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Technology sourcing and the strategic roles of manufacturing subsidiaries in the U.K.: local competences and global competitiveness.
Abstract:
As global competitiveness intensifies MNEs need to get new products into all major markets quickly and in ways that respond distinctively to the needs of these markets. In allowing subsidiaries to implement this responsiveness an additional advantage is that these enhanced roles permit them to extend their use of local technological expertise and widen the knowledge scope of the group.

Subject:
International business enterprises (Science and technology policy)
Technology transfer (Research)
Subsidiary corporations (Science and technology policy)
Strategic planning (Business) (Research)
Manufacturing industry (Science and technology policy)
Authors:
Papanastassiou, Marina
Pearce, Robert
Pub Date:
01/01/1997
Publication:
Name: Management International Review Publisher: Gabler Verlag Audience: Trade Format: Magazine/Journal Subject: Business; Business, international Copyright: COPYRIGHT 1997 Gabler Verlag ISSN: 0938-8249
Issue:
Date: Jan, 1997 Source Volume: v37 Source Issue: n1
Product:
Product Code: 3900000 Manufacturing NEC NAICS Code: 33999 All Other Miscellaneous Manufacturing SIC Code: 3900 MISCELLANEOUS MANUFACTURING INDUSTRIES
Geographic:
Geographic Scope: United Kingdom Geographic Name: United Kingdom
Accession Number:
19623925
Full Text:
Key Results

* A widening of their sources of technology inputs underwrites creative roles in subsidiaries, but this usually remains within the established technological trajectory of the group.

Introduction

The new competitive conditions of the global economy demand that MNEs adopt a genuinely decentralised perspective on not only the use of their technological and managerial competences (the way they are applied), but also on the way they are generated. This development involves a thorough redefinition of the roles of overseas subsidiaries in the process of modernising the competitive organisation of the MNE.

Whilst the demand situation facing subsidiaries has become more intense and distinctive, their supply situation has also developed increasingly original conditions which allow them the opportunity to acquire competences within their MNE group. Rising incomes, in many host countries have allowed for the rise of more discriminating, and less submissive, consumer tastes, manifested through an increasing demand for national or regional products. The strengthening of indigenous industry in many host countries, alongside the emergence of new MNEs (from Japan and similar countries) made the industrial environment vastly more competitive. This increased diversification of tastes and emergence of new forces of competition was reinforced by the generation of managerial and other skills, and in particular of technological capacities and specialised competences, in an increasing range of countries, which therefore became available to MNEs' subsidiaries in these countries. Thus creative subsidiaries are increasingly allocated extensive responsibilities to develop their own original capacities in order to supply effectively their own, n original and distinctive markets (which are now likely to extend beyond their host country).(1)

Central to the emergence of such creative subsidiaries is the development of their own technological capabilities within the portfolio of technologies available to the group, in achieving this the subsidiary will build up a certain degree of technological capacity within its own operations (i. e. a R & D laboratory or an engineering unit) but may also establish collaborative arrangements with other elements in the host-country science and technology base. In this way the technological profile of a creative subsidiary will reflect the distinctive specialised technological capacities of the country in which it is located. This, in turn, represents a realistic view of the need for a MNE to take advantage of all the technological opportunities available to it throughout its global operations, in order to generate and retain competitive advantages.

These perspectives on contemporary MNE operations are investigated in this paper through an analysis of replies to a questionnaire survey sent to manufacturing subsidiaries of foreign companies operating in the U.K.(2) In total the questionnaire was sent to 812 such subsidiaries with satisfactory replies being received from 190 of them.(3) In the next section evidence is provided on the relative prevalence of four different types of subsidiary role. The third section evaluates the importance in these subsidiaries' operations of seven different sources of technology, and relates their relative position to the roles played by the subsidiaries.

