Is Knowledge Power? Knowledge Flows, Subsidiary Power and Rent-Seeking within MNCs

  • Ram Mudambi
  • Pietro Navarra


In recent years, as multinational corporation (MNC) subsidiaries have become more closely linked to international networks, their knowledge intensity has risen, and some of their R&D has gained a more creative role. Simultaneously, and often connectedly, many subsidiaries have acquired considerable strategic independence in all aspects of their operations, and therefore are able to exercise considerable intra-firm bargaining power to influence the distribution of the firm’s resources. In this context, we suggest that intra-MNC knowledge flows are a key determinant of subsidiary bargaining power. We argue that subsidiary managers can exploit such power to pursue their own ends. Such rent-seeking behavior is implicit in much of the literature on managerialism, but our analysis suggests that such behavior can now occur in headquarters–subsidiary and subsidiary–subsidiary relations. Thus subsidiary strategic independence, designed to enhance the competitiveness of outputs (market knowledge) and inputs (asset-seeking and learning), can be corroded when the pursuit of subsidiary objectives encourages rent-seeking. Empirical analysis of a sample of high-technology subsidiaries in the UK provides strong support for the theory. We examine several avenues whereby the incentives of units within the MNC can be aligned.


Foreign Direct Investment Bargaining Power Knowledge Flow Strategic Management Journal Foreign Subsidiary 


