris paribus.
In the above propositions, we examined conditions under which a focal subsidiary is likely to feel motivated to seek
knowledge-based ties. We now examine attributes of a potential partner and dyadic dynamics that the focal subsidiary is likely to
consider when forming a tie with a peer subsidiary.
3.2. Potential partner attributes
3.2.1. Intellectual capital of the potential partner

Intellectual capital refers to the collective knowledge and other resources and capabilities held by a potential partner and the
relevance of such resources to the focal subsidiary. In other words, it is a “valuable resource and a capability for action based in
knowledge and knowing” (Nahapiet and Ghoshal, 1998, page 245). Both volume and diversity of partners' intellectual capital
become important in the focal subsidiary's consideration. The volume of intellectual capital will determine the amount of
knowledge accessible to the focal subsidiary, whereas the diversity of intellectual capital will determine the range or types of
knowledge available to the focal subsidiary. Similarly, while the stock of intellectual capital is an important factor, mere existence
of high stock of knowledge may not be the main driving force for tie formation. The intellectual capital possessed by the potential
partner must be relevant to the focal subsidiary for it to be strongly driven to form a tie. Gupta and Govindarajan (2000) state that
in order for a subsidiary's knowledge to be of value to others in a network, it has to not only create non-duplicative knowledge on
its own, but also that this non-duplicative knowledge must be relevant for the rest of the global network. When relevant
complementary knowledge of two partners is combined, the outcome could be more synergistic effect and increased competitive
advantage of both partners (Schulz, 2001).
We argue that intellectual capital of a potential partner is a major determinant of tie formation for several reasons. The more
endowed the potential partner is, the more resources and knowledge are available to the focal subsidiary. An enriched partner
enhances the resource and capability base of the focal subsidiary. The greater the availability of resources and capabilities and the
more efficient and effective search enabled by the endowed partner, the greater will be the potential for the focal subsidiary to
enhance its overall knowledge base. A partner with high intellectual capital is likely to help the focal subsidiary in information
search and information processing. Information overload can adversely affect a firm's innovation ability and trusted partners with
high intellectual capital can act as effective ‘information screening device’ (Ahuja, 2000) for the focal subsidiary. They may have
the ability to gauge the value of the information for its partner; screen out irrelevant pieces of information and enable the focal
subsidiary to leverage information towards optimal use. Both the quality of information and its relevance for the focal subsidiary
may be higher when it is coming through an intellectually capable and trusted partner. Thus, a partner with high intellectual
capital can reduce the focal subsidiary's search costs and increase its search effectiveness. Equipped with more reliable and higher
quality information and reduced information load, the focal subsidiary can deploy its resources more effectively to make better use
of the available information.
The notion of Center of Excellence (COE) suggested by Frost et al. (2002, p. 997) relates well to the notion of intellectual capital
developed in this paper. A COE is an “organizational unit that embodies a set of capabilities that has been explicitly recognized by
the subsidiary as an important source of value creation, with the intention that these capabilities be leveraged by, and/or
disseminated to, other parts of the firm…centers of excellence represent a focus for a superior set of capabilities within the
subsidiary, including tangible resources such as equipment, licenses, and patents, and intangible resources such as knowledge and
experience.” When the MNC recognizes a particular subsidiary as a COE, that subsidiary's knowledge base will be relevant for
value-creating activities throughout the organization. Therefore the focal subsidiary will find a COE an attractive potential partner.
A subsidiary with a COE mandate will form a tie with the focal subsidiary not only because of its assumed role but also because it
may be able to garner additional resources from Headquarters and increase its bargaining power and reputation within the MNC
system.
Moreover, several studies have reported that the subsidiary with a stock of knowledge that is unique and greater than that of
other MNC units will be a desirable alliance partner because of the ease of knowledge transfer from such a subsidiary (Davenport
and Prusak, 1998). Gupta and Govindarajan (2000) demonstrate that there is a positive relationship between subsidiary
knowledge stock level and outward transfers of knowledge from the subsidiary to both peer subsidiaries and the parent
corporation. A recent paper by Monteiro et al. (2008) illustrates that greater knowledge outflows occur from subsidiaries that are
perceived to be highly capable by peer subsidiaries. Almeida and Phene (2004) argue that subsidiaries that belong to
technologically rich and diverse MNCs are likely to be more innovative. In terms of relevance, Cho and Lee (2004) suggest that
similarity of knowledge in terms of products, technology, and managerial expertise is positively related to the likelihood of intra-
network knowledge sharing. Similarly, Björkman et al. (2004) suggest that when a subsidiary has a high stock of intellectual
capital, or when a subsidiary is a reservoir of non-duplicative knowledge, the greater would be its attractiveness as a partner for
other units in the MNC. Based on the above reasoning, we propose that,
Proposition 3. The greater the intellectual capital of a potential partner subsidiary, the greater the likelihood that the focal
subsidiary will form a tie with that subsidiary, ceteris paribus.
3.2.2. Social capital of the potential partner

