Managing the Multinational Enterprise

Journal of World Business 44 (2009) 180–191

Regional location of multinational corporation subsidiaries and economic development contribution: Evidence from the UK

Pavlos Dimitratos a,b, Ioanna Liouka b, Stephen Young b,* a Athens University of Economics and Business, Athens, Greece b University of Glasgow, Glasgow, Scotland, UK

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A R T I C L E I N F O

Keywords:

Multinational subsidiaries

Economic development

UK regions

International entrepreneurship

* Corresponding author at: CIER, Department of

versity of Glasgow, Gilbert Scott Building, West Quad

Glasgow G12 8QQ, Scotland, UK. Tel.: +44 0141 330

E-mail address: [email protected] (S. Young

1090-9516/$ – see front matter � 2008 Elsevier Inc

doi:10.1016/j.jwb.2008.05.007

A B S T R A C T

The regional location of multinational corporation (MNC) subsidiaries in their host

country and their associated entrepreneurial output and networking activities are likely

to affect their economic development contribution, measured in terms of technology and

management know-how transfers; enhancement of innovativeness of other firms; and

company spinoffs. This theme has considerable research and public policy value. We

investigate the issue drawing from a large-scale study of 264 MNC subsidiaries based in

the UK. The findings show that activities in developed regions are associated with higher

economic development contribution than those in less developed regions. Moreover,

entrepreneurial output and networking with partners external to the MNC system

positively affect economic development contribution. Key implications of this study are

that entrepreneurship critically influences economic development contribution, under-

lying the importance of the MNC subsidiary research stream; and that the policy practice

of supply-side measures fostering entrepreneurial output and embeddedness in local

networks seems to be appropriate to pursue.

� 2008 Elsevier Inc. All rights reserved.

1. Introduction

In this article, we investigate the effect of the regional location, in which subsidiaries of multinational corpora- tions (MNCs) are based, on economic development contribution in their host country. Towards this goal, we provide empirical evidence from a large-scale study in the UK, distinguishing between developed and less developed regions in this advanced economy. Moreover, we explore the effects of entrepreneurial output and networking of MNC subsidiaries on contribution to economic develop- ment. The examination of entrepreneurial output is essential in as much as locations in a developed or less developed area can be connected to different entrepre-

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neurial and innovative activities. Likewise the examination of networking is required since these activities are implemented by MNC subsidiaries through embeddedness in organisational networks of dissimilar regions. Therefore, our research objective is to investigate to what extent the location of MNC subsidiaries in a region, and their associated entrepreneurial outputs and networking activ- ities, matter for economic development contribution to the host country. The economic development contribution in this article is defined as comprising technology and management know-how transfers; enhancement of inno- vativeness of other firms; and company spinoffs in the country. These long-run dynamic contributions of MNC subsidiary activities are contrasted with short-run static benefits, the latter referring to capital formation, employ- ment, trade and the balance of payments (Dunning & Lundan, 2008).

Our study is important for research and public policy reasons. In terms of research, previous studies mostly focus on the effects of foreign direct investment (FDI) across

P. Dimitratos et al. / Journal of World Business 44 (2009) 180–191 181

countries (Barrell & Pain, 1999; Cantwell & Piscitello, 2005; Driffield, 2001; Fors, 1996; Frenkel, Shefer, Koschatzky, & Walter, 2001; Kumar, 1996; Odagiri & Yasuda, 1996) rather than across regions. Scholars have highlighted the significance of the region within the country (Buckley & Ghauri, 2004; Krugman, 1990; Nijkamp, 2003; Porter, 1990; Storper, 1992), suggesting that regions are increas- ingly becoming important milieus for competitive-enhan- cing FDI activities (Dunning, 2000; Porter, 1996; Scott, 1998). In a related vein, other researchers (Meyers, 2004; Sargent & Matthews, 2006; Wells, 1998) support the view that international business study has been relatively uninterested in analysing the contribution made by MNCs to economic development in their host countries. We seek to provide empirical evidence to fill this gap.

Our study is additionally valuable for research purposes since it builds on the idea of the ‘entrepreneurial subsidiary’ recently proposed by Boojihawon, Dimitratos, and Young (2007). This idea expands the notions of ‘developmental’ and ‘creative’ subsidiaries put forward by Young, Hood, and Peters (1994) and Pearce (1999), respectively. These two last terms describe those sub- sidiaries that access local resources and knowledge through dynamic linkages, which is a process resulting in beneficial implications for the host country economy. The idea of the entrepreneurial subsidiary also extends Birkinshaw’s (1997, 1999, 2000) line of thinking on subsidiary initiative. Initiative concerns autonomous activities, risk-taking and proactive behaviour, and the use of resources beyond the control of the MNC subsidiary. Consequently, we posit that entrepreneurial subsidiaries are likely to act as independent actors in the MNC system; form embedded networks with other stakeholders; and contribute to economic development through spillover effects (cf. Birkinshaw & Hood, 1998; Blomström & Kokko, 1998; Graham & Krugman, 1995; Lall, 1980; Young et al., 1994), thereby impacting positively on the local country environment. In emphasising the subsidiary unit of analysis, we seek to fill a void in the literature that has so far examined the effect of MNC activities in the host country largely at the aggregate MNC level (Akbar & McBride, 2004; Cantwell & Piscitello, 2005; Dunning & Lundan, 2008).