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Almeida, P. (1996) ‘Knowledge sourcing by foreign multi nationals: patent citation analysis in the US semiconductor industry’, Strategic Management Journal 17: 155–165.CrossRefGoogle Scholar
  2. Almeida, P. and Kogut, B. (1997) ‘The exploration of tech nological diversity and the geographic localization of innovation’, Small Business Economics 9(1): 21–31.CrossRefGoogle Scholar
  3. Andersson, U., Forsgren, M. and Holm, U. (2002) ‘The strategic impact of external networks: subsidiary performance and competence development in the multinational corporation’, Strategic Management Journal 23: 979–996.CrossRefGoogle Scholar
  4. Argyres, N. (1995) ‘Technology strategy, governance structure and interdivisional coordination’, Journal of Economic Behavior and Organization 28: 337–358.CrossRefGoogle Scholar
  5. Armstrong, J.S. and Overton, T. (1977) ‘Estimating non-response bias in mail surveys’, Journal of Marketing Research 7: 71–86.Google Scholar
  6. Asakawa, K. (2001a) ‘Organizational tension in international R&D management: the case of Japanese firms’, Research Policy 30: 735–757.CrossRefGoogle Scholar
  7. Asakawa, K. (2001b) ‘Evolving headquarters–subsidiary dynamics in international R&D: the case of Japanese multi nationals’, R&D Management 31(1): 1–14.CrossRefGoogle Scholar
  8. Avila, M. and Ronen, J. (1999) ‘Transfer-pricing mechanisms: an experimental investigation’, International Journal of Industrial Organization 17(5): 689–715.CrossRefGoogle Scholar
  9. Bartlett, C.A. (2002) Philips vs. Matsushita: a new century, a new round, Harvard Business School: Boston, MA Case 9–302–049.Google Scholar
  10. Bartlett, C.A. and Ghoshal, S. (1998) Managing Across Borders: The Transnational Solution, 2nd edn. Harvard Business School Press: Boston, MA.Google Scholar
  11. Benito, G.R. and Gripsrud, G. (1992) ‘The expansion of foreign direct investments: discrete rational location choices or a cultural learning process?’, Journal of International Business Studies 23(3): 461–476.CrossRefGoogle Scholar
  12. Birkinshaw, J. (1996) ‘How multinational subsidiary mandates are gained and lost’, Journal of International Business Studies 27(3): 467–498.CrossRefGoogle Scholar
  13. Birkinshaw, J.M. and Hood, N. (1998) ‘Multinational subsidiary evolution: capability and charter change in foreign-owned subsidiary companies’, Academy of Management Review 23(4): 773–795.Google Scholar
  14. Birkinshaw, J. and Morrison, A.J. (1995) ‘Configurations of strategy and structure in multinational subsidiaries’, Journal of International Business Studies 26(4): 729–753.CrossRefGoogle Scholar
  15. Buckley, P.J. and Carter, M. (1996) ‘The economics of business process design: motivation, information and coordination within the firm’, International Journal of the Economics of Business 3: 5–25.CrossRefGoogle Scholar
  16. Buckley, P.J. and Casson, M.C. (1976) The Future of the Multinational Enterprise, Macmillan: London.CrossRefGoogle Scholar
  17. Campa, J. and Shaver, J.M. (2002) ‘Exporting and capital investment: on the strategic behavior of exporters’, Paper Presented at the Academy of Management Conference, Denver.Google Scholar
  18. Cantwell, J.A. (1989) Technological Innovation and Multinational Corporations, Basil Blackwell: Oxford.Google Scholar
  19. Cantwell, J.A. (1995) ‘The globalisation of technology: what remains of the product cycle model?’, Cambridge Journal of Economics 19: 155–174.Google Scholar
  20. Cantwell, J.A. and Iammarino, S. (1998) ‘MNCs, technological innovation and regional systems in the EU: some evidence in the Italian case’, International Journal of the Economics of Business 5(3): 383–408.CrossRefGoogle Scholar
  21. Cantwell, J.A. and Janne, O.E.M. (1999) ‘Technological globa lization and innovative centers: the role of corporate techno logical leadership and locational hierarchy’, Research Policy 28(2–3): 119–144.CrossRefGoogle Scholar
  22. Cantwell, J.A. and Mudambi, R. (2001) ‘MNE competence-creating subsidiary mandates: an empirical investigation’, Discussion Papers in International Investment and Management,, Vol 12, No 285 University of Reading: UK.Google Scholar
  23. Cantwell, J.A. and Piscitello, L. (1999) ‘The emergence of corporate international networks for the accumulation of dispersed technological competences’, Management Interna tional Review 39(Special Issue 1): 123–147.Google Scholar