While intellectual capital is an intra-subsidiary phenomenon, social capital is an external phenomenon, i.e., ties and network of
a subsidiary with local institutions and other subsidiaries within the MNC. Social capital of a subsidiary represents its reach of
collective network resources through its partners and through partners' direct partners. The subsidiary's network of relations
could be both within the MNC and outside of it (within its local environment such as suppliers, customers, research labs,
universities, and government) (Almeida and Phene, 2004). Social capital includes a structural component and a relational
component (Gulati, 1998). The structural aspects relate to the network structure and the structural position of the subsidiary in
the overall network (Gnyawali and Madhavan, 2001), whereas the relational aspects focus on trust and cohesiveness between
directly connected partners (Nahapiet and Ghoshal, 1998). Scholars of social network theory have argued that structural and
relational properties have different, yet complementary roles; therefore implications of networks could be understood better by
investigating the effects of both sets of properties (Nahapiet and Ghoshal, 1998).
One of the important elements of the structural component of social capital is the centrality of position occupied by a subsidiary
in the MNC network. A subsidiary can be central in the network, i.e., can occupy a strategic position in the MNC network by virtue
of being involved in many significant ties (Wasserman and Faust, 1994). As a result, it enjoys greater status and easier access to
resources and capabilities of the network members. When choosing a potential partner, the focal subsidiary is likely to seek
partners that are highly central in the network for several reasons. First, high centrality of a partner means that the focal subsidiary
will have easier access to more resources and knowledge of that partner (Gnyawali and Madhavan, 2001). The early access to
resource flows increases the possibility of the central subsidiary to contribute knowledge and other resources to a partner
subsidiary. Second, a central subsidiary has developed the capability of handling inter-subsidiary relationships over time and this
experience would increase the success of a new inter-subsidiary tie (Tsai, 2000). Third, high centrality implies higher status and
power (Wasserman and Faust, 1994). When a focal subsidiary gets connected to a central subsidiary (or a subsidiary with high
status and prestige) in the network, the focal subsidiary's status is likely to be elevated. The improved status would likely increase
the influence of a focal subsidiary on decision-making, resource allocation, and entrepreneurial championing (Floyd and
Woolridge, 1999). Since subsidiaries compete for resources and legitimacy within the MNC, the focal subsidiary would be very
interested in establishing ties with a sister subsidiary that is central in the network.
The relational component of social capital refers to the trustworthiness of potential subsidiaries that would tend to reduce
monitoring costs and provide flexibility during informal exchange of knowledge. High relational social capital diminishes the
probability of opportunism and reduces the need for costly monitoring (Luo 2006; Nahapiet and Ghoshal, 1998). Relational social
capital enables transfer of fine-grained information (Uzzi, 1997) and tacit knowledge (Hansen, 1999). A subsidiary's social capital
can also be conceptualized in the context of its local environment (or the subsidiary's external network) and the internal (MNC)
network. Almeida and Phene (2004) demonstrate that subsidiaries that have high “network richness” in their host countries are
likely to be highly innovative. Therefore, a focal subsidiary would be more motivated to form ties with sister subsidiaries that have
high relational social capital.
Social capital also confers influence, control, and power on the firm. The ability to influence others and the power to get things
done are valuable advantages that can enable a subsidiary to play a leadership role in the MNC. Thus the focal subsidiary, in order
to build its own knowledge networking capability, will look for a partner subsidiary that has several ties within the MNC as it can
gain surrogate power and legitimacy through its relationship with the central partner. Further, when a subsidiary is facing a
turbulent domestic environment, initiating a tie with a peer subsidiary with high social capital will give a feeling of security and
solidarity to the focal subsidiary. The trust network as pointed out earlier makes possible transmission of sensitive and richer
information due to the feeling of solidarity (Krackhardt and Hanson, 1993). Hence social capital, much like other forms of capital, is
an asset with the expectation of future flow of benefits and rewards (Adler and Kwon, 2002), and the focal subsidiary will evaluate
the benefits that will accrue to it based on the stock of the social capital of its potential partner.
While our focus in this paper is on internal MNC network, it is important to note that a subsidiary's external network also
influences its social capital and its attractiveness as a partner. For example, subsidiaries with high social capital in their external
network can learn from local environment, can be more innovative, and can share such knowledge to other subsidiaries within the
MNC (Mu et al., 2007). Such increased social capital from external network makes the potential partner even more attractive for
the focal subsidiary. Based on the above reasoning on the role of social capital, we propose that,
Proposition 4. The greater the social capital of a potential partner subsidiary, the greater the likelihood that the focal subsidiary
will form a tie with that subsidiary, ceteris paribus.
3.3. Dyadic dynamics
While intellectual capital and social capital represent potential benefits a focal subsidiary can derive from a particular partner,
the dyadic dynamics represent the likelihood of realizing the potential. We suggest that proximity and goal congruence between
potential partners influence this realization.
3.3.1. Proximity between the potential partners

