Journal of International Management
5 (1999) 187–206
Original Article
The contribution of foreign subsidiaries to host country
national competitiveness
Sharon O’Donnella,*, Timothy Blumentrittb
a
Department of Business Administration, College of Business and Economics,
University of Delaware, Newark, DE 19716, USA
b
Department of Management, Marquette University, Milwaukee, WI 53201-1881, USA
Abstract
In this article, we develop a conceptual model of national competitiveness, focusing on the influence of foreign subsidiaries on the competitiveness of their host countries. Essentially, we view foreign subsidiaries as potential sources of resources important to a nation in developing and maintaining
its international competitiveness. We argue that there is a set of subsidiary characteristics that enables
a foreign subsidiary to contribute to the national competitiveness of its host country. These characteristics include the strategic role of the subsidiary, the level of technology employed in the subsidiary’s
processes, the type of training provided by the parent company, and the degree to which the subsidiary
is part of an interdependent network of international subunits of the firm. National policy implications
are discussed. © 1999 Elsevier Science Inc. All rights reserved.
Keywords: National competitiveness; Multinational corporations; Foreign subsidiaries; Host country
1. Introduction
Many factors influence a nation’s competitiveness. Among these are the country’s natural
resources and the economic policies of the country’s government. However, few would disagree that a nation’s competitiveness depends, in large part, upon the competitiveness of the
firms operating within it, or, conversely, that the competitiveness of a firm is influenced by
the home country wherein it is located. Indeed, scholars have been arguing for decades that
the two are inextricable (Fayerweather, 1978; Kobrin, 1976).
During the years that national and firm competitiveness have been examined, there has
been a dramatic rise in the importance of global business in general and multinational corporations (MNCs) in particular. Over the last two decades, international trade has grown faster
* Corresponding author. Tel.: 1302-831-4560; fax: 1302-831-4196.
E-mail address: [email protected] (S. O’Donnell)
1075-4253/99 $–see front matter © 1999 Elsevier Science Inc. All rights reserved.
PII: S1075-4253(99)00012-5
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than the global economy, and foreign subsidiaries of MNCs headquartered in many different
countries now operate in nearly every nation in the world. These developments suggest that
the relationship between national and firm competitiveness should be viewed from a different perspective.
In this paper, we examine how a country’s national competitiveness can be influenced by
subsidiaries of foreign firms operating within the country instead of focusing on the firms
headquartered within a nation. Because of the dramatic rise in the number of foreign subsidiaries as well as the scope of their operations, these subsidiaries have a substantial impact on
the economies in which they operate. Our basic premise is that, as subsidiaries differ (Birkinshaw and Morrison, 1995; Ghoshal and Bartlett, 1990; Ghoshal and Nohria, 1989; Jarillo and
Martinez, 1990), so too should their influences on their host countries. Although many factors can influence a nation’s competitiveness, here we limit our discussion to those characteristics of foreign subsidiaries that enable them to influence a host country’s national competitiveness.
The arguments are presented in several steps. First, we discuss and define national competitiveness. Next, we outline the factors that contribute to a country’s competitiveness. The
main section of this article then explores the characteristics of foreign subsidiaries that enhance the degree to which they are able to contribute to the competitiveness of their host nations. Finally, we discuss the implications of these arguments.
2. National competitiveness
2.1. Defining national competitiveness
A generally accepted definition of the term national competitiveness has not yet been
achieved, thus various defensible definitions exist (Spence and Hazard, 1988). It may be that
this lack of consensus is because national competitiveness can mean many different things.
For example, a researcher may define national economic superiority by world market share
held by the companies of a certain country, by the profitability of those firms, or by more
subjective measures (potential for growth or significance of current R&D projects, for example), which may yield different results as to which country holds economic advantage (see,
for example, Johanson and Yip, 1994). Similarly, authors of newspaper and magazine articles are able to use the term at will to inspire either hopeful or fatalistic perceptions of a
country’s economic outlook, depending solely upon the article’s orientation.
Although there is variation in the definitions of national competitiveness, most have certain core aspects. These include such concepts as a nation’s ability to increase the wealth and
welfare of its inhabitants and the ability of its companies to discover and then profit from
technologies and products in world markets. Many definitions of national competitiveness
are centered on these key ideas. For example, Porter defines a nation’s competitiveness as
depending upon the “capacity of its industry to innovate and upgrade” (Porter, 1990: 73).
Scott and Lodge define it as “a country’s ability to create, produce, distribute, and/or service
products in international trade while earning rising returns on its resources” (Scott and
Lodge, 1985: 3). According to Blaine, “a nation’s competitiveness refers to its ability to produce and distribute goods and services that can compete in international markets, and which
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simultaneously increase the real incomes and living standards of its citizens” (Blaine, 1993:
63). The Institute of Management Development’s 1996 World Competitiveness Yearbook
states that competitiveness is the ability of a country to create added value, and, thus, increase national wealth by managing assets and processes, attractiveness and aggressiveness,
global breadth and proximity, and integrating these relationships into an economic and social
model.
Two important points should be taken from these definitions of national competitiveness.