The present investigation is also important for public policy. The gap in economic prosperity between developed and less developed regions has been a vital issue on the UK public policy agenda since the middle years of the 20th century (Ashcroft, 2002). Other countries, such as Germany or Ireland, face similar challenges as regards their public policy priorities linked to inward FDI (e.g. Alecke, Alsleben, Scharr, & Untiedt, 2006; Ruane & Uğur, 2005). In general, the value of the economic contribution of MNC subsidiaries in different regions of the host country has been debated (Christodoulou, 1996; Siler, Wang, & Liu, 2003; Turok, 1993; Young, Hood, & Dunlop, 1988). In this article, we provide recent evidence that compares subsidiary con- tributions to economic development between developed and less developed areas in the advanced UK economy.

In relation to the UK, the British government, facing a deteriorating regional problem in the late 1950s, offered differential regional policy incentives (grants for capital

investment) to induce FDI in the ‘assisted’ (poorer and peripheral) areas of the north and west of the country. Although these incentives proved particularly attractive to MNCs, their contribution to economic development was much debated (e.g. Hood, Peat, Peters, & Young, 2002; Young et al., 1994), leading Firn (1975) to famously describe less developed regions as ‘branch plant econo- mies’. As Brown (2002: p. 130) noted, ‘[This] term was used to depict a regional economy which was highly dependent upon truncated manufacturing operations of multinational enterprises with few decision-making powers, bringing little in the way of self-sustaining economic development to the host economy’. Corroborating this point, Ashcroft and Love (1993) cast doubts on whether spillover benefits from MNC subsidiary activities occurred to any significant degree in British peripheral regions. Nevertheless, current policy thinking in the UK (and other countries) being applied since the early 1990s focuses upon ‘the importance of supply-side drivers to economic development and the key roles played by entrepreneurship, skills, new technol- ogy and appropriate infrastructure in stimulating output growth’ (Ashcroft, 2002: p. 22).

The role of entrepreneurship in the enhancement of economic development has been confirmed in the literature (Acs & Armington, 2004; Acs & Storey, 2004; Audretsch & Keilbach, 2004; Braunerhjelm & Borgman, 2004; Van Stel & Storey, 2004). On this point, Schumpeter (1934) argued that entrepreneurship and innovation are the most critical factors for productivity, employment and economic prosperity. Recently, Audretsch, Keilbach, and Lehmann (2006) have also provided evidence in support of knowledge spillovers from entrepreneurship, linking entrepreneurship to economic growth and performance. Entrepreneurship and innovation additionally foster eco- nomic growth at a regional level (Suarez-Villa, 1993). In this article, along the lines of current policy practice, we seek to explore to what degree entrepreneurial and network activities implemented by MNC subsidiaries do indeed contribute to economic development.

This article is organised as follows. Section 2 provides an overview on empirical studies elaborating on the notions of regional location, entrepreneurial output and networking. In doing so, it presents the hypotheses that guide the conduct of this research. Section 3 presents the methodological aspects concerning sampling, data collec- tion and measurement of variables. Section 4 elaborates on the statistical analysis and discusses the findings of the study. The concluding section provides a summary of the article; and explores research and public policy implica- tions.

2. Research background and hypotheses

2.1. Regional location

Studies on the dynamic benefits of FDI spillovers (Driffield & Munday, 2000) show that FDI may be attracted in particular regions due to their already existing positive externalities. In support of this argument, Lall and Narula (2004) noted that subsidiaries undertaking complex activities require high levels of local competence in terms

P. Dimitratos et al. / Journal of World Business 44 (2009) 180–191182

of related advanced specialised skills, strong industrial and service firms as well as robust support institutions. Developed regions, like London and the South East UK, are typically characterised by higher public expenditures, more rapidly growing markets and more competitive market structures than less developed regions (Athreye & Keeble, 2002; Keeble & Bryson, 1996). These features may impact on the propensity of firms in the developed area to innovate (Athreye & Keeble, 2002). Other studies also provide clear evidence in favour of the role of a metropolitan location to innovate (Frenkel & Shefer, 1996; McCartney & Teague, 1997). Viewed in this light, literature suggests the notions of ‘learning region’ and ‘innovative milieu’ (Cooke & Morgan, 1998) linked to ‘high- order’ regions characterised by significant technological infrastructure and substantial spillovers for firms located in those areas (Cantwell & Iammarino, 2000).

MNCs may play a part in a ‘virtuous cycle’ of increasing technological capability in host countries (Dunning & Lundan, 2008) and potentially regions. Developed regions that grow rapidly and encourage indigenous technological development are likely to attract inward investment in research intensive activities. In turn, these activities are likely to induce innovation, and the development of agglomeration economies in technological centres of excellence (cf. Young et al., 1994).

Nonetheless, activities of subsidiaries in less developed regions are also likely to be associated positively with economic development contribution. Peripheral branch plant regions may create new forms of competitive advantage through access to global networks of production and exchange of information. It follows that local economic development in branch plant areas can build learning regions (Florida, 1995; Morgan, 1997). Reinforcing this point, Cumbers (2000) posited that branch plant sub- sidiaries may be regarded as potential assets in connecting otherwise peripheral economies with new developments at a global level. To illustrate, branch plants can prove to be critical to their host regions through the transfer of best management practices and production techniques from international knowledge networks to local firms (Florida, 1995).