The construct ‘proximity’ encompasses two aspects: institutional and geographic. Institutional proximity consists of three
components (Kostova, 1999; Scott, 1995): cognitive, normative, and regulatory. The cognitive aspect reflects the cognitive
structures or mental models shared by employees of potential partners. When two subsidiaries have similar cognitive frames and
perceptions of reality, it is easier for them to effectively communicate and negotiate to reduce the cost of coordination. Subsidiaries
with similar cognitive frames are also likely to understand each other's needs and priorities and thus are likely to engage in the
pursuit of a common agenda.
Normative components introduce “a prescriptive, evaluative, and obligatory dimension into social life” (Scott, 1995, p. 37).
When members of two groups share norms and values, they are more likely to cooperate (Lawrence and Lorsch, 1967). Subsidiary
culture and administrative heritage can be different particularly when a partner subsidiary may have been acquired from a
different country. In the often cited case of Meridian Magnesium (Bansal and Cole, 2001) the Core Technologies unit whose
mandate was to communicate best practices among the subsidiaries in Canada, USA, and Italy, it was found that cultural and
language differences imposed barriers between the US and Italian subsidiary and even when there was similarity in language
between the US and Canadian subsidiary, problems arose because the plants did not adopt common values towards technological
developments. Thus, differences in normative aspects can inhibit communication and make working relationships hard to
negotiate and maintain. The regulatory component of an institutional environment refers to existing laws and rules (Scott, 1995).
When the regulatory environments of subsidiaries are very different, coordination becomes problematic because the regulation in
one country may promote one type of coordination while the other country may restrict it. When basic procedures like accounting
and information systems, approval limits, and union agreements of subsidiaries are different, coordination is hard to achieve
(Porter, 1985). Regulatory differences can also create friction and confusion when subsidiaries have to work together and increase
the costs of working together.
The literature on geographic cluster and proximity suggests that firms that are proximate to each other benefit from each
other's knowledge and expertise (Baptista and Swann, 1998). Geographic proximity also provides opportunities for more informal
and frequent interactions (Maskell and Malmberg, 1999), which are critical for the subsidiaries to build trust and pursue joint
knowledge tasks. Recent studies in knowledge creation and transfer in international settings clearly indicate the importance of
cultural similarity—which is more likely with institutional and geographic proximity. Hong et al. (2006) found that cultural
differences were major impediments to learning and knowledge transfer by Japanese companies. A meta-analytic study by Van
Wijk et al. (2008) shows that cultural distance inhibits knowledge transfer and the problem is greater in intra-organizational
setting than in inter-organizational setting. All the above arguments and examples clearly suggest that the greater the proximity in
both geographic and institutional terms, the greater the likelihood that the subsidiaries will be able to work together and benefit
from each other's knowledge and resources. Proximity makes it easier for frequent, intimate, and informal interactions among
managers; helps to develop similar mental models needed for working together; and makes it easier for understanding each other
and for developing tacit and complex knowledge. Specifically, we propose that:
Proposition 5. The greater the proximity between a potential partner subsidiary and the focal subsidiary, the greater the
likelihood that the focal subsidiary will form a tie with that subsidiary, ceteris paribus.
3.3.2. Goal congruence between the potential partners