First, there are two different units of analysis that are proposed: the nation-state, as in the definitions of Scott and Lodge (1985), Blaine (1993), and the Institute of Management Development; and industry, as in Porter’s (1990) definition. The importance of this difference lies in
its implications for addressing issues of national competitiveness. In particular, in developing
competitiveness, should countries place emphasis on particular industries and the firms
within them, or concentrate on improving the general industrial climate of the nation? The
conclusions of this article support the latter position, following the argument that efforts toward more holistic improvements of the investment climate of the nation will better serve a
country’s industrial base than will initiatives directed at aiding any particular industry
(Brewer, 1993; Doz, 1986; Grant, 1982). Second, the key concept in the national competitiveness definitions presented here seems to be the ability of the firms within a nation to increase their productivity, which leads to the accrual of economic benefits by the residents of
the nation.
We agree with the fundamentals, but would like to add a dynamic emphasis to the analysis
of each of the above characteristics of national competitiveness. Although national competitiveness, in any of its definitions, can be measured in cross-sectional terms, it is a dynamic
phenomenon, and its definition should reflect this condition. Thus, this paper defines national competitiveness as the ability of a nation to improve the welfare of its inhabitants
through the development and use of its human, technological, and natural resources.
2.2. Foreign subsidiaries and national competitiveness
National competitiveness is discussed most often in terms of the companies indigenous to
the nation. However, with increased industrial globalization, subsidiaries of foreign firms
also play a role in determining a nation’s competitiveness, as well as its development. In essence, we are deliberating on two independent influences: (1) the characteristics of foreign
subsidiaries that may have an impact on a host nation’s competitiveness; and (2) a nation’s
competitiveness that might influence the location of subsidiaries by foreign firms. The latter
relationship has been well discussed by international economists, who have examined the
differences in nations’ industrial activities. For example, in Dunning’s (1979, 1980, 1988)
eclectic paradigm (and, generally, in theories of foreign direct investment), nations are considered to hold varying capabilities that lead to country-specific or location advantages and
that allow firms within those countries to achieve competitive advantages based on the resources that are contained in that nation. Similarly, Porter’s (1990) work has built upon the
premise of Ricardian comparative advantage in noting that the industries of some nations
seem to dominate their particular global markets and that differences among nations contribute to the success or failure of an industry in a nation.
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However, it is the influence of foreign subsidiaries on the competitiveness of the host
country that is of interest in our conceptual model, which is presented in Figure 1. In past attempts to understand the influence of firms on national competitiveness, the vast majority of
work focused on the characteristics of indigenous firms in the development of national competitiveness. However, some scholars have presented arguments suggesting that foreignowned firms within a nation also contribute in important ways to the international competitiveness of the host nation. For example, Reich (1990, 1992) argued that a nation should be
concerned more with the skills of its workers than with the ownership nationality of the firms
for which they work. Similarly, Krugman (1994) suggested that economic advancements by
a nation do not really matter to any particular country; what should concern a nation is increasing the level of productivity achieved by its own workforce. Enhanced productivity is
the primary means by which the citizens of any region of the world improve their standard of
living, regardless of the nation’s relative productivity. Therefore, foreign-owned subsidiaries
may play a role in national competitiveness, a role that has not been discussed explicitly.
Two related streams of literature have discussed the relationship between foreign firms
and host economies. First, studies have focused on the effects of spillovers that may occur as
the result of foreign investment into a host country on such factors as levels of technology,
levels of workforce productivity, and general levels of competition within the particular national market. Caves (1974) found a positive impact of foreign firms on what he labeled as a
country’s allocative efficiency (or benefits from increases in competition), its level of technical efficiency, and its degree of technology transfer. Coe et al. (1997) found evidence of
R&D spillovers from industrial to developing countries. Harrison (1994) argued that foreign
investment may benefit host countries through transfers of technology, stimulation of technology diffusion from new competition, and provision by foreign firms of worker training
and management skill development. Similarly, Chung (1997) demonstrated that foreign direct investment (FDI) results in increased host country productivity through technology
transfer, but only when the initial level of host industry competition is relatively low. Also, at
an industry level of analysis, Blomström (1986) found a positive correlation between foreign
presence and the structural efficiency of manufacturing industries. These studies generally
have found a positive impact of foreign investment on host country economies.
A shortcoming of the literature on economic spillovers is its lack of investigation into the
particular characteristics of foreign investment that are more likely to lead to economic spillovers. Although Kokko (1994) found that more technology spillovers were evident when
there existed small technology gaps between the foreign investor and the host economy, far
more work needs to be done on this subject. We attempt to work toward this objective by examining the types of subsidiaries most likely to benefit host countries.
A second related stream of literature investigates the presence of foreign firms in national
industry clusters. This line of study suggests that foreign firms both benefit from and augment industrial clusters that exist within a particular country. For example, Cantwell discussed how “the use of technology in new environments feeds back into fresh adaptation and
(depending on the state of local scientific and technological capability) new innovation”
(Cantwell, 1989: 9). Almeida (1996) empirically demonstrated that not only do foreign firms
locate plants in the United States to gain access to existing technologies, they also spur new
technological development within those clusters with which they are involved. In a similar
Fig. 1. Model of foreign subsidiary contribution to host country national competitiveness.
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vein, this paper examines the reciprocal relationship between country characteristics, and the
types of subsidiaries they may attract in terms of a feedback loop. In doing so, the research
on industry clusters and the participation of foreign firms in host countries are further related.