In support of high economic growth in less developed regions, Alderman and Davies (1990) suggested that a low regional economic capacity, although constituting a constraint on the innovation of new products, allows the diffusion of innovative production processes. This is connected to the fact that presence of firms in less developed regions can develop material linkages with indigenous suppliers and upgrade support infrastructure of their local economies (Munday, Morris, & Wilkinson, 1995). In other words, because MNC subsidiaries in less developed areas start from a comparatively lower base in terms of economic growth (than those in developed ones), their contribution to economic development can be stronger.

Although we expect that location of the MNC subsidiary in both developed and less developed regions will positively contribute to economic development, the relative impact is unknown. In other words, it is plausible that location in any of the two regions will have a stronger

impact on performance than the other. Thus, we propose the following null hypothesis to guide our empirical analysis:

Hypothesis 1. Other things being equal, MNC subsidiaries located in developed regions will contribute to a higher (lower) extent to economic development than MNC sub- sidiaries located in less developed regions.

2.2. Entrepreneurial output

Traditional approaches in the international business literature considered innovation from the MNC head- quarters perspective, suggesting that home-country gen- erated advantages were transferred to foreign subsidiaries and exploited in the host country (Vernon, 1966). The role of the subsidiary was essentially confined to adapting such parent-driven innovations to local market needs. More recent literature challenges this view and acknowledges that MNCs may optimise their innovative capabilities through integrating subsidiary-specific advantages in various countries (Bartlett & Ghoshal, 1989; Dunning, 1998; Nobel & Birkinshaw, 1998; Pedersen, 2006a,b; Rugman & Verbeke, 2001). Through their foreign sub- sidiaries, MNCs can exploit conditions and resources in different host locations and generate innovation (Kogut & Chang, 1991; Teece, 1992). Innovation, either created within the headquarters and transferred to MNC sub- sidiaries or generated at the subsidiary level, may bring about potential economic benefits to the local economy. Literature acknowledges innovation as one of the most critical factors in economic development and growth (Schumpeter, 1934) both at a country and a regional level (Suarez-Villa, 1993).

In this article, in line with the entrepreneurship literature, we incorporate innovation under a broad umbrella along with other end-results of the entrepre- neurial output of the firm (Miller & Friesen, 1982; Zahra, Jennings, & Kuratko, 1999). Therefore, entrepreneurial output of the MNC subsidiary can serve as the encom- passing context embracing apart from innovation, expan- sion into new markets (Birkinshaw & Ridderstråle, 1999); and product process and administrative improvements (Ghoshal & Bartlett, 1988). In the entrepreneurship literature, various forms of entrepreneurial activity are allied to economic development and growth in the host country (e.g. Acs & Storey, 2004; Audretsch & Keilbach, 2004; Braunerhjelm & Borgman, 2004). Hence, entrepre- neurial output taking place at the subsidiary level may be essentially accompanied by the appearance of new economic activity, market expansion, new technological applications, or even novel work practices. Such MNC subsidiary output can have significant spillover effects in the local economy (Dunning & Lundan, 2008; Tavares & Young, 2005a), thereby justifying the subsidiary’s bene- ficial contribution to the economic welfare in the host country. Consequently:

Hypothesis 2. Other things being equal, the entrepreneur- ial output of the MNC subsidiary will be positively related to the subsidiary’s contribution to economic development.

1 Subsidiaries that were not eligible to participate included organisa-

tions that became independent firms; subsidiaries that discontinued their

activities in the UK; subsidiaries that became acquired by firms of another

nationality; and subsidiaries that were single person firms. 2 Although the total number of received responses was 281, elimina-

tion of incomplete cases led to a usable sample size of 264 questionnaires.

P. Dimitratos et al. / Journal of World Business 44 (2009) 180–191 183

2.3. Networking (internal and external)

MNCs have been viewed as internal networks between intra-organisational affiliates that have distinct roles; and which encompass multiple and heterogeneous external network relations (Castells, 2000; Dicken & Malmberg, 2001; Dicken & Thrift, 1992; Ghoshal & Bartlett, 1991; Ghoshal & Nohria, 1989). Inadequate attention however has been placed in the literature to the relevance of MNC network-based strategies for economic development contribution (Morgan, 1997; Turok, 1993; Young et al., 1988). In the present research we seek to provide some evidence to fill this gap.

With regard to internal networking with the head- quarters and other sister affiliates, the corporate parent plays an important role in subsidiary capability develop- ment (Schmid & Schurig, 2003). Subsidiaries further engage in important interactions with other sister sub- sidiaries within the MNC system such as internal customers, internal suppliers and/or internal R&D units (Ghoshal & Bartlett, 1991). Gupta and Govindarajan (2000) examined technical knowledge flows within MNCs and concluded that the parent firm is the most active creator and diffuser of knowledge within the hierarchy of the firm.

Increased levels of networking within the MNC may imply strong intra-organisational dependencies (Anders- son & Pahlberg, 1997). Internal network partners can prove to be key sources of new knowledge and ideas, and so, enhance the subsidiary’s capabilities (Bartlett, 1986). Such a subsidiary possessing enhanced capabilities is likely to create positive externalities in the host market in which it operates. This is related to the fact that networking of MNC subsidiaries may have favourable impacts on the activities and characteristics of local firms, and so, produce significant spillover benefits for the host country economy (Young et al., 1994).