Goal congruence refers to the extent to which potential partners believe that a tie between them is beneficial to achieve their
knowledge priorities. Goal congruence could be a function of the expected payoffs from the relationship and their mutual
interdependence. Expected payoff is likely to be high when parties pursue a common agenda resulting in gains for both parties and
when one party gets unique benefits without hurting the other. An example of the former is the creation of a new technology by
working together and an example of the latter is the partners' beliefs about how much they can individually benefit from the
newly-created technology. Since subsidiaries often compete with each other (Luo, 2005), a threat of opportunistic behavior and
potential instability is likely to exist (Das, 2004) even among sister subsidiaries, thus underscoring the importance of mutual
benefit.
Related to the notion of high expected payoff is the notion of mutual dependence. Subsidiaries may depend on each other
especially when the market conditions require huge investments (requiring various units to pull together their capital and
technological strengths) or combination of multiple and unique technologies that neither one can develop on its own. Subsidiaries
that are in related markets and technologies are likely to depend on each other because each one may possess relevant knowledge
and expertise the other needs and vice versa (Zhao and Luo, 2005). Mutual dependence will therefore increase the likelihood that
subsidiaries will form a knowledge tie; this will be especially pronounced when partners have had prior experience (Gulati, 1995)
and when formal and informal relationships exist among managers of the subsidiaries (Manev, 2003). Mutual dependence
provides the incentive to work together in order to reduce uncertainty and market risks for both parties.
When goal congruence is low, subsidiaries have little incentive to take on the extra costs of developing ties. Considering the
additional costs of coordination, compromise, and inflexibility (Porter, 1985), the subsidiaries would rather avoid creating new
relationships unless they see that the benefits outweigh the costs. When goal congruence is high, partners are likely to be willing
to share each others' knowledge and resources and benefit from them. The reciprocal reliance also increases the potential for fair
exchange and thus encourages the dyad to collaborate. High goal congruence would also provide the incentive for frequent and
repeated interaction between two partners which is likely to foster trust. High trust will increase the likelihood that the
subsidiaries will commit resources, co-engage in knowledge creation tasks, and take risk even when expected outcomes are rather
unclear. Therefore, subsidiaries with high goal congruence are very likely to develop mutually beneficial exchange relationships.
Proposition 6. The higher the goal congruence between the focal subsidiary and a potential partner subsidiary, the greater the
likelihood that the focal subsidiary will form a tie with that sister subsidiary, ceteris paribus.
3.4. Contextual factors influencing tie effectiveness
The above propositions focused on factors influencing the probability of sister subsidiaries establishing a tie, i.e., collaborate
with each other for the creation and sharing of knowledge. Once established, the tie provides a concrete basis for the parties to
work together to create new knowledge, share each other's knowledge, and engage in new areas of exploration based on their
mutual needs. Formalized relationships and exchange mechanisms also serve as conduits for the flow of information, knowledge,
and other relevant resources among the partners. However, not all ties will be equally effective in the creation and sharing of
knowledge. This section therefore focuses on factors that determine the effectiveness of these ties. Tie effectiveness could be
examined in several ways: volume and quality of knowledge created, speed and volume of knowledge transfer, and quality of
knowledge transferred. More subtle metrics include fewer bottlenecks in knowledge creation and transfer, limited suspicion of
each other, efforts to resolve issues mutually, and creation of synergy by working together.
We discuss the role of two contextual factors: support from the headquarters for a particular tie and the match between the
nature of knowledge and strength of the tie. Since subsidiaries are a part of the MNC, mutual collaboration among subsidiaries is
likely to thrive if the headquarters of the MNC supports the collaborative initiative of the subsidiaries. Similarly, because our focus
is on knowledge ties, we must examine the nature of knowledge involved and the extent to which there is a match between the
nature of knowledge and the strength of the tie.
3.4.1. Support from headquarters

We suggest that support from the headquarters is very critical to ensure that the partner subsidiaries are effective in creating
and exchanging knowledge. Research suggests that organizational tensions in the MNC are reduced when the headquarters
provides higher autonomy to the subsidiaries and shares information with them (Asakawa, 2001). While headquarters' support is
important for any subsidiary for its operation, our focus here is on specific kinds of support that can be provided to an inter-
subsidiary tie. We identify three ways in which the HQ could support a knowledge tie: instituting mechanisms for effective
communication and exchange, providing greater autonomy, and allocating necessary resources. While these supports might be
costly (Martinez and Jarillo, 1989), they do foster a culture that encourages collaboration and subsequently more effective
knowledge creation and transfer.
Since mutual knowledge creation and exchange requires on-going interactions (Gnyawali and Stewart, 2003), it is critical that
the HQ institutes appropriate mechanisms to encourage and facilitate such interaction. Examples include an intranet system
instituted by the HQ to facilitate communication between the partners (Birkinshaw et al., 1998), liaisons and task forces consisting
of managers from the partners (Gupta and Govindarajan, 2000; Martinez and Jarillo, 1989), and exchange of expatriates to build a
network of relationships among them (Birkinshaw and Hood, 2001). Headquarters can institute corporate socialization
mechanisms which build interpersonal familiarity, personal affinity, and convergence in cognitive maps among personnel from
the subsidiaries (Edstrom and Galbraith, 1977). Greater interpersonal familiarity and personal affinity can increase openness of
communication between the interacting parties and facilitate effective knowledge creation and exchange.
Headquarters can also support a tie by providing greater autonomy to the partners so that they can engage in mutual
exploration of ideas and projects. Increased autonomy increases the likelihood that the joint initiatives undertaken by the
subsidiaries will be more vigorously pursued and brought to fruition (Birkinshaw, 1997). Along these lines, Zhao and Luo (2005)
argue that subsidiary autonomy will be positively associated with a high contributory role for the subsidiary in realizing firm-
specific advantages. The importance of subsidiary autonomy is also evident from Richards' (2000) study of various overseas
subsidiaries. While high autonomy might increase opportunism and empire-building (Birkinshaw et al., 1998; Mudambi and
Navarra, 2004), the HQ can use control systems to mitigate such threats and to encourage deeper level collaboration.
Finally, HQ can allocate necessary resources to increase the capability of partner subsidiaries to pursue joint knowledge tasks
and share knowledge with each other. The HQ can provide seed money and discretionary budgets to test ideas (Birkinshaw and
Hood, 2001). Similarly, it can serve as a repository of information regarding expertise resident in particular subsidiaries and when
the need arises, can direct a focal subsidiary in need of particular expertise to the expert subsidiary. For instance, PepsiCo
headquarters uses a Best Practices Council for marketing information gathered from all subsidiaries and disseminates it
throughout the organization. In addition, it grants rewards and recognition through a “Ring of Honor” and recognizes via internal
newsletters managers who meet “people objectives” that include cross-subsidiary knowledge sharing. Headquarters could also
pick up the cost of short-term assignment of employees in these subsidiaries or may fund partially or fully proposals from two
subsidiaries that intend to collaborate on a common project.
Overall, we argue that the MNC headquarters can play a critical role in making sure that inter-subsidiary ties flourish and
provide important knowledge benefits to the partners. The greater the support provided, the more likely that the subsidiaries will
be motivated and capable to work together for effectively creating and transferring knowledge.
Proposition 7. The greater the support provided by the headquarters to a particular inter-subsidiary tie, the greater the
effectiveness of that tie in knowledge creation and transfer, ceteris paribus.
3.4.2. Nature of knowledge and its match with tie strength