2.3. Resources contributing to national competitiveness
Our definition of national competitiveness suggests that it is enhanced through the development of a country’s human, technological, and natural resources. Because there is little a
country can do to develop its natural resources beyond improving the efficiency of their extraction, we focus on the ways in which the development of a nation’s human and technological resources influences national competitiveness. Specifically, these two types of resources
are discussed, respectively, in terms of a highly skilled labor force and the ability to continuously innovate (Porter, 1990; Reich, 1990).
2.3.1. Skilled workforce
Reich (1990) contends that industrialized countries should concentrate on developing
those resources that improve the competitiveness of the nation itself rather than on protecting
firms that nominally align themselves with the nation but do not operate solely in the home
nation’s interests. He argues that one of the resources of an industrialized nation that contributes to its national competitiveness is the skill and ability of its human resources, particularly
with regard to productivity and technological and managerial expertise. As the labor force
within a nation becomes more technologically and managerially skilled, it becomes more
valuable to the employing firms within the nation. The workers are able to command a higher
wage rate, thus bettering their standard of living, which is one way of assessing national
competitiveness. In addition, these enhanced skills enable the nation’s workers to produce
more efficiently, making the nation’s products more competitive in world markets. As the
nation’s products become more competitive, the nation’s trade balance can be positively affected, in turn raising the wealth of the nation.
2.3.2. Innovative capability
Innovation is a form of knowledge creation in which knowledge is actively developed to
solve defined problems (Nonaka, 1994). Innovation is important in maintaining a nation’s
competitiveness, given that competitive advantage is sustainable only to the extent that it
cannot be initiated by competitors (Barney, 1991; Collis, 1991; Peteraf, 1993; Wernerfelt,
1984). Because most sources of competitive advantage can be imitated or substituted by
competitors, the capability to innovate enables a nation to maintain its competitiveness by allowing it to remain ahead of the competition. As competitors learn to substitute or copy existing knowledge, new knowledge is created through innovation. Although any one piece of
knowledge may be imitable and, thus, not a source of sustainable competitive advantage, the
capability to innovate and create new knowledge is a resource or capability that allows competitive advantage to be sustained.
Porter (1990), in his diamond model of national competitiveness, stresses the role of innovation in a nation’s competitive advantage. He argues that such innovative capability stems
from four different categories of country-level resources, which are the four points of his di-
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amond model: factor conditions, demand conditions, domestic competition, and related and
supporting industries. Each of these country-level factors influences the competitive ability
of firms within a nation and, together, help explain why firms from one nation outperform
firms from other nations in a particular industry. One of the key arguments is that each of the
four points of the diamond can stimulate the innovation process that occurs within organizations. Similarly, Francis (1992) suggested that there is a direct relationship between the competitive activities of the firms that comprise a country’s industrial force and the country’s national competitiveness.
For a nation to maintain its competitiveness, it must maintain the resources that are important contributors to it; namely, skilled labor and innovative capability. One of the ways in
which a nation can improve its innovative and developmental capabilities is through inward
FDI (Mowery and Oxley, 1995).
2.4. Resources contributed by foreign subsidiaries
Through FDI, a nation is exposed to the processes and skills of a foreign organization.
Following basic FDI theory, firms will make investments in foreign markets when they
present opportunities for gains not available in their home market (de la Torre, 1981). These
foreign-owned investing organizations bring with them the processes by which they expect
to generate their profits, and the institutions and people of the receiving nation have the opportunity to learn from them. Considering that increased globalization has led to what
Ohmae (1990) refers to as a “borderless world,” in which an ever-increasing percentage of a
nation’s workforce is employed by foreign-owned firms, foreign subsidiaries have thus become increasingly important contributors to a nation’s competitiveness by providing product
and process technology and technical and managerial skills. These skills are essential in enhancing the skills of a nation’s workforce and the innovative capability housed within the nation. The experience and skills that individual workers gain on the job collectively contribute
to national innovation systems (Freeman, 1995; Mowery and Oxley, 1995). Thus, subsidiaries of foreign-owned firms can provide some of the resources that contribute to the competitive advantage of their host nation.
Local employees of a foreign subsidiary learn the managerial practices and the technology
processes that the foreign parent employs in its operations, as well as its general business
practices and strategies. What the employees of the subsidiary learn spills over to individuals
within the host nation, who are outside the subsidiary. As demonstrated in Kogut (1991),
firm boundaries are permeable to firm-based knowledge and expertise, including management practices. In working closely with the subsidiary, local customers and suppliers of the
foreign subsidiary also incorporate some of the technology and skills brought into the host
nation by the foreign firm (Porter, 1980). Also, major inflows of foreign investment generate
a great deal of local media and industry attention, much of which is focused on the new technologies and practices employed by the investing firm. Thus, spillovers are likely to occur
despite attempts of foreign subsidiaries to protect their valuable stocks of tacit knowledge.
Studies of the changes occurring in the countries of Eastern Europe have noted the importance and potential contribution of foreign firms to the economic transitions in these
countries. Scholars have noted that Western firms may be looked to for contributions to the
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technology (Baylis, 1994), managerial learning (Child and Czeglédy, 1996), institutional infrastructure, (McMillan, 1995) productivity and efficiency, (Svetlicic et al., 1993), as well as
the general levels of human and financial capital (Villinger, 1996) that reside within their
home countries.