Roles of Subsidiaries

Respondents to the questionnaire were asked to evaluate the importance of four possible roles in their operations as being either `our only role', `our predominant role', `a secondary role', or `not a part of our role'. Overall 39 indicated that they focused on a unique role, whilst 216 evaluations of particular roles as being predominant ones were provided. The latter number reflects the reluctance of some respondents to separate two roles in terms of the lead (predominant) position in the subsidiary's overall operations. The subsidiaries of European MNEs emerged us rather more inclined to possess distinct lead roles, and/or to be able to delineate clearly the hierarchy of roles in their operations. Thus whilst the proportion of European subsidiaries that discerned a particular role as being their only one was very close to the average for all respondents, an above average proportion reported certain roles as absent from their operations and a below average proportion considered roles to be their predominant one.(4)

The first role investigated was defined as `to produce for the U.K. market products that are already established in our MNE group's product range'. This type of import-substituting role (supplying to the host-country market goods that are already established elsewhere in the MNE's operations, so that they could otherwise have been supplied through trade) is traditionally perceived as one that emerged in eras that were characterised by high levels of protectionism, which artificially fragmented markets. With the lowering of protectionism through GATT rounds and the emergency of free-trade areas, and the general intensification of international competition, this role is often considered to be in decline,(5) to be replaced by subsidiaries that are more oriented to specialised positions in the supply of the wider markets that are now accessible. Within the context of the more contemporary approaches to global competition, however, local-market-focused subsidiaries could still persist where a strong motivation to adapt established products to meet distinctive local-market needs and characteristics exists.

Of the 185 subsidiaries that evaluated their operations in terms of this first role 15 (8.1%) considered it to be their only one, 69 (37.3%) rated it a predominant role, 50 (27.0%) felt it only took a secondary position and 51 (27.6%) did not include it. Once these replies are summarised in terms of average responses (ARs) Table 1 shows that this is still, very marginally, the most pervasive of the four roles. It is also marginally the relatively most prevalent role amongst European MNEs' subsidiaries in the U.K.(6) and takes the equal leading role for the U.S. Food is the industry in which this role is most prevalent in subsidiaries in the U.K. It is least prominent in two industries, mechanical engineering and metal manufacture and products, where the frequent need to customise items for individual consumers mitigates against routine supply of established standardised for even slightly adapted) products.

Table 1. Relative Importance of Roles Played by MNE Subsidiaries in the U.K., by Industry Home Country

Role of subsidiaries

A -- to produce for the U.K. market products that are already established in our MNE group's product range.

B -- to play a role in the MNE group's European supply network by specialising in the production and export of part of the established product range.

C -- to play a role in the MNE groups's European supply network by producing and exporting component parts for assembly elsewhere.

D -- to develop, produce and market for the U.K. and/or European (or wider) markets, new products additional to the MNE group's existing range.

(*) Respondents were asked to evaluate each role as (i) our only role, (ii) our predominant role (ii), a secondary role, (iv) not a part of our role.

(**) The average response is calculated by allocating a value of 4 to `our only role', 3 to `our predominant role', 2 to `a secondary role' and 1 to `not a part of our role'.

(***) Includes subsidiaries of MNEs from Australia and Canada.

The second type of subsidiary position investigated was `to play a role in the MNE group's European supply network by specialising in the production and export of part of the established product range'. This can be perceived as a contemporary evolution of the first role in terms of one of its two key characteristics, i.e. its target market. Thus this second type of role reflects the ease of trade within the EU, in particular, so that MNEs can allow individual subsidiaries to focus on the cost-effective production of a limited part of the relevant product range and supply this to markets throughout the region. In terms of the other defining characteristic, however, there is no substantive evolution, in that the subsidiary still produces goods that are already in position as part of its MNE's established product range. Thus the new role may enhance the effectiveness of the subsidiary's contribution to group operations by increasing the efficiency of its use of standard production inputs (by focusing on a narrower range of products and achieving economies of scale that were not available when it was limited essentially to its host-country market), but it still does not provide scope for the use of the creative managerial, technological and other talents that might be accessible to it.

Again 185 subsidiaries evaluated their operations in terms of this role, with 6 (3.2%) rating it their only one, 86 (46.5%) their predominant one, 40 (21.6%) a secondary one and 53 (28.6%) believing it to be absent. As Table 1 shows, when these results were converted into an average response this role virtually matched the first as the most prevalent in the current operations of MNE subsidiaries in the U.K. This type of role appears to have emerged most decisively in the operations of Japanese subsidiaries.