Nature of knowledge refers to both the type of knowledge involved (tacit or explicit), and the type of knowledge activity
(knowledge development or knowledge acquisition) within the scope of the tie. Tacit and explicit knowledge are two dimensions
or types of knowledge commonly identified in the literature (Polanyi, 1967). Knowledge that is highly tacit, sticky, and difficult to
communicate requires elaborate mechanisms for transfer. Tie strength refers to the frequency, reciprocity, and the emotional
attachment and trust that partners develop in each other. A strong tie is characterized by frequent and repeated interactions
among the partners, emotional attachment to the relationship, and high level of trust among the partners (Rowley et al., 2000;
Granovetter, 1973). Subsidiaries having a strong tie will engage in on-going, sustained, and repeated interactions and discussions,
which help create and transfer tacit knowledge. Complex knowledge by nature is difficult to acquire and therefore requires mutual
development and stronger cooperation (Szulanski, 1996). Hansen's (1999) study of new product development teams shows that
when the knowledge is tacit and complex, strong ties are needed for effective inter-unit knowledge transfer.
Knowledge activity can be conceptualized as knowledge development and knowledge acquisition (Gnyawali and Stewart,
2003). The former implies creation of a new body of knowledge by working together and combining mutual resources and
expertise. Knowledge acquisition refers to accessing and getting knowledge the other party already possesses. So, acquisition
involves simple exchanges, whereas development requires subsidiaries to mutually commit their resources, including knowledge,
and blend them to create a new body of knowledge. Knowledge acquisition mainly relates to declarative encapsulated knowledge
like blue-prints, manuals, sharing of market and customer information, or transfer of explicit knowledge between partners (Lane
et al., 2001). Strong ties or sustained and repeated interactions may not be necessary for this exchange, which can be accomplished
through weak ties or even contractual arrangements. Strong ties are costly to create and maintain and therefore are not
appropriate for transfer of explicit and encapsulated knowledge.
However, strong ties are very critical when the knowledge is tacit and the focus is on knowledge development. First, by
working together over a period of time and committing major resources, subsidiaries will jointly develop new cognitive
understanding, new technology, or new set of routines that neither party currently has access to. Strong ties facilitate a series of
experiments, trial-and-error activities, and exploration needed for knowledge development. Interactions and discussions occur in
teams consisting of key members from each partnering firm. The teams discuss and share their own perspectives on the issues at
hand, examine their assumptions, and deeply engage in discovery and reflection so that they would be able to develop a fresh
understanding of the issues (Gnyawali and Grant, 1997). Nonaka (1994) suggests that tacit knowledge is created when knowledge
creating parties engage in high levels of interaction, synthesize unique perspectives, and jointly experience the knowledge
creation process. While studying buyer–supplier relationships, Kotabe et al. (2003) discovered that the effect of ordinary technical
exchanges on supplier performance improvement did not vary with the relationship duration, however when considering higher-
level technology transfer, performance grew more positive as relationship duration increased, thus reiterating that the role of
relational assets of inter-firm relationships is more important when transfer involves higher-level technological capabilities. We
argue that strong ties between partners entail the processes suggested by Nonaka (1994) and thus increase the likelihood of tacit
knowledge development. The fact that the knowledge is developed through sustained interactional processes suggests that the
knowledge will be unique and embedded in the context of the subsidiary units.
Second, sustained and strong ties help to achieve reciprocity, common goals, and goodwill (Yli-Renko et al., 2001) between the
connected partners. Shared expectations and goals reduce the need for formal monitoring and help to develop compatible systems
and cultures and idiosyncratic routines needed to engage in mutual exploration of knowing activities. Similarity of views may
enable the firms to exchange richer information in chunks (Gulati, 1998) and thus share tacit knowledge or combine each other's
knowledge to develop idiosyncratic knowledge.
Finally, strongly tied subsidiaries may be willing to assign their key managers in joint activities, and therefore engage in shared
learning experience—an important requirement for tacit knowledge development (Nonaka, 1994). Because of strong ties, these
managers are likely to discuss and use individual knowledge and expertise and recombine it into usable, actionable and a valuable
body of knowledge. The less skeptical the managers are of each other's intentions and actions, the more likely that they will engage
in discussions and dialogue, agree to invest in joint projects, and combine their knowledge and create unique knowledge.
Discussions, dialogue, and joint development efforts will enable the firms to develop new routines and technology, and share the
knowledge among the members. Along the above line of thought, research by O'Dwyer and O'Flynn (2005) suggests that
contractual mechanisms are insufficient for acquisition of tacit knowledge, and deeper levels of cooperative relationships such as
alliances and joint ventures are required for that purpose. As noted earlier, Hansen's (1999) research also shows that strong ties
are important to successfully transfer complex knowledge transfer across units. By consolidating the above arguments, we suggest
that tie strength must match the nature of knowledge involved for an inter-subsidiary tie to be effective.
Proposition 8. The greater the match between tie strength and nature of knowledge, the greater the effectiveness of an inter-
subsidiary tie, ceteris paribus. Specifically, a strong tie is more effective when the task involves knowledge development and
transfer of tacit knowledge.