Foreign subsidiary characteristics contributing to national competitiveness
Not all foreign subsidiaries will contribute the resources needed to maintain the national
competitiveness of their host nation. We argue that subsidiaries with certain characteristics
are greater providers of the resources and technical and managerial skills that are so important in building and maintaining national competitiveness. By drawing on several different
bodies of literature, the next sections detail some of the characteristics of foreign subsidiaries
that enable them to make an impact on the competitiveness of their host nations. Such subsidiary characteristics include: its strategic role within the corporation; the level of technology employed in its processes; the training it provides for its employees, suppliers, and customers; and the subsidiary’s level of international interdependence
3.1. Foreign subsidiary strategic role
As international management researchers have demonstrated, one of the mechanisms
MNC managers have used to meet the challenges of implementing a coordinated global strategy is the differentiation of the strategic roles assigned to the various foreign subsidiaries of
a single firm (Ghoshal and Bartlett, 1990, 1994; Ghoshal and Nohria, 1989; Gupta and
Govindarajan, 1991). Subsidiary roles may differ in several respects, such as the degree to
which they are actively involved in the formulation and implementation of corporate strategy
and the degree to which they are creators and users of knowledge within the firm (Birkinshaw and Morrison, 1995; Gupta and Govindarajan, 1991; Jarillo and Martinez, 1990). As
has been noted in previous research, some subsidiaries may be given the authority to make
strategic and operating decisions autonomously; whereas, others may be implementers of
headquarters-developed strategic decisions (Ghoshal and Bartlett, 1990; Taggart, 1997). Depending upon their different strategic roles, some subsidiaries will have the capability to contribute to the international competitiveness of their host countries more than will others.
One strategic role that a foreign subsidiary can be given is that of a world or global product
mandate (Crookell, 1990; Roth and Morrison, 1992; Rugman and Bennett, 1982; White and
Poynter, 1984), or a strategic leader (Bartlett and Ghoshal, 1986; 1989). With a global mandate,
the foreign subsidiary has worldwide responsibility for a complete set of value activities associated with a particular product or product line. The corporate expertise for the product or product
line resides in the subsidiary, with the subsidiary managing the R&D, production, and marketing activities on a global basis. Thus, strategic and operational activities are centralized and coordinated worldwide, but the critical point or focus of decision making is at the subsidiary
level, not at headquarters. Within a multinational corporation that gives some of its subsidiaries
a global mandate role, the responsibilities for global decision making are dispersed throughout
the organization, with the responsibility for the set of value activities for different products or
product lines being centralized at different subsidiary locations.
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As pointed out in previous studies, because product line expertise resides at the subsidiary
level, subsidiaries with a global mandate or strategic leader role tend to exhibit a high degree
of strategic decision making with regard to their mandated product (Birkinshaw, 1996; Roth
and Morrison, 1992; Roth and O’Donnell, 1996). Decisions regarding R&D, production, and
marketing are made at the subsidiary level, although operational activities may occur at other
locations. In addition, subsidiaries with such a role have a higher percentage of international
sales, which underscores the notion that, with a global mandate, a subsidiary has worldwide
responsibility for its product line. These subsidiaries develop, produce, and market their
products for use on a global basis. They do not merely market internationally a product that
was originally developed for the local market, but rather, they take the lead in developing a
product intended for worldwide sale from its inception. The global market, not the home
market of the subsidiary, is the primary focus throughout the development and production of
the subsidiary’s product (Poynter & Rugman, 1982).
These two characteristics of foreign subsidiaries with a global mandate role—(1) subsidiary-level strategic decision making, and (2) the development of products for use on a global
basis—allow such subsidiaries to contribute to the international competitiveness of their host
countries. Indeed, it has been suggested that attracting foreign subsidiaries with a global
mandate is a means by which countries, particularly developed nations, can improve their position of international competitiveness (Poynter and Rugman, 1982; Rugman and Bennett,
1982).
The higher level of strategic decision making that accompanies these types of strategic
roles helps develop the expertise and managerial capabilities of the middle- and upper-level
managers at the subsidiary. It is these managerial and decision-making skills that Reich
(1990) argues are important elements in a nation’s international competitiveness. In addition,
the worldwide product line responsibility implied by a global mandate requires managers to
view their competitors on an international level, necessitating a more global view. Finally,
because such a subsidiary has responsibility for all functions regarding its mandated product
line, it will develop the skills and abilities of its employees and managers in many different
functional areas, including R&D, production, marketing, and support activities. Thus, such
subsidiaries likely are associated with increased technical and managerial expertise at multiple levels and in multiple functional areas.
Subsidiaries with a value-adding role, such as a global mandate, also are associated with
developments in product and process technology. For subsidiaries with such roles, one of the
most important innovation-driving functions, R&D, is coordinated in the host country. When
the R&D for a worldwide product or product line is centralized in the host country, it increases the level of technology generated and accessed within that country (Poynter and Rugman, 1982). Through several case analyses, Rugman and Bennett (1982) demonstrated how
R&D centralized at foreign subsidiaries within Canada helped to enhance the innovativeness
and technology development of other firms within the same industries.
