Traditional versus decentralized innovation strategies of multinational enterprises

Abstract

In this paper we investigate innovation strategies of foreign multinational enterprises (MNEs) by distinguishing between traditional centralized and newer decentralized competence models. In centralized competence models, MNEs maintain core research and development (R&D) functions at home, and conduct design and market screening in host locations. In decentralized competence models, MNEs also undertake R&D in host country locations. We test empirically the interrelations and heterogeneities among these three types of host country affiliate innovation activities: design, market-screening, and R&D. Our results indicate that traditional and new roles of MNEs are complements, although the determinants of each strategy are somewhat different. The presence of local knowledge spillovers is positively associated with the probability that an affiliate does R&D, design, and market-screening activities. R&D activities are more likely to appear when an affiliate has more developed internal capabilities and has been operating for a longer time in the host country. Our findings provide some support for the predictions of decentralized competence models.