External context networks of MNC subsidiaries com- prise relationships in their local and international markets with customers, suppliers, distributors, research institutes, professional organisations, regulators and other policy makers (Andersson & Forsgren, 1995; Lindstrand, 2003; Tsai & Ghoshal, 1998). Birkinshaw and Hood (2000) found that subsidiaries in leading-edge industry clusters are embedded to a very high extent locally. Local networks may also be seen as supporting mechanisms for new forms of creative entrepreneurship (Nijkamp, 2003; Yamin, 2002), which can support growth activities undertaken by local firms in the host country (Coe & Townsend, 1998). Therefore, it is not surprising that literature has suggested that locally embedded subsidiaries may maximise the long-term benefits and economic growth potential for the host location (Amin, Bradley, Howells, Tomaney, & Gentle, 1994; Amin & Thrift, 1992; Markusen, 1996; Paci & Usai, 2000; Tavares & Young, 2005a; Young et al., 1994).

Additionally, external networking of subsidiaries may extend beyond the host country. International linkages of MNC subsidiaries can provide access to critical resources located outside the host market location (cf. Alvarez & Barney, 2001; Andersson, 1985; Van de Ven, 1993). Viewed in this light, international networks developed through MNC subsidiary activities are likely to reinforce the

creation of local advantages (Huggins, 1997), thus poten- tially enhancing critical subsidiary capabilities, embedd- edness in the host market and contribution to economic development. In accord with this rationale:

Hypothesis 3a. Other things being equal, internal net- working of the MNC subsidiary will be positively related to the subsidiary’s contribution to economic development.

Hypothesis 3b. Other things being equal, external net- working of MNC subsidiary will be positively related to the subsidiary’s contribution to economic development.

3. Methodology

3.1. Sample and data collection

The data was collected as part of a larger Economic and Social Research Council project that examined the determinants and effects of entrepreneurship in MNC subsidiaries operating in the UK. The selection of the sample was based on the identification of the countries having the highest levels of FDI inflows in the UK. Specifically, the sample included European (Dutch, French, German), US and Japanese subsidiaries located in the UK.

A large database comprising the entire population of subsidiaries from the aforementioned countries in the UK was constructed. This database was compiled from the respective national Chambers of Commerce and Dun and Bradstreet. In total, it incorporated 14,508 subsidiaries, corresponding to the entire population of Dutch, French, German, US and Japanese subsidiaries based in the UK. A disproportionate sampling method was followed, that is equal numbers of European, US and Japanese subsidiaries were asked to take part in the survey. Analytically, 750 subsidiaries from each Triad region were randomly selected, adding up to a total sample of 2250 subsidiaries. After excluding subsidiaries that were not eligible to participate in the survey,1 the actual sample ofsubsidiaries endedup being 1770 subsidiaries. The sample included subsidiaries from a wide range of industries such as chemicals and pharmaceu- ticals, mechanical engineering, electronics, vehicles, logis- tics operations as well as business and financial services.

A structured questionnaire was pretested by academics and subsidiary managers in order to check its comprehen- sibility and clarity before the launch of the survey. The data collection from the 1770 subsidiaries included three postal waves and two rounds of follow-up phone calls in between. Printed questionnaires were posted to subsidiary managing directors, while a second top management respondent also participated in the survey in 10% of the sample to establish inter-rater reliability. Response rates varied per country of origin (as suggested by Harzing, 1997, 1999), ranging from 14 to 21%. The overall response rate across the entire sample of subsidiaries was 16%,2

P. Dimitratos et al. / Journal of World Business 44 (2009) 180–191184

leading to a total number of 264 usable responses (103 responses from European subsidiaries, 78 from Japanese and 83 from US subsidiaries). The 16% response rate was satisfactory and comparable to other recent studies involving large-scale surveys that targeted high-level managers (Capron, 1999; Dickson & Weaver, 1997; Gatignon, Robertson, & Fein, 1997; Harzing & Noorderha- ven, 2006; Powell & Dent-Micallef, 1997). Non-response bias was accounted for through comparing responses received across the three postal waves (Armstrong & Overton, 1977).3

3.2. Measures

Regional location: This variable refers to the subsidiary’s activity in a developed versus less developed UK area. Regions were classified based on the Eurostat Regions (2007) categorisation scheme, namely the Nomenclature of Territorial Units for Statistics (NUTS 1 Level). This classification is generally considered appropriate to analyse the distribution of technological and innovative activities at the UK regional level. Analytically, the typical approach of a North versus South split was followed, with developed regions consisting of East Anglia, London, South East England, South Central and the Midlands; and less developed regions consisting of Scotland, North East England, North West England, South West England, and Wales.4 A profile of investigated subsidiaries according to their regional location appears in Appendix A. A dummy variable (0/1) was employed to measure this location factor, with 1 indicating a subsidiary based in a developed UK region.