3.2. Level of technology
The level of technology used in the processes performed at the foreign subsidiary is another important factor in the degree to which the subsidiary can contribute to the host na-
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tion’s competitiveness. As discussed previously, the firm-level resources that contribute to a
nation’s competitiveness are innovative product and process technology and skilled human
resources. Clearly, an industrialized nation’s technological resources and skills will be enhanced to a greater extent by firms investing in such knowledge-based industries as electronics, pharmaceuticals, and biotechnology, which employ a high level of technology and
knowledge-based skills, than by those investing in low-tech, labor-intensive industries.
Mowery and Oxley (1995) note that host countries can reap the benefits of inward technology transfer, with important technological benefits being provided by spillovers, or external
effects, of inward foreign investment in high-tech industries. Such spillovers include the development of similar products by local manufacturers that are then exported, as well as skill
acquisition through “learning by using” (Mowery and Oxley, 1995: 79).
High-tech, knowledge-intensive industries have a high tacit knowledge component. Tacit
knowledge, by definition, is not subject to codification, which makes its acquisition experiential in nature and prevents it from being transferred directly (Kogut and Zander, 1992,
1993; Nelson and Winter, 1982). Foreign subsidiaries can be an important channel for the
transfer of such tacit, high-tech knowledge through the demonstration and application of advanced product and process technologies and innovative managerial techniques. As these advanced product and process technologies and technical and managerial skills are learned by
local employees, they are likely to spillover to local firms (Kogut, 1991), thus becoming a
nation-level resource that contributes to the host nation’s competitiveness. Mowery and Oxley (1995) note the contribution that inward investment in high-technology industries has
played in the postwar economic development of Japan, Taiwan, and South Korea.
3.3. Formal and informal training programs
Knowledge and skills can be transferred from the foreign-owned firm to the host nation
through both formal and informal training. Training provides a mechanism for transferring
product and process technology and for building the technical and managerial skills of the
subsidiary’s local workforce. Kogut and Zander (1992) distinguish between two categories
of knowledge: information and know-how. Information refers to knowledge that can be
transmitted through facts, axioms, and symbols; whereas, know-how refers to accumulated
skill or expertise. These two categories of knowledge are transmitted through different types
of training. Information can be transferred more efficiently through formal training programs, but the transfer of know-how is facilitated through less formal means.
The fundamental purpose of a training program is the dissemination of information. Information is codifiable and can be transmitted through manuals, blueprints, and verbal instructions. The transmission of technical and managerial information from corporate headquarters
to the foreign subsidiary through formal training can increase the subsidiary’s level of innovative capability as well as the skills of its local employees. Thus, foreign subsidiaries in
which there is extensive use of corporate-based in-house training have the ability to enhance
the national competitiveness of their host countries through their contribution to the innovative capability and skills of their employees. The information component of product and process technology can be communicated quite easily through formal training programs (Nonaka, 1994).
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Training at the foreign subsidiary can be just as effective for transferring know-how in the
form of skills and expertise from the parent corporation to the local employees. However, the
transfer of this type of knowledge is likely to occur through informal rather than formal training. The process of transferring tacit knowledge is less direct and more cumulative, because
know-how must be learned and acquired over time (Nonaka, 1994). Skills can be difficult to
pass on to others because of their tacit nature. The teaching of know-how requires frequent
interaction within small groups, which facilitates the sharing of experiences and the building
of a common stock of knowledge (Jones et al. 1997; Katz and Kahn, 1966; Kogut and
Zander, 1992). Such transfer of know-how is similar to Ouchi’s (1980) notion of socialization, in which social relationships serve as a means for transferring tacit knowledge that is
unspecified and difficult to state explicitly. Training programs can facilitate the transfer of
such tacit skills and know-how, particularly if they involve hands-on training and interaction
in small groups. Tacit knowledge is more easily communicated as relationships are built
through small group interaction and as group members build up common experiences. Thus,
both formal training programs and informal interactions among employees are important in
the transfer of information and know-how from the foreign subsidiary to the workforce of the
host country.
3.4. Intrafirm international interdependence
Another characteristic of a foreign subsidiary that can enable it to contribute to the skill of
the workforce and innovative capability of its host country is international interdependence.
International interdependence refers to the degree to which the activities and outcomes of the
foreign subsidiary affect or are affected by the activities and outcomes of headquarters or
other foreign subsidiaries of the MNC. In the international management literature, a global
firm has been conceptualized as one in which competitive actions in one country location affect those taken in another location (Porter, 1980, 1986). Thus, the global organization links
its competitive position across its various country locations and reacts to or initiates changes
in the competitive environment in international as well as domestic markets. Sources of competitive advantage for the multinational can include international scale and scope economies
and advantages that result from operating in a specific country location (Kogut, 1985; Porter,
1980, 1990). Realizing competitive advantage from these sources requires a more efficient
flow of resources (capital, products, information, know-how, technology) between different
units of the firm than is achieved by competitors. These necessary resource flows are an important element in the integration necessary to develop and sustain competitive advantage
(Prahalad and Doz, 1987), and they result in a high degree of international interdependence.
International interdependence has become increasingly important as multinationals need to
capitalize on knowledge and capabilities acquired in one market in order to compete effectively in other international markets.