  24. Cantwell, J.A. and Santangelo, G.D. (1999) ‘The frontier of international technology networks: sourcing abroad the most highly tacit capabilities’, Information Economics and Policy 11: 101–123.CrossRefGoogle Scholar
  25. Carlos, A.M. and Nicholas, S. (1993) ‘Managing the manager: an application of the principal-agent model to the Hudson’s Bay Company’, Oxford Economic Papers 45(3): 243–256.Google Scholar
  26. Caves, R.E. (1996) Multinational Enterprise and Economic Analysis, 2nd edn. Cambridge University Press: Cambridge, MA.Google Scholar
  27. Churchill Jr, G.A. (1995) Marketing Research: Methodological Foundations, 6th edn. Dryden Press: Fort Worth.Google Scholar
  28. Coff, R. (1999) ‘When competitive advantage doesn’t lead to performance: the resource-based view and stakeholder bargaining power’, Organization Science 10(2): 119–133.CrossRefGoogle Scholar
  29. Cowan, R., David, P.A. and Foray, D. (2000) ‘The explicit economics of knowledge codification and tacitness’, Industrial and Corporate Change 9(2): 211–253.CrossRefGoogle Scholar
  30. Daft, R.L. and Lengel, R.H. (1986) ‘Organizational and informa tion requirements, media richness and structural design’, Management Science 32(5): 554–571.CrossRefGoogle Scholar
  31. Dun & Bradstreet (1994) Business Register, Dun & Bradstreet: London.Google Scholar
  32. Dun & Bradstreet (1995) Business Register, Dun & Bradstreet: London.Google Scholar
  33. Dunning, J. (1992) ‘Multinational enterprises and the globaliza tion of innovatory capacity’, in O. Grandstrand, L. Hakanson and S. Sjolander (eds.) Technology Management and Interna tional Business: Internationalization of R&D and Technology, John Wiley & Sons: Chichester.Google Scholar
  34. Edwards, R., Ahmad, A. and Moss, S. (2001) ‘Export roles of MNC subsidiaries: implications for subsidiaries in Malaysia’, Journal of Asian Business 17(2): 1–14.Google Scholar
  35. Forsgren, M., Johanson, J. and Sharma, D. (2000) ‘Development of MNC centers of excellence’, in U. Holm and T. Pedersen (eds.) The Emergence and impact of MNC Centers of Excellence, Macmillan: London pp: 45–67.Google Scholar
  36. Forsgren, M. and Pedersen, T. (2000) ‘Subsidiary influence and corporate learning: centers of excellence in Danish foreign-owned firms’, in U. Holm, T. Pedersen (eds) The Emergence and impact of MNC Centers of Excellence, Macmillan: London pp: 68–78.Google Scholar
  37. Foss, N. (2001) ‘Leadership, beliefs and coordination: an explo rative discussion’, industrial and Corporate Change 10(2): 357–388.CrossRefGoogle Scholar
  38. Foss, N. and Foss, K. (2002) ‘Authority and discretion: tensions, delegation and implications for new organizational forms’, Paper Presented at the 2001 LINK conference, Copenhagen, Denmark.Google Scholar
  39. Foss, N., Foss, K. and Vazquez-Vicente, X.H. (2003) ‘Tying the manager’s hands’: how firms can make credible commit ments that make opportunistic managerial intervention less likely, DRUID Working Paper 2003–10, Copenhagen Business School.Google Scholar
  40. Foss, N. and Pedersen, T. (2001) ‘Building a MNC knowledge structure: the role of knowledge sources, complementarities and organizational context,’, Paper Presented at the 2001 LINK Conference, Copenhagen, Denmark.Google Scholar
  41. Fransmann, M. (1997) ‘Is national technology policy obsolete in a globalized world? The Japanese response’, in D. Archibugi and J. Michie (eds.) Technology, Globalization and Economic Performance, Cambridge University Press: Cambridge.Google Scholar
  42. Frey, B.S. (1998) Not Just for the Money: An Economic Theory of Personal Motivation, Edward Elgar: Aldershot/Brookfield, VT.Google Scholar
  43. Frost, T. (2001) ‘The geographic sources of foreign subsidiaries’ innovations’, Strategic Management Journal 22: 101–123.CrossRefGoogle Scholar
  44. Frost, T., Birkinshaw, J. and Ensign, P. (2002) ‘Centers of excellence in multinational corporations’, Strategic Manage ment Journal 23: 997–1018.CrossRefGoogle Scholar
  45. Ghoshal, S., Korine, H. and Szulanski, G. (1994) ‘Inter-unit communication in multinational corporations’, Management Science 40(1): 96–110.CrossRefGoogle Scholar
  46. Griliches, Z. (1992) ‘Patent statistics as economic indicators: a survey’, Journal of Economic Literature 28: 1661–1707.Google Scholar