Our focus above has been on identifying predictors of tie formation and factors that may influence tie effectiveness for knowledge.
We therefore did not systematically discuss major downsides of inter-subsidiary ties, but acknowledge them here. Ties can be risky to
partners because they might lose their core competence and knowledge that makes them unique and powerful in the MNC. Ties are
also costly to monitor and manage, and conflicts between parties can make the ties very unstable. Das (2005) points out instances of
deceitful behavior among alliance partners that can cause problems to the unsuspecting partner. Moreover, ties among subsidiaries
might make a group of subsidiaries collude with each other and defy headquarters' intentions and engage in their own “free will”. As a
result, the MNC may have greater difficulty in integrating the subsidiaries within the system. Yet, as Gomes-Casseres et al. (2006)
argue, relational problems arising from intra-firm ties will be smaller than inter-firm ties because of three primary reasons: (a) shared
culture, similar perspective, and common control systems from the headquarters, (b) the possibility of support from headquarters in
terms of resources, and (c) fear of censure in case one subsidiary tries to inappropriately capture inordinate rents from another.
4. Contributions and implications
Three related developments have occurred in the recent MNC literature: (a) the strategic role of subsidiaries (Andersson et al.,
2002; Birkinshaw and Hood, 1998; Taggart, 1998); (b) the importance of knowledge creation and sharing by subsidiaries (Almeida
and Phene, 2004; Almeida et al., 2002; Gupta and Govindarajan, 2000; Mudambi and Navarra, 2004); and (c) network view of
MNC with subsidiaries occupying a more critical role in the network (Ghoshal and Bartlett, 1990) with a focus on lateral ties
among subsidiaries (Almeida et al., 2002; Foss and Pedersen, 2004; Manev, 2003). Scholars have argued that “a company's
ability to develop, access, integrate, and deploy knowledge across its world-wide system is likely to grow more critical.”
(Almeida et al., 2002: 159). Moreover, recent research reveals that knowledge transfer increases both performance and
innovativeness of firms especially when such transfer is intra-organizational, and MNC units and subsidiaries that do not share
knowledge or do not learn from each other—the isolated subsidiaries—perform poorly (Monteiro et al., 2008; van Wijk et al.,
2008). Thus, the literature has explicitly recognized the role of subsidiaries and inter-subsidiary ties although HQ-subsidiary
relations have attracted considerably more attention and “the subsidiary–subsidiary relations are less well known” (Manev,
2003). This is in part due to the lack of a systematic theoretical framework to investigate how and why ties are likely to be
formed and what role ties play in achieving a knowledge advantage in firms. This paper addresses this critical gap by developing
a multi-level conceptual model.
4.1. Contributions
This paper makes several important contributions to the literature. We briefly discuss four of them. First, the conceptual model
that investigates inter-subsidiary tie formation—the foundation of any MNC network—provides a basis for concretely advancing
research on MNC network and knowledge flow in the network. While Ghoshal and Bartlett (1990) suggested the importance of
conceptualizing the MNC as an inter-organizational network more than fifteen years ago, limited research has advanced this
important line of inquiry. We suggest that this is partly due to lack of a systematic understanding of how and why ties are formed
among various units inside the MNC. We believe that this paper provides the conceptual basis to advance research in this
intriguing area. Our multi-level model helps to develop a holistic view of inter-subsidiary tie formation by incorporating the role of
the headquarters, the focal subsidiary, a pair of subsidiaries, and the contextual factors. Given the space and other limitations, our
focus has been to identify a parsimonious set of factors for each level. We incorporate current literature on subsidiary exchange
(e.g. Hansen, 1999, 2002; Monteiro et al., 2008; Tsai, 2000) and subsidiary–headquarters exchange (e.g., Kostova and Roth, 2003)
and contextual factors in developing our model.
Second, with a focus on voluntary ties, we make a clear distinction between tie formation and tie effectiveness and thus suggest
that not all ties can be effective in creation and transfer of knowledge. Our discussion incorporates multiple drivers of voluntary
efforts of subsidiaries to collaborate with each other and specifies conditions in which voluntary ties are likely to be formed and
what conditions will make the ties effective. Thus, we shift the discussion away from HQ-driven ties to subsidiary-driven voluntary
ties and how such ties can enhance the capability and advantage of subsidiaries within the MNC. The next contribution expands
this idea and advances the concept of knowledge networking capability.
Third, our conceptual model and related discussion explicitly addresses an important capability of a subsidiary, which we call
“knowledge networking capability.” The growing importance of knowledge flow and network of relations in MNCs suggests the
need for subsidiaries to develop their knowledge networking capability, i.e., the ability of a subsidiary to channel its network of
relationships in order to identify, acquire, access, and create valuable knowledge and become a strategic player in the MNC.
Knowledge networking capability has three major elements: a knowledge element, a networking element, and an evolution
element. In terms of the knowledge component, a subsidiary needs to identify unique and valuable knowledge held by its peer
subsidiaries, assess the relevance or value of the knowledge identified, and develop and use inter-subsidiary mechanisms to
acquire the relevant knowledge. Similarly, the subsidiary needs to be able to engage with the partners to co-develop required
knowledge with peer subsidiaries. In terms of networking component, a subsidiary needs to have the ability to identify, establish,
and nurture value-creating relationships with peer subsidiaries. It needs to identify and screen potential partners and demonstrate
that it is an attractive partner to its sister subsidiaries. Once ties are formed, it needs to nurture the relationship to build social