Operations of this second type are found most extensively in two industries, pharmaceuticals and electronics, where it might have been expected to encounter some constraints. In the case of pharmaceuticals the frequently observed importance of host-country regulations, and also distinctive elements of consumer taste, might have been expected to fragment the market in such a manner that the need to adapt products to meet particular national requirements would severely compromise the ability of one supply location to meet the wider European demand for a product. In fact the U.K. subsidiaries of European pharmaceutical MNEs (an AR of 2.80) and also those from the U.S. (AR of 2.40) defy this proposition. A key clement in this may be that the reasons for product adaptation may be easy to both discern and communicate in the pharmaceutical industry. Thus the specific requirements of government regulations should he set out in a clearly documented form which can be easily communicated, as perhaps can the relevant aspects of consumer tastes (e.g. for drugs in tablet, capsule or liquid form). In this way a subsidiary producing a particular product can differentiate it for a range of separate national markets without needing the close association with consumers in each of them that is often considered necessary in other industries.

In electronics it might have been anticipated that unique European standards (e.g. TV transmission systems and electricity supply characteristics) might have meant that U.S. and Japanese companies would need to develop unique new versions of their products for the European market, with these taking on distinctive characteristics that go beyond the mere adaptation of those that originated in the home country. In fact the Japanese subsidiaries to a very notable degree (AR of 2.77 for this rote), and also the U.S. to a quite significant extent (AR of 2.33), were able to use their U.K. operations to supply an established part of the MNEs' product range to the wider European market. By contrast European electronics MNEs' subsidiaries in the U.K., were very strongly oriented to the first, local-market, role (AR of 2.71), with little commitment to the second (AR of 1.86). This may mean that European electronics companies are mainly interested in niche markets of limited concern to U.S. and Japanese enterprises, and their U.K. subsidiaries seek to adapt such products to particular local requirements.

As a complement to the second role the next was `to play a role in the MNE group's European supply network by producing and exporting component parts for assembly elsewhere'. Once again the assumption is that the emergence of such roles in a European network of MNE subsidiaries would seek to optimise the more static dimensions of efficiency by achieving economies of scale or by producing particular components in locations that are especially favourable in terms of input availabilities or costs. This role turned out to be by far the least prevalent of the four, with 127 (70.2%) of the 181 subsidiaries who evaluated it considering it was not a part of their operations, only 11 (6.1%) rating it a predominant role and 2 (1.1%) focusing on it entirely. This may mean either that MNEs generally do not make extensive use of such decentralised component-supply networks in their European operations, or that the U.K. is not often considered a particularly relevant site for that type of activity. The role does seem to be rather more developed in U.S. subsidiaries in the U.K. than in those of Japanese or European MNEs. It is thus U.S. subsidiaries that contribute particularly strongly to those industries that have a relatively strong orientation to this role, with ARs of 1.88 in automobiles, 1.75 in chemicals and 1.60 in pharmaceuticals.

The final role analysed was defined as being `to develop, produce and market for the U.K. and/or European (or wider) markets, new products additional to the MNE group's existing range'. The key evolutionary aspect of this role is therefore the widening of the creative scope of the subsidiary by allowing it to move beyond the range of established products and derive its own distinctive contribution to the group's capabilities. As in the second and third roles the subsidiary's position is again predicated on specialization, but here this is secured not so much from a static advantage in the use of an existing technology (embodied in the established goods produced) but more from a dynamic ability to move the group's technology itself forward in the direction of new applications in distinctive additional products. When they escape from situations which mainly involve the effective implementation of allocated roles in existing supply networks and instead are allowed to win higher-value-added positions based around their own capabilities, subsidiaries immediately enhance the value of their own human capital by enabling management, engineering, scientific and other personnel to more fully realise their potential. The alleviation of the sense of frustration that is likely to beset such personnel when their scope is limited to the dependent implementation of externally-determined group-level production programmes is another likely benefit of their accession to a more autonomous and creative situation. The possibility of a country being host to subsidiaries playing this role is then less likely to be decisively influenced by the availability and cost of production inputs, with the scope and quality of creative assets (e.g. managerial and marketing personnel, the wider scientific community) emerging as more relevant determinants. With its emphasis on product development the definition of this fourth role is agnostic as to the market focus of the operations. However, it is very likely that a subsidiary that played the role successfully would be expected to create products that could secure a share of wider markets (here at least the European) than that of their host country.

Of the 184 responding subsidiaries that evaluated the relevance of this role in their operations 16 (8.7%) said it was their only one, 50 (27.2%) their predominant role, 63 (34.2%) that it took a secondary position and 55 (29.9%) that it was absent. When these figures ate converted into an average response (Table 1) it is clear that these more contemporary creative type of operations have now taken their place among the key roles played by MNE subsidiaries in the U.K. Indeed only for Japanese subsidiaries does the presence of this role not yet match that of the first two. Thus the Japanese MNEs' U.K. operations encompass very strongly one evolutionary development, a notable orientation to supply the wider European market (role two), but allocate much less prominance to the other in the form of creative responsibility at the subsidiary level (role four). Both of these differences may reflect the relative newness of the Japanese facilities. 7 Thus the majority of these subsidiaries have been set up at a time when the need for a European perspective on supply programmes is fully understood in many industries. On the other hand the viability and benefits of the incorporation of creative scope within subsidiaries may only be understood after the success of the more routine roles has been secured. The extension of operations to the fourth role may still be an evolutionary one, only perceived as viable when the less ambitious roles have allowed subsidiaries to fully settle in an environment and comprehend its needs and potentials, On this basis it may well be the case that this role may soon match the others in Japanese subsidiaries, as indeed it may move into clearer predominance in U.S. or European operations.

Food industry subsidiaries are the most strongly committed to this fourth role, with an especially extensive involvement of U.S. subsidiaries (an AR of 2.80). This parallels their strong evolution of the first, U.K.-market focused, role (AR of 2.80) so it may be that U.S. subsidiaries initially needed to adapt their established food products quite extensively to meet U.K. tastes and conditions and in doing so created types of expertise within the subsidiaries that encouraged the complementary implementation of more extensive product development. The strong product development role in mechanical engineering, which reflects the pervasive need to supply customised capital goods to meet individual firms' specifications, is most notable in U.S. subsidiaries (AR of 2.71) but also quite prevalent in Japanese and European (AR of 2.22 in both cases). The result for instruments mainly represents the behaviour of U.S. subsidiaries (AR of 2.43) and probably reflects the need of these firms to apply their existing technology to European conditions more competitively by developing products that embody it in ways that meet distinctive requirements of particular scientists, health services, firms, etc. The strength of the product development role in automobiles reflects the behaviour of U.S. (AR of 2.50) and Japanese (AR of 2.43) subsidiaries in the U.K., rather than those from European MNEs (AR of 1.50). Thus in the latter case the U.K. mainly provides a supply base for cars and components that have already been designed to fully incorporate European needs, but the U.S. and Japanese subsidiaries in the U.K. have a much more extensive responsibility to contribute to the derivation of specifically European parts of their MNE's product range.

Pharmaceuticals and electronics are the two industries in which the product development role is least extensive in subsidiaries in the U.K. Taken alongside its prevalence in food and mechanical engineering it is clear that participation in a technologically-dynamic industry is neither necessary nor sufficient to generate product development activity in subsidiaries. Implementation of such operations is clearly more likely to reflect a wide range of subsidiary and host-country endowments and motivations, rather than predominantly respond to the degree of technological opportunity endemic in the industry. Indeed in industries such as pharmaceuticals and electronics, where leading contemporary technological paradigms (biotechnology; micro-electronics and information technology) are very influential, the desire of leading MNEs to maximise the benefits from participation in such scientific areas may lead to greater centralised control over the firm's own technological trajectory with less room for relatively autonomous dispersed creative initiatives, in pharmaceuticals it therefore seems likely that most product development is centralised (or at least carried out in labs with no direct association with a particular production