Economic development contribution (Cronbach a = 0.74): It measures the effect of subsidiary activity on economic development in the host country. It reflects the subsidi- ary’s performance at a macro-level, which is host country- related, and concerns subsidiary management perceptions linked to the contribution of the subsidiary to the economic welfare in the country. The measurement of the significance of spillovers from MNCs to the host country is a complex issue (Driffield & Munday, 2001). Based on a literature review on the dynamic impact of MNC subsidiaries on host locations (Blomström, Kokko, & Zejan, 2000; Blomström & Persson, 1983; Kokko, 1994, 1996; Siler et al., 2003; Tavares and Young, 2005a), four key effects referring to long-run dynamic contributions were examined. In particular, respondents were asked to indicate on a five point Likert scale (1 = not at all, 5 = very much) the extent to which their subsidiary’s activities had the following effects in the UK economy: (1) technology

3 The F-statistic tests did not reveal any significant differences across

the three response waves, suggesting that non-response bias was not a

problem in this study. 4 The Midlands are generally considered to be lying between developed

and less developed UK regions. Because of this, regression models

(described below) were run incorporating the Midlands both in the

developed and less developed regions, with the final results remaining

consistent. Therefore, the Midlands finally remained in the category of

developed areas. Additionally, since we received only two questionnaires

from subsidiaries in Northern Ireland, we eliminated this area from

subsequent analyses.

transfers from the subsidiary’s activities to other firms within the UK; (2) management know-how transfer from this subsidiary’s activities to other firms within the UK; (3) enhancement of innovativeness of other firms within the UK; and (4) company spinoffs from the subsidiary in the UK economy.

Entrepreneurial output (Cronbach a = 0.78): This term essentially refers to the end-result of subsidiary entrepre- neurship, notably the outcome of entrepreneurial activity that has been realised. Based on Birkinshaw, Hood, and Jonsson’s (1998) earlier operationalisation of subsidiary initiative and entrepreneurship, this study measures on a five point Likert scale (1 = not at all, 5 = very much) the extent to which subsidiaries pursued six particular activities during the past 3 years: (1) entering (a) new market(s); (2) developing a major new product offering; (3) developing a new technology; (4) developing a new major process (e.g. administrative, manufacturing, man- agement, etc.); (5) restructuring the organisation, invol- ving creation or elimination of departments; and (6) developing innovative work practices. These activities were identified based on a review of relevant literature (Birkinshaw & Ridderstråle, 1999; Ghoshal & Bartlett, 1988; Stopford & Baden-Fuller, 1994). Both ‘strategic’ (items 1–3) and ‘operational’ (items 4–6) entrepreneurial activities were included (e.g. Dutton, Ashford, O’ Neill, Hayes, & Wierba, 1997).

Subsidiary networking: The subsidiary’s networking activity refers to exchanging, sharing, and/or combining resources (e.g. human, financial, technological, informa- tion, etc.) with internal and external parties. The internal and external networking activity was measured based on two dimensions: range (i.e. types of internal or external partners) (Burt, 1992) and intensity (i.e. frequency of the contact) (Aldrich, 1975; Zhao & Aram, 1995). These two dimensions appear in the network-related literature (Granovetter, 1973; Nelson, 1989), while they were also used by Dollinger (1984). Respondents were asked to indicate on a five point Likert scale (1 = not at all, 5 = very much) the extent to which their subsidiary had cooperated with internal and external (to the MNC subsidiary) organisations in performing its business activities.5

Internal networking (Cronbach a = 0.74): includes net- working with (1) the parent corporation; and (2) other sister subsidiaries located in the UK or abroad.

External networking (Cronbach a = 0.71): includes networking with (1) external customers; (2) suppliers; (3) distributors; (4) government organisations; (5) aca- demic and research institutions; and (6) professional and trade associations.

Five control variables were employed in this research. First, subsidiary size was measured as the logarithm of the subsidiary’s total number of full-time employees (Egelhoff, 1984; Roth, Schweiger, & Morrison, 1991; Roth & Morrison, 1992). Second, subsidiary age was measured based on the number of years that the subsidiary had been in operation in the UK (Egelhoff, 1984). Third, the country of origin

5 The identification of specific categories of partners was based on

Schmid and Schurig’s (2003) relevant study on subsidiary network

embeddedness.

Table 2

Subsidiary effect on economic development contribution

Variable Model A Model B

Developed region 0.192* (2.072) 0.228** (2.713)

Entrepreneurial output 0.307*** (5.890) 0.310*** (5.986)

Internal networking 0.052 (1.167) 0.053 (1.195)

External networking 0.138* (2.406) 0.135* (2.355)

Log size 0.059* (2.446) 0.056* (2.337)

Age 0.003 (1.456) 0.003 (1.499)

USA �0.201 (�1.824) �0.196 (�1.776)

Europe �0.190 (�1.873) �0.179 (�1.777)

Greenfield 0.232** (2.771) 0.240** (2.886)

Manufacturing only �0.088 (�0.901)

F-statistic 10.296*** 11.358***

R2 0.289 0.287

Adjusted R2 0.261 0.262

Numbers are beta coefficients—associated numbers in parentheses are t-

ratios. * p < 0.05. ** p < 0.01. *** p < 0.001.

P. Dimitratos et al. / Journal of World Business 44 (2009) 180–191 185

effect was measured by using two country dummy variables (US 0/1, Europe 0/1) in order to account for any effects that might be due to national characteristics of a specific Triad region. Fourth, the mode of entry was measured based on a dummy variable (0/1), with 1 indicating greenfield subsidiaries (rather than subsidiaries formed through mergers/acquisitions). Fifth, manufactur- ing only operations were also measured through a 0/1 dummy variable, with 1 indicating subsidiaries involved solely in manufacturing activities. The incorporation of this variable was necessary to account for the aforementioned branch plant phenomenon.

