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Is knowledge power? Knowledge flows, subsidiary power and rent-seeking within MNCs

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Abstract

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.

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Notes

  1. We are grateful to Rajneesh Narula for this colorful phrase.

  2. Whenever a person or group has power over an organization, the person or the group will seek to obtain special favors at the expense of all others in the organization (Krueger, 1974).

  3. We are aware of the large literature on the nature of knowledge, and refer the interested reader to the wonderful survey of Cowan et al. (2000). For our purposes, it is sufficient to recognize that codified knowledge has more of the characteristics of ‘information’, that tacit knowledge is more holistic, and that the distinction between the two relates largely to issues of articulation.

  4. Power in a bargaining game is derived from the value of a player's outside options (Osborne and Rubinstein, 1990). Subsidiary bargaining power must also arise from such calculus; however, this can only occur implicitly, as it is not an independent legal entity. Although the subsidiary itself is generally tied to the parent firm, many of its resources (particularly its human and relational resources) are not, and therefore have outside options that can be exercised. For example, key managers can quit, key relationships may not be leveraged, and so on.

  5. For a more general discussion of the advantages, limitations and interpretation of US patent data, the reader is referred to the classic work of Griliches (1992).

  6. Managers' loyalties are often divided along cultural lines between the MNC parent and the local operation, as summarized in the table below. See Mudambi (1999) for details.

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Acknowledgements

We would like to thank participants at the third LINK conference in Copenhagen, Denmark, and especially Nick Argyres, Lars Hakanson, Rajneesh Narula, Torben Pedersen and Sid Winter for helpful comments that significantly improved the paper. We would also like to acknowledge a substantial intellectual debt to Anil Gupta, many of whose ideas appear in this paper. The usual disclaimer applies.

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Authors and Affiliations

  1. Institute of Global Management Studies, Temple University, Philadelphia, USA

    Ram Mudambi

  2. The ISMA Centre, University of Reading, UK

    Ram Mudambi

  3. Institute of Economics and Finance, University of Messina, Italy

    Pietro Navarra

  4. London School of Economics and Political Science, UK

    Pietro Navarra

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  1. Ram Mudambi
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  2. Pietro Navarra
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Correspondence to Ram Mudambi.

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Accepted by Nicolai Juul Foss and Torben Pedersen, Departmental Editors, 11 February 2004. This paper has been with the author for two revisions.

Appendix A

Appendix A

Variable definitions are shown in Table A1.

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Mudambi, R., Navarra, P. Is knowledge power? Knowledge flows, subsidiary power and rent-seeking within MNCs. J Int Bus Stud 35, 385–406 (2004). https://doi.org/10.1057/palgrave.jibs.8400093

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