capital. Viewed from a larger network (as opposed to a dyad) perspective, the subsidiary needs to maintain a vital network of
relationships, i.e., have ties with partners that are willing and able to engage in continuous learning and innovation so that the
focal subsidiary has continuous access to new and valuable knowledge from its relationships. The evolution element relates to the
need for the subsidiary to assess the extent to which its current ties are contributing to its own knowledge, dissolve ties that are
not adding value, and create new ties that add value. Thus, a subsidiary's ability to continuously rejuvenate its network of
relationships is an important part of knowledge networking capability. Overall, a subsidiary with a dynamically evolving
knowledge network is likely to continuously access and acquire knowledge from its network and build new knowledge by
interacting with its peer partners. To the extent that a subsidiary develops dynamic capabilities through knowledge networking, it
can successfully innovate and prosper in dynamically changing environments (Teece, 2007).
Finally, a natural outgrowth of the conceptual model and the knowledge networking capability discussed above is its relevance
to the notion of subsidiary evolution, an important topic in MNC research (Birkinshaw and Hood, 1998). This point is related to the
evolution element discussed above. It appears that the phenomenon of subsidiary evolution could be understood better if it is
combined with the ideas of subsidiary networking capability discussed in this paper and the ideas of subsidiary bargaining power
(Mudambi and Navarra, 2004). A subsidiary with enhanced knowledge networking capability will create knowledge-based
advantages for itself and elevate its bargaining power in the MNC. Moreover, the MNC could capitalize on the knowledge
networking capabilities of its selected subsidiaries and foster their autonomous strategic behavior to improve the overall
capability of the MNC. Essentially, the notion of autonomous strategic behavior suggests that MNCs need to encourage subsidiaries
in their entrepreneurial orientation and behaviors, reward such behaviors, and provide a conducive environment such that
innovation pursued by subsidiaries can be nurtured and leveraged.
4.2. Future research and implications
The conceptual model developed in this paper enriches our understanding of factors contributing to peer to peer ties in
MNCs and provides empirically testable propositions on the increasingly important phenomena of intra-firm networks and
knowledge flow in the context of MNCs. By building on our work, researchers could develop a more comprehensive
understanding on MNC network and empirically investigate drivers and consequences of inter-subsidiary ties. When all dyadic
ties among subsidiaries of the MNC are put together, an overall MNC network emerges. Future work can examine the effects of a
focal subsidiary's structural position in the network, such as centrality and structural holes on that subsidiary's ability to learn
and transfer knowledge. Related to the ideas of social capital and intellectual capital of partners as described earlier, future
research could examine the effects of centrality and structural autonomy on inflow and outflow of knowledge. Similarly, MNCs
with highly dense networks are likely to achieve rapid flow of knowledge within the network, although high density may
inhibit the creation and flow of unique knowledge. Future research can also examine the role of various structural factors of the
MNC network for knowledge flow in the entire MNC. Moreover, building on the idea of MNC network, researchers could
examine the relative influence of structural and relational factors on the flow of different types of knowledge. For example, it is
possible that the structural factors will facilitate efficient flow of information and explicit knowledge, and relational factors
(such as strength of ties) will be important for the flow of tacit and complex knowledge and for the creation of new body of
knowledge. Another very important direction for future research is to examine issues that are at the interface of subsidiary
initiative and headquarters influence. Researchers could investigate knowledge related roles of various types of ties, i.e., those
(a) mandated by administrative control, (b) arising purely out of subsidiary initiatives, and (c) have both very strong subsidiary
initiative and very strong HQ influence.
This paper also helps MNC managers to understand the conditions under which peer ties are most likely to be formed and how
to be effective in acquiring and developing the knowledge base of their own subsidiary. Our discussion of partner attributes and
dyadic dynamics provide concrete ideas for managers as they try to explore potential partnership opportunities with sister
subsidiaries. This paper also provides a basis for managers for selecting partners by pursuing partners that are culturally and
technologically similar i.e. have low institutional distance, and those that have high social and intellectual capital that is relevant to
themselves and can be leveraged in the future. We suggest that subsidiary managers need to be cognizant of each others' goals and
priorities while initiating new relationships. Moreover, ties need to be rather strong when the knowledge is tacit and the need is to
develop a new body of knowledge. Managers representing headquarters can also benefit by realizing the role headquarters can
play in the knowledge creation and dissemination process by providing support and incentives in fostering peer to peer
collaboration and ties.
Overall, while the mainstream organizational research has discussed the notion of ‘relational advantage’ within the MNC, the
role of inter-firm ties has not been examined in depth. Our conceptual model built through the blending of literature on inter-firm
network and knowledge-based view, provides a foundation to understand how knowledge advantage can be achieved via inter-
subsidiary ties. We believe that our conceptual model and the notion of knowledge networking capability will provide a concrete
basis to empirically examine inter-subsidiary ties and the role of such ties in creating a knowledge advantage in multinational
corporations.
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INTER-SUBSIDIARY COLLABORATION FOR KNOWLEDGE: A CONCEPTUAL