As a foreign subsidiary is increasingly characterized by international interdependence, it
will have an increased amount of interaction with other organizational units within the corporation. These interactions will facilitate the transfer of capabilities and knowledge between
the subsidiary and other organizational units, particularly those with which it is highly interdependent. By its definition, international interdependence also implies that different interna-
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tional subsidiaries of the MNC depend upon one another to perform their functions and
achieve their goals. For such an interdependent network of international subsidiaries to function effectively, each unit must have the capabilities necessary to perform its designated role
within the system. Any subsidiary that is dependent on another subsidiary will ensure that the
other subsidiary on which it is dependent has the resources and capabilities that are necessary
for the two of them to perform their interdependent roles. Thus, an interdependent network of
subsidiaries is likely to exhibit a level of inter-unit cooperation and resource transfer that is
not exhibited or necessary at low levels of interdependence.
Therefore, as a subsidiary experiences a greater amount of international interdependence,
it is more likely to be a receiver as well as a supplier of intra-MNC flows of explicit and tacit
knowledge. As argued earlier, subsidiaries that possess intangible skills in the areas of product and process technology as well as technical and managerial skill are better positioned to
contribute to the host country’s innovative capability and the skill of its workforce. Subsidiaries that are an integral part of an interdependent MNC network will, in a sense, have access to the knowledge and skills of the other units of the MNC with which they are interdependent. In particular, such foreign subsidiaries will have greater access to the skills and
knowledge necessary to perform their organizational function effectively, increasing their
ability to contribute to their host countries those resources that enhance the country’s national competitiveness.
Finally, it is likely that the subsidiary characteristics discussed above may interact with
one another in their effects on the subsidiary’s contribution to the competitiveness of the host
country. For example, although the strategic role of the subsidiary as well as the level of
technology employed in its processes both were argued to have a positive impact on the host
country’s competitiveness, these two characteristics combined likely may have a synergistic
effect. A subsidiary that is both high tech or knowledge intensive as well as having a global
mandate role will develop to an even greater extent the firm-level resources that contribute to
national competitiveness. Previous research has addressed, albeit indirectly, some of the potential interactions or synergies between the subsidiary characteristics discussed here. For
example, Hedlund’s (1986, 1993) work on the MNC as a “heterarchy” discussed the interaction of subsidiary strategy and international interdependence. In a heterarchical MNC, individual foreign subsidiaries are viewed as centers of excellence or knowledge sources (i.e.,
subsidiary role of strategic leader or global mandate), and the MNC as a whole is conceptualized as having the capability to combine or integrate the knowledge generated at the subsidiary level through the intrafirm transfer of such knowledge (international interdependence).
Similarly, Ghoshal and Bartlett (1990) and others have discussed the MNC as an integrated
network in which ties between nodes of the network serve as conduits for such intangibles as
knowledge and expertise, as well as such tangibles as products and components.
4. Model summary
In sum, we have limited our examination of national competitiveness to the specific characteristics of foreign subsidiaries that may have an impact on the competitiveness of the host
country. In particular, we have argued that the global strategic role of the subsidiary, the
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199
level of technology employed in the subsidiary’s processes, the formal and informal training
provided by the subsidiary, and the degree to which the subsidiary is part of an interdependent network of international subsidiaries of the MNC all enhance the subsidiary’s ability to
contribute to the skill of the host country’s workforce and the over-all innovative capability
of the host nation, as depicted in Figure 1. In doing so, these subsidiary characteristics indirectly contribute to the national competitiveness of the host country.
It should be noted that most of the subsidiary characteristics detailed here involve a high
degree of knowledge and skill transfer from the parent company to its foreign location. It is
likely that much of knowledge and skills transferred to the subsidiary would be proprietary in
nature, or at least closely held by the corporation. The MNC would be unlikely to transfer
such valuable tacit assets if it did not expect to have control over how they were to be used or
disbursed in the foreign location. Host country regulations that limit foreign ownership can
have a considerable impact on the degree to which a foreign parent has control over its assets
within that country. The model presented here assumes that the parent corporation retains
control over the subsidiary. Thus, for the purposes of this model, a foreign subsidiary is defined as a foreign operation in which the parent corporation has at least a majority ownership
share and management control.
4.1. Role of the host government
Thus far, the model has not explicitly considered political factors, which, in a study of national competitiveness, is only possible in conceptual terms. In practice, the influence of host
government policies on economic conditions must be taken into account (Porter, 1990). In
the model presented here, host government policies may affect the interactions between foreign subsidiaries and the economies of their host countries.
Many examples of the potential impacts of governmental decisions can be cited. For example, the regulatory structure enacted by a host government may have a large impact on the
activities assigned to a foreign subsidiary. Stringent environmental regulations may induce
the MNC to provide its subsidiary in that country with either a less substantial production
role or more advanced technologies to meet the government’s restrictions. Local ownership
requirements may influence the size and types of subsidiaries located in particular countries.
In addition, the monetary and fiscal policy decisions made by governments that promote or
inhibit growth in the country’s economy in general or within specific industries may influence the MNC’s decision to locate facilities in foreign countries.