4. Analysis and discussion

Table 1 provides details on the descriptive statistics and correlation patterns for the numerical variables of this study. Overall, the economic development contribution score is fairly low (mean = 1.80). This suggests that MNC subsidiaries only modestly add to economic development in the host country. This result implies that subsidiaries still have a long way to go before they contribute substantial spillovers in the UK. On the other hand, entrepreneurial output, internal and external networking scores lie at quite high levels (means of 3.18, 3.51 and 3.81, respectively). These figures imply a relatively satisfactory degree of entrepreneurial activity and embeddedness within and outside the MNC system. Additionally, eco- nomic development contribution is positively and sig- nificantly correlated with entrepreneurial output and both types of networking.

In order to test the research hypotheses of this study, multiple regression analysis was performed. The four independent variables (location, entrepreneurial output, internal and external networking) along with the control variables were regressed against economic development contribution. Model A of Table 2 summarises the results of this analysis. Model A is statistically significant at the p < .001 level with an adjusted R2 value of 26.1%. With regard to the independent variables, regional location, entrepreneurial output and external networking have statistically significant betas at the p < .05 level or lower. Among the control variables, size of the subsidiary and establishment through a greenfield investment prove to be statistically significant predictors. No collinearity pro- blems were evidenced in the regression analyses since there was no case of a high variable inflation factor, notably

Table 1

Descriptive statistics and correlation matrix

Variable Mean S.D. Entrepreneurial

output

Internal

network

Entrepreneurial output 3.18 0.90 1

Internal networking 3.51 0.96 0.185** 1

External networking 3.81 0.74 0.231** 0.224**

Log size 1.90 0.82 0.391** 0.012

Age 24.71 22.23 0.008 0.008

Economic development

contribution

1.80 0.76 0.424** 0.192**

* Correlation is significant at the 0.05 level (2-tailed). ** Correlation is significant at the 0.01 level (2-tailed).

exceeding the value of 10; or, a condition index above 30 with variance proportions exceeding 0.90.

Model A shows that the location of the MNC subsidiary in developed UK regions is associated with an enhanced contribution to economic development. With regard to Hypothesis 1, the potential of MNC subsidiaries to generate dynamic benefits in host locations appears to be stronger in ‘core’ rather than peripheral and less developed UK locations. However, the cause-and-effect direction of this relationship is unclear. It could be that high growth rates as well as strong infrastructure in terms of technological development, services and support institutions attract FDI into developed regions (Driffield & Munday, 2000). This would reinforce the existence of ‘virtuous and reinforcing cycles of development’ (Cantwell, 1989), allowing more developed regions to benefit further from additional activities of MNC subsidiaries.

Hypothesis 2 predicted that subsidiary entrepreneurial output would be positively associated with economic development contribution. Model A in Table 2 presents a positive and highly significant effect of subsidiary entre- preneurial output, confirming this hypothesis. This is the first empirical study establishing such a link for entrepre- neurial (rather than purely innovative) activity of MNC subsidiaries and contribution to economic development. Consequently, this research adds to the scant empirical

ing

External

networking

Log size Age Economic development

contribution

1

0.038 1

�0.026 0.143* 1

0.248** 0.263** 0.052 1

Table 3

Economic development contribution according to location and value-

added activity

Manufacturing only Other

Developed region Mean: 1.81 Mean: 1.87

S.D.: 0.792 S.D.: 0.786

N = 27 N = 135

Less developed region Mean: 1.66 Mean: 1.73

S.D.: 0.729 S.D.: 0.693

N = 59 N = 43

P. Dimitratos et al. / Journal of World Business 44 (2009) 180–191186

evidence concerning the entrepreneurship–performance relationship (Zahra et al., 1999). The positive effect of subsidiary entrepreneurial output attests to the existence and importance to host regions of entrepreneurial sub- sidiaries (Boojihawon et al., 2007).

In relation to networking, the results of Table 2 show that internal networking within the MNC system does not have a significant effect on economic development contribution. Therefore, Hypothesis 3a is not supported. In contrast, external networking outside the MNC hier- archy is positively and significantly related to economic development contribution in the host country, confirming Hypothesis 3b. To our knowledge, this is the first empirical study providing evidence on the simultaneous effects of internal and external networking of MNC subsidiaries on their contribution to economic development in the host country. Our evidence corroborates the importance of embeddedness in local relationships (Birkinshaw & Hood, 1998; Crone, 2002; Görg & Ruane, 2001); and of alliances for economic development in the host country (Amin & Thrift, 1992; Markusen, 1996; Paci & Usai, 2000).

The fact that internal networking does not add to economic development could be linked to the evidence proposing a negative association between intra-MNC resource interdependencies and subsidiary autonomy (Andersson & Forsgren, 1996; Birkinshaw & Morrison, 1995; Holm & Pedersen, 2000; Taggart & Hood, 1999). If this negative association is indeed valid, subsidiaries with low autonomy levels may be unlikely to contribute substantially to economic development of the host country. Another interesting conjecture is that internal and external networking activities may act counter to one another in terms of contribution to economic development in the local market. It might be that both of them enhance the competencies of the MNC subsidiary (Andersson & Forsgren, 1995, 1996). Internal networking can however divert relational assets and knowledge flows away from the host market towards the headquarters centre. In other words, embeddedness within the MNC system may imply a rather low extent of host country subsidiary embedded- ness (e.g. global and not local sourcing), and so, the spillover effects to the local economy will be reduced.