  47. Grubaugh, S.G. (1987) ‘Determinants of foreign direct invest ment’, Review of Economics and Statistics 69: 149–152.CrossRefGoogle Scholar
  48. Gupta, A.K. and Govindarajan, V. (1991) ‘Knowledge flows and the structure of control within multinational firms’, Academy of Management Review 16(4): 768–792.Google Scholar
  49. Gupta, A.K. and Govindarajan, V. (2000) ‘Knowledge flows within multinational corporations’, Strategic Management Journal 21(4): 473–496.CrossRefGoogle Scholar
  50. Hakanson, L. (1995) ‘Learning through acquisitions: manage ment and integration of foreign R&D laboratories’, international Studies of Management and Organization 25(1–2): 121–157.CrossRefGoogle Scholar
  51. Heberlein, T.A. and Baumgartner, R. (1978) ‘Factors affecting response rates to mailed questionnaires: a quantitative analysis of the published literature’, American Sociological Review 43(4): 447–462.CrossRefGoogle Scholar
  52. Hedlund, G. (1980) ‘The role of foreign subsidiaries in strategic decision-making in Swedish multinational companies’, Strate gic Management Journal 1(1): 23–36.CrossRefGoogle Scholar
  53. Hedlund, G. (1984) ‘Organization in-between: the evolution of the mother-daughter structure of managing foreign subsi diaries of Swedish MNCs’, Journal of international Business Studies 15(2): 109–123.CrossRefGoogle Scholar
  54. Hedlund, G. (1986) ‘The hypermodern MNC: a heterarchy?’, Human Resource Management 25: 9–25.CrossRefGoogle Scholar
  55. Hennart, J.-F. (1982) A Theory of Multinational Enterprise, University of Michigan Press: Ann Arbor.Google Scholar
  56. Hill, C.W.L. (1988) ‘Financial capital market controls and financial performance in multidivisional firms’, Journal of industrial Economics 37: 67–83.CrossRefGoogle Scholar
  57. Holm, U. (1992) Internationalization of the second degree, Published Doctoral Dissertation, Uppsala University.Google Scholar
  58. Holm, U. and Pedersen, T. (eds) (2000) The Emergence and impact of MNC Centers of Excellence, Macmillan: London.Google Scholar
  59. Hood, N., Young, S. and Lal, D. (1994) ‘Strategic evolution within Japanese manufacturing plants in Europe: UK EVI DENCE’, International Business Review 3(2): 3–26.CrossRefGoogle Scholar
  60. Jaffe, A., Trajtenberg, M. and Henderson, R. (1993) ‘Geographic localization of knowledge spillovers as evidenced by patent citations’, The Quarterly Journal of Economics 108(3): 577.CrossRefGoogle Scholar
  61. Katrak, H. (1983) ‘Global profit maximization and the export performance of foreign subsidiaries in India’, Oxford Bulletin of Economics and Statistics 45(2): 205–222.CrossRefGoogle Scholar
  62. Krueger, A.O. (1974) ‘The political economy of the rent-seeking society’, American Economic Review 64: 291–303.Google Scholar
  63. Kuemmerle, W. (1999) ‘The drivers of foreign direct investment into research and development: an empirical investigation’, Journal of international Business Studies 30(1): 1–24.CrossRefGoogle Scholar
  64. Lamont, O. (1997) ‘Cash flow and investment: evidence from internal capital markets’, Journal of Finance 52(1): 83–109.CrossRefGoogle Scholar
  65. Lawrence, P.R. and Lorsch, J.W. (1986) Organization and Environment: Managing Differentiation and integration, Harvard Business School Press: Boston, MA.Google Scholar
  66. Levinson, R. (1983) ‘The high cost of remote control manage ment’, Management Review 72(4): 12–20.Google Scholar
  67. Martin, X. (2002) ‘Organizational and inter-organizational effects of corporate expansion: impacts of relation-specific and general assets on inter-firm link continuity during inter national expansions,’, Working Paper, New York University.Google Scholar
  68. Morck, R. and Yeung, B. (1992) ‘Internalization: an event study test’, Journal of international Economics 31: 41–56.CrossRefGoogle Scholar
  69. Morck, R., Yeung, B. and Yu, W. (2002) ‘The information content of stock markets: why do emerging markets have synchronous stock price movements?’, Journal of Financial Economics 58(1–2): 893–912.Google Scholar
  70. Mudambi, R. (1998a) ‘The role of duration in multinational investment strategies’, Journal of international Business Studies 29(2): 239–262.CrossRefGoogle Scholar
  71. Mudambi, R. (1998b) ‘Review of ‘technology, globalization and economic performance’’, Journal of Management Studies 35(5): 690–692.Google Scholar
  72. Mudambi, R. (1999) ‘MNE internal capital markets and subsi diary strategic independence’, International Business Review 8(2): 197–211.CrossRefGoogle Scholar
  73. Mudambi, R. (2002) ‘Knowledge management in multinational firms’, Journal of international Management 8(1): 1–9.CrossRefGoogle Scholar
  74. Narula, R. (2002) ‘Innovation systems and ‘inertia’ in R&D location: Norwegian firms and the role of systemic lock-in’, Research Policy 31(5): 795–816.CrossRefGoogle Scholar
  75. Nohria, N. and Ghoshal, S. (1994) ‘Differentiated fit and shared values: alternatives for managing headquarters-subsidiary relations’, Strategic Management Journal 15(6): 491–502.CrossRefGoogle Scholar
  76. Nonaka, I. and Takeuchi, H. (1995) The Knowledge-Creating Company, Oxford University Press: Oxford.Google Scholar
  77. OECD (1996) Technology, Productivity and Job Creation, Vol 2, Analytical Report, Office of the Secretary-General: Paris.Google Scholar
  78. Office for National Statistics (1996) The UK SiC 1992: Methodo logical Guide, HMSO: London.Google Scholar
  79. Osborne, M. and Rubinstein, A. (1990) Bargaining and Markets, Academic Press: San Diego.Google Scholar
  80. Osterloh, M. and Frey, B.S. (2000) ‘Motivation, knowledge transfer and organizational forms’, Organization Science 11(5): 538–550.CrossRefGoogle Scholar
  81. Patel, P. and Pavitt, K. (1991) ‘Large firms in the production of the world’s technology: an important case of non-globaliza tion’, Journal of international Business Studies 22(1): 1–21.CrossRefGoogle Scholar
  82. Pearce, R.D. (1999) ‘Decentralized R&D and strategic competi tiveness: globalized approaches to generation and use of technology in MNCs’, Research Policy 28(2–3): 157–178.CrossRefGoogle Scholar
  83. Price Waterhouse (1995) Doing Business series, Price Waterhouse: London.Google Scholar
  84. Rajan, R., Servaes, H. and Zingales, L. (2000) ‘The cost of diversity: the diversification discount and inefficient invest ment’, Journal of Finance 55(1): 35–80.CrossRefGoogle Scholar
  85. Rugman, A. and Verbeke, A. (2001) ‘Subsidiary specific advan tages in multinational enterprises’, Strategic Management Journal 22: 237–250.CrossRefGoogle Scholar
  86. Scharfstein, D. and Stein, J.C. (2000) ‘The dark side of internal capital markets: divisional rent-seeking and inefficient invest ment’, Journal of Finance 55(6): 2537–2564.CrossRefGoogle Scholar
  87. Schroeder, D.M. (1990) ‘A dynamic perspective on the impact of process innovation upon competitive strategies’, Strategic Management Journal 11(1): 25–41.CrossRefGoogle Scholar
  88. Schroeder, D.M. (1993) ‘Organizational structure and intrafirm transfer prices for interdependent products’, Journal of Business Finance and Accounting 20(3): 441–455.CrossRefGoogle Scholar
  89. Stein, J.C. (1997) ‘Internal capital markets and the competition for corporate resources’, Journal of Finance 52(1): 111–133.CrossRefGoogle Scholar
  90. Szulanski, G. (1996) ‘Exploring internal stickiness: impediments to the transfer of best practice within the firm’, Strategic Management Journal 17: 27–43.CrossRefGoogle Scholar
  91. Tavares, A.T. and Pearce, R. (1999) The industrial policy implications of the heterogeneity of subsidiaries’ roles in a multinational network, Institute for Development Policy Dis cussion Paper No. 5.Google Scholar
  92. Vernon, R. (1979) ‘The product cycle hypothesis in a new international environment’, Oxford Bulletin of Economics and statistics 41: 255–267.CrossRefGoogle Scholar
  93. White, R.E. and Poynter, T.A. (1985) ‘The strategies of foreign subsidiaries’, International Studies of Management and Organi zation 14(4): 91–106.Google Scholar
  94. White, P., Douglas, A. and Stillwell, A. (2002) Regional Competitiveness Indicators, HMSO/Department of Trade and Industry: London.Google Scholar
  95. Williamson, O. (1975) Markets and Hierarchies: Analysis and Antitrust Implications, The Free Press: New York.Google Scholar
  96. Williamson, O. (1996) The Mechanisms of Governance, Oxford University Press: Oxford.Google Scholar
  97. Zander, I. (1999) ‘How do you mean ‘global’? An empirical investigation of innovation networks in the multinational corporation’, Research Policy 28(2–3): 195–213.CrossRefGoogle Scholar

Copyright information

© Academy of International Business 2015

Authors and Affiliations

  • Ram Mudambi
  • Pietro Navarra

There are no affiliations available

Personalised recommendations