Article in Academy of Management Annual Meeting Proceedings · August 2007

Devi R. Gnyawali Manisha Singal

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Journal of International Management 15 (2009) 387–400

Contents lists available at ScienceDirect

Journal of International Management

Knowledge ties among subsidiaries in MNCs: A multi-level

388 D.R. Gnyawalị et al. / Journal of International Management 15 (2009) 387–400

2.1. Role of inter-subsidiary ties for knowledge ﬂow

D.R. Gnyawalị et al. / Journal of International Management 15 (2009) 387–400 389

3. Conceptual model and propositions

Fig. 1. A multi-level conceptual model of knowledge ties among subsidiaries.

390 D.R. Gnyawalị et al. / Journal of International Management 15 (2009) 387–400

3.1. Subsidiary motivation to form inter-subsidiary ties

3.1.1. Entrepreneurial orientation

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3.1.2. Strategic vulnerability

392 D.R. Gnyawalị et al. / Journal of International Management 15 (2009) 387–400

3.2. Potential partner attributes

3.2.1. Intellectual capital of the potential partner

3.2.2. Social capital of the potential partner

D.R. Gnyawalị et al. / Journal of International Management 15 (2009) 387–400 393

3.3. Dyadic dynamics

3.3.1. Proximity between the potential partners

394 D.R. Gnyawalị et al. / Journal of International Management 15 (2009) 387–400

3.3.2. Goal congruence between the potential partners

3.4. Contextual factors inﬂuencing tie effectiveness

D.R. Gnyawalị et al. / Journal of International Management 15 (2009) 387–400 395

3.4.1. Support from headquarters

3.4.2. Nature of knowledge and its match with tie strength

396 D.R. Gnyawalị et al. / Journal of International Management 15 (2009) 387–400

4. Contributions and implications

D.R. Gnyawalị et al. / Journal of International Management 15 (2009) 387–400 397

398 D.R. Gnyawalị et al. / Journal of International Management 15 (2009) 387–400

4.2. Future research and implications

D.R. Gnyawalị et al. / Journal of International Management 15 (2009) 387–400 399

400 D.R. Gnyawalị et al. / Journal of International Management 15 (2009) 387–400

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