Model A in Table 2 also shows that subsidiary size significantly and positively determines spillovers in the local economy. This could be explained by the fact that subsidiaries of large size are likely to possess increased levels of slack resources in the form of human capital, organisational capabilities and knowledge, which facilitate engagement in innovation and entrepreneurial activity (Athreye & Keeble, 2002; Camison-Zornoza, Lapiedra- Alcami, Segarra-Cipres, & Boronat-Navarro, 2004; Cosh, Hughes, & Wood, 1996; Cosh & Wood, 1998). This would likely contribute to economic development in the host location. In addition, subsidiaries formed through green- field investments tend to have a stronger contribution on economic development in the host country than those established through mergers and/or acquisitions. The establishment of greenfield operations has been typically linked in the literature with the existence of MNC-specific assets, such as product, technology, managerial skills (Caves, 1971; Hymer, 1960), which generate strong

competitive advantages in the host location (Blomström & Zejan, 1991; Chen & Hennart, 2002; Gomes-Casseres, 1989; Kogut & Chang, 1991). Therefore, the existence of strong competitive capabilities through greenfield opera- tions can be linked to spillovers into the host country, explaining the statistically significant positive coefficient of Model A.

Since branch plants with low value-added activities such as manufacturing (assembly) may be allied to the UK regional issue examined in this article, we sought to examine whether the exclusion of the ‘manufacturing only’ variable would change the results. When this control variable was excluded from the analysis (Model B in Table 2), all results remained unchanged, with the exception of the regional variable. In particular, the regional variable became even more significant (p < .01) when ‘manufacturing only’ was excluded from the regression model. In order to explain this finding we performed a k-means cluster analysis. Table 3 presents these results. The evidence shows that the contribution of MNC subsidiaries to economic development in the host country is higher in developed rather than less developed areas, a finding in accord with the regression analysis results of Table 2. Moreover, the economic development contribution is higher for subsidiaries that engage in value- added activities other than purely manufacturing. Sub- sidiaries with merely manufacturing activities in less developed UK regions appear to have the smallest contribution on economic development in their region; whereas, this contribution is largest for subsidiaries operating in developed areas with activities incorporating not simply manufacturing.

5. Conclusions

5.1. Summary

In our article, we sought to examine the association between location, entrepreneurial output, internal and external networking of MNC subsidiaries, on the one hand; and their contribution to economic development, on the other. Towards this direction we provided evidence from 264 subsidiaries operating in the UK. Our evidence suggests that the economic contribution of MNC sub- sidiary activities in developed regions is higher than that in less developed regions; and that entrepreneurial output and external networking positively contribute to economic development. These findings have considerable implica- tions for research and public policy.

P. Dimitratos et al. / Journal of World Business 44 (2009) 180–191 187

5.2. Research implications

With regard to research, the current study examines the theme of MNC contribution to economic development focusing on the subsidiary. In line with the MNC subsidiary research stream (Birkinshaw, 2000; Birkinshaw & Hood, 2000, 2001), we posit that the subsidiary is the principal organisation that has to be investigated when examining MNC activities in the host country. This approach complements previous studies in the literature that investigate the effect of MNC activities in the host country at the overall MNC macro-level (Akbar & McBride, 2004; Cantwell & Piscitello, 2005; Dunning & Lundan, 2008); or, examine transfers from the headquarters to its subsidiaries (Cui, Griffith, Cavusgil, & Dabie, 2006; Kaufmann & Roessing, 2005; Siler et al., 2003; Wang, Tong, & Koh, 2004). The importance of the MNC subsidiary as the unit of analysis derives from the fact that the subsidiary formulates and/or implements MNC strategy; generates entrepreneurial outputs and becomes an indigenous stakeholder in the economy through embeddedness in networks with local organisations; and thus, potentially contributes to economic development of the host country. In line with this rationale, we measure the key constructs of this study through perceived opinions of MNC sub- sidiary managers.

In contrast to previous research, entrepreneurial output in particular was assessed through management percep- tions rather than objective data such as number of patents applied (Acs, Anselin, & Vargac, 2002; Breschi, 2000; Cantwell & Iammarino, 2000; Frost, 2001); or, R&D expenditures (Athreye & Keeble, 2002; Driffield & Munday, 2000; Frenkel et al., 2001; Zander, 1999). The possible problems with these objective measures are that not all innovations are patented; not all patents are commercia- lised; and that R&D expenditures are an input rather than outcome measure of entrepreneurial output. Therefore, by assessing perceptive indicators of strategic and operational entrepreneurship in the current research, we complement the literature that has almost exclusively relied on objective data, thereby failing to incorporate ‘soft’ mea- sures of entrepreneurial output.6

A related implication of this study to research is that it highlights the conclusive importance of MNC subsidiary entrepreneurship for economic development contribution. This evidence builds on that presented by Birkinshaw (1997, 1999, 2000) on subsidiary initiative. We extend this line of argumentation and contribute to the emerging viewpoint of the entrepreneurial subsidiary, given that the notion of initiative is too narrow to address the entire theme of subsidiary entrepreneurship (Birkinshaw, Hood, & Young, 2005; Boojihawon et al., 2007). There seems to be a clear gap in the subsidiary-focused type of research in terms of developing a more holistic measurement of MNC subsidiary entrepreneurship (Birkinshaw, 1997; Dess et al., 2003; Wright, 1999). We add to this literature through offering a conceptualisation and measurement of sub-

6 Nevertheless, these perceptual measures may have drawbacks in the

sense of relying on respondents’ subjective views, recall bias, etc. (for

related reviews, see Archibugi, 1992; Griliches, 1990).

sidiary entrepreneurial output that effectively can be the end-result of initiative.