In such ways, political imperatives may influence the types of subsidiaries located in a
host country, the firm-level and nation-level economic resources resident in a host country,
and host country national competitiveness. However, differences in government policies
should not change the relationships proposed in the model. The impact of foreign subsidiaries on a nation’s competitiveness, through influences on firm-level and nation-level resources, will change in degree, not in nature, based on government policies that promote or
retard foreign investment. In other words, although host government policies may set the
playing field, the rules of the game remain the same. The implication is that host governments, through policy decisions, can manage to some degree the influence of foreign companies on their economies.
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4.2. Demand conditions
Another factor that will have an impact on several of the elements of the model presented
in Figure 1 is the character of demand within the host country. As discussed at length by Porter (1990), demand characteristics within a country, particularly the quality of demand, have
a great effect on national competitive advantage. More specifically, Porter argued that sophisticated and demanding buyers influence a country’s national competitiveness by exerting
pressure on firms to be more innovative in their product offerings and to meet higher standards with respect to quality, product features, and service. Thus, it can be argued that home
country demand directly affects our model through its impact on firm-level resources. In doing so, it also indirectly influences nation-level resources and national competitiveness.
However, demand conditions do not affect the relationships between the elements of our
model or the particular subsidiary characteristics that we have argued affect national competitiveness. Nevertheless, host country demand is likely to influence the degree to which
MNCs locate foreign subsidiaries with these characteristics in a particular country, because
of its indirect effect on nation-level resources and the feedback loop from nation-level resources to subsidiary characteristics, which is presented in the following section.
5. Feedback loop: Influence of host country characteristics on inward FDI
The main focus of our arguments, thus far, has been on the contribution of foreign subsidiaries to the national competitiveness of the host nation. However, the resources of a nation
and the level of competitiveness it has achieved with those resources also have impacts on
the types of foreign subsidiaries likely to be located in that nation, as is well-noted in the literature on foreign direct investment. This body of literature has suggested that national differences in resources create incentives for MNCs to locate activities in particular foreign
countries in an attempt to tap those characteristics that lead to superior performance through
competitive advantages. The incentive is based on the idea that MNCs can gain access to a
foreign country’s resources through foreign direct investments in the country of interest (de
la Torre, 1981). The implication is that the resources and capabilities of a country will influence the kinds of foreign investment it will receive from the global operations of MNCs
(Murtha and Lenway, 1994).
Much of the literature on foreign direct investment focuses on the investment location decision, or where to locate overseas operations. Graham and Krugman (1991) believe that
strategic motivations are the primary reason for foreign investment by firms. Similarly, de la
Torre (1981) suggests that FDI decisions should fit with the MNCs’ worldwide strategy,
taking into account other aspects of the firm’s activities. A global firm likely will have operations in multiple countries, but the location and role of each of these operations will be
determined largely by the resource characteristics of the host county. There are certain country-level characteristics that make some nations more appropriate host locations than others
for subsidiaries with those characteristics that we earlier argued contribute to the competitiveness of the host nation. As detailed previously, these subsidiary characteristics include
the subsidiary strategic role, high-tech products and processes, advanced training programs,
and being part of an interdependent network of international subsidiaries. From the perspec-
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201
tive of the investing firm, the desired host country characteristics are those that will contribute to the sustained competitive advantage of a subsidiary with such characteristics.
One host country characteristics that is attractive to investing firms is a skilled workforce.
In terms of a nation’s factor endowments, Porter (1990) refers to skilled human resources as
an “advanced factor,” one of those that is most significant for competitive advantage. Indeed,
the literature on host country bargaining power also cites access to skilled human resources
and technology as potential sources of bargaining power for a nation, particularly for highly
industrialized host countries (Behrman and Grosse, 1990; Fagre and Wells, 1982).
Skilled human resources are a particularly important resource for foreign subsidiaries with
some of the specific characteristics described earlier. For example, a subsidiary with a strategic leader role requires a high level of skill and expertise in its employees. With a global
mandate, management expertise and R&D are centralized at the subsidiary location, thus requiring high levels of managerially and technologically skilled employees and access to research knowledge and facilities. Because a subsidiary with such a strategic role is a worldwide center of excellence within the MNC, it is necessary for it to have a pool of highly
skilled managers from which to draw. Similarly, foreign subsidiaries in high-technology industries also require host countries with an adequately skilled and trained workforce.
Another host country characteristic that is important for attracting foreign subsidiaries is
its innovative capability. From the investing firm’s perspective, an environment conducive to
innovation is highly desirable, because the innovation process is influenced by the environment in which it takes place (Nonaka, 1994). Indeed, Porter (1990) discusses several nationlevel characteristics that contribute to a firm’s innovative capability. In particular, he notes
the role played by leading-edge consumers in maintaining the innovative capabilities of firms
within an industry.
Innovative capability is a particularly important host country characteristic for subsidiaries
with a global mandate role, those in high-technology industries, and those that are part of interdependent international corporate networks. For example, a subsidiary with a global mandate
role is one that is intended to be a worldwide center of innovation and excellence for its mandated product or product line. Local demand conditions consisting of sophisticated and technologically advanced customers will assist such a foreign subsidiary in establishing and maintaining its own innovative capabilities. Similarly, innovative and quality-driven suppliers can
further enhance the subsidiary’s ability to innovate, particularly in terms of product and process
technology. The foreign subsidiary’s resources may be further enhanced by industry conditions
within the host nation. The existence of highly developed related and supporting industries will
assist the foreign subsidiary’s innovation by generating interactions leading to the development
of its own resources. Advantages and learning opportunities that may be gained through proximity to suppliers and other industries of similar or connected products are additional motives
for firms to locate activities in particular countries.
6. The resource spiral
In summary, we have suggested that a highly skilled labor force and the capability of
achieving continuous innovation are important in maintaining or improving an industrialized
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nation’s competitiveness. Inward foreign investment plays a role in developing a country’s
national competitiveness, given that foreign subsidiaries can be key contributors of innovative capabilities and can enhance the skills and abilities of the local workforce. Host countries will benefit most from foreign subsidiaries that have one or more of the characteristics
that contribute to the development of the technological and managerial ability of the labor
force and to the innovative capability of the host country’s firms. Foreign subsidiaries with
these characteristics will benefit their host country by helping to develop those resources that
lead to enhanced national competitiveness more than will subsidiaries without these characteristics. The FDI literature suggests that the skills and abilities that a foreign subsidiary may
help develop in a host country are the same as those that firms look for in a host country
when making overseas investments. For example, subsidiaries with a global mandate strategic role are more likely to be located in host countries that have skilled human resources and
highly developed innovation capability.
As shown in Figure 2, those country-level resources that contribute to a nation’s international competitiveness are the same as those that attract foreign subsidiaries with such characteristics as a strategic leader, high-tech processes, extensive training programs, and international interdependence. In addition, such foreign subsidiaries then serve to enhance those
same country-level resources that first drew them to the host country. This set of interlinked
variables forms a causal loop, so that when one variable is changed, the others also will
change in the same direction. It becomes a spiral, or a deviation-amplifying loop, in which
positive or negative changes build upon themselves (Weick, 1979).
The nature of the relationships depicted in Figure 2 indicates that nations cannot ignore
the resources that attract inward foreign direct investment of the type that contributes most
directly to national competitiveness. By enhancing the skills of its human resources and its
innovative capabilities, a nation may find that it attracts the type of foreign investment that
will then enhance these resources to an even greater extent. Thus, the model suggests that in-
Fig. 2. The foreign investment—national competitiveness “loop.”
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203
ward FDI may not only afford foreign firms an opportunity to extract value from the host
country, but may also provide hosts with opportunities for value creation with respect to national economic resources. Alternatively, the spiral suggests that, as the innovative capability
and skills of a nation’s workforce begin to decline, there likely will be a corresponding decline in the type of foreign investment that enhances these nation-level resources, thus setting
off a downward trend in the international competitiveness of the country.
6.1. Policy implications
Adam Smith proposed that national governments have several broad goals, one being the
provision of services for the economic well-being of the people that they govern (Smith,
1973), a view shared by others (Robinson, 1964). Although such a mandate may be fulfilled
in many different ways, this paper has argued that one way in which economic development
is enhanced, thus improving national competitiveness, is through the resource contributions
of subsidiaries of foreign firms. Foreign subsidiaries may be able to inject new skills, processes, and capabilities into the national economy in which they are conducting operations.
These arguments are based on the assumption that governments and businesses act within the
same social environment, and the two are inextricably intertwined (Block, 1994; Doz. 1986).
The two entities may have different definitions of success and certainly have different means
by which they address their tasks, but each can better achieve its goals with support from the
other (Lax, 1988).
Certain country-level resources and capabilities will play a role in the location of foreign
subsidiaries with such characteristics as a strategic leader role, high-tech processes, advanced
training, and international interdependence. Thus, a country may see its competitiveness developed in distinct ways. First, there will be some propensity for countries strong in an area
to become even stronger in it as time passes, as inward foreign investment directed at exploiting the strengths of the country further enhances the stocks of those resources. Second, a
country may attempt to use its strengths in a particular area to advance its abilities in other related industries. Finally, a country may come to the realization that its abilities in a certain
area are either weak or becoming obsolete, and choose not to emphasize them. For example,
Japan once was a source of low-cost labor, but as it developed and wage rates rose, those
types of activities shifted to other countries, such as Korea, Malaysia, and China.
In sum, we have argued that foreign subsidiaries with such characteristics as a strategic
leader role, high-tech processes, or advanced training programs will be likely contributors to
local economies. Parent firms do not make such foreign investments lightly, and certainly not
without the definite prospect of developing their own operations and being profitable. By attracting such subsidiaries, nations and their people may share in the value created by the
firms. In the process, the people working in the subsidiaries may acquire knowledge and
skills that could spill over into related industries through a number of paths, creating a ripple
effect in the expansion of skills. The process of incorporating the operations of foreign firms
into a national economy presents the opportunity for the inhabitants of a nation to improve
their work skills and their ability to innovate.
Although there will be differences in states’ abilities to implement such an industrial development agenda and in their means of conducting such actions (Lenway and Murtha,
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1994), policy makers should attempt to bring into their economies firms that offer the opportunities both to utilize the resources housed within the nation optimally and to direct flows of
resources over time in manners that will further national resource stocks in the long term.
Such actions have the potential to develop the human resources of the nation and augment its
ability to innovate with respect to future uses of its available resources, both of which can
improve the nation’s competitiveness.
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