International Diversification and MNE Innovativeness: A Contingency Perspective of Foreign Subsidiary Portfolio Characteristics

Abstract

We advance research on how international diversification affects MNEs’ innovativeness by reconciling contradictory views on the role of international diversification for innovation. We do so by developing a portfolio perspective of MNE innovation that moves beyond foreign R&D subsidiaries to consider firms’ entire international footprints and by theorizing that MNE innovativeness depends on the interplay of geographical (i.e., regional diversification and institutional distance) and organizational (i.e., asset diversification and functional mandate breadth) characteristics of the foreign subsidiary portfolio. We test our proposed relationships on a unique multi-source panel dataset of Japanese listed electronics firms (266 firms and their 4505 subsidiaries between 2007 and 2015 resulting in 1936 firm-year observations and 28,350 subsidiary-year observations). We find that the institutional distance and asset diversification of the foreign subsidiary portfolio constrain the extent to which geographical (regional) diversification can enhance MNEs innovativeness. We also find that, at high levels of geographical diversification, MNEs with low levels of institutional distance and asset diversification in the foreign subsidiary portfolio tend to achieve higher innovativeness. Lastly, we did not find empirical support for functional mandate breadth as affecting how geographical diversification influences MNE innovativeness. Overall, the study highlights that, for a nuanced understanding of MNE innovativeness, managers need an encompassing and deliberate portfolio-level strategy that explicitly considers the interrelatedness of geographical and organizational characteristics.