5.3. Public policy implications

Our study has important policy implications. The evidence suggests that MNC activity in developed regions of the UK is associated with superior economic develop- ment contribution than that in less developed areas. Interestingly, this association is diluted (albeit to a minor extent) when the manufacturing value-added considera- tion is brought into the picture. As the evidence in Table 3 shows, the existence of branch plant subsidiaries with solely manufacturing value-added activities reduces the economic development contribution of MNC subsidiaries in both developed and less developed regions. The higher incidence of manufacturing branch plants in less devel- oped areas, which is associated with the UK regional incentive regime (established in the late 1950s, and involving capital grants to foreign investors), may largely be connected to the lower economic development con- tribution of MNC subsidiaries in those areas of the country. The evidence of the present research implies that the economic benefits in less developed regions are most likely short-run and static in nature because they are not allied to spillovers and company spinoffs, a statement with which recent literature would also concur (Dunning & Lundan, 2008; Tavares & Young, 2005b).

Additionally, the evidence from the current study suggests that entrepreneurial output positively affects economic development contribution. Relating the discus- sion of policy measures to the theme of entrepreneurial activity, it is doubtful if it is possible to attract entrepre- neurial subsidiaries ab initio. Nevertheless, it may be feasible to target certain types of parent MNC character- istics, namely firms with a proven record of implementing entrepreneurial and innovative projects (cf. Alecke et al., 2006; Bode, 2004). Moreover, more realistically, policy measures may be introduced to stimulate entrepreneur- ship at a subsidiary level. Such measures could include support for innovation programmes, and entrepreneurship training for both management and employees.

The evidence of this article also indicates that MNC subsidiary external networking positively contributes to economic development. The policy implication stemming from this finding is that governments should promote linkages with local partners including customers, suppli- ers, distributors, competitors, state organisations and academic institutions to enhance the embeddedness of the subsidiary in the host country (Tavares & Teixeira, 2006; Tavares & Young, 2005a). Furthermore, the findings in this article show that current supply-side measures focusing on the spillover, network and cluster strategies from MNC subsidiary activities are critically significant. This evidence is in agreement with that presented by Tavares and Teixeira (2006).

In a nutshell, the UK represents an interesting country context for research on the economic development contribution of the MNC subsidiary because of the historic (and continuing) importance attached to inward FDI in industrial development; and the policy focus on attracting

P. Dimitratos et al. / Journal of World Business 44 (2009) 180–191188

FDI to the less developed (northern and western) regions of the country. While evidence from other countries should be sought to generalise the findings of the present study, the UK experience likely provides lessons for other economies.

Although developing and transition economies are very heterogeneous, regional problems within some countries are even greater than those in developed nations because of isolation linked to poor transport and infrastructure, as well as poverty, low education and skills. Policy approaches differ and have had mixed success. For example, in China huge sums are now being invested in infrastructure, energy, environment and resources projects in the disadvantaged western regions, but the hopes for spillover effects to these western regions from FDI in the coastal growth centres have yet to materialise (Taube & Ügütçü, 2002; Zheng & Chen, 2007). In Poland, the regions in the east of the country continue to suffer from lower investment, lower income and higher unemployment compared to the areas around the capital city; and the establishment of 14 ‘special economic zones’ does not appear to have reduced regional economic imbalances (Churski, 2005). By contrast, in Brazil, the Industrial Pole of Manaus, established in the Amazon Rain Forest in 1967, was initially criticised as a screw-driver industrial site; yet recent research (Figueiredo, 2006) has indicated that the technological capability of MNC sub- sidiaries and local firms has constantly been upgraded to undertake diverse types of innovative activity. The policy lessons from the current study refer to the importance of entrepreneurial supply-side policy measures for economic development contribution; and to a commitment to continuously focus on enhancing subsidiary value-added activities and encouraging spillovers through networking and local embeddedness. There is an important future research agenda to test such findings in the context of the above countries and other developing and transition economies, recognising the significance of entrepreneurship and networking for economic growth.

Acknowledgement

The authors gratefully acknowledge that this research has benefited from an Economic and Social Research Council Grant (RES-000-22-0621).

Appendix A. Profile of sample data by UK region

Developed regions

Number of

subsidiaries

Percentage of

subsidiaries

Developed regions

East Anglia

31

12

London

44

17

South East England

17

6

South Central

30

11

Midlands

40

15

Subtotal

162

61

Less developed regions

Scotland

35

13

North East England

19

7

North West England

25

9

South West England

10

4

Wales

13

5

Subtotal

102

39

Total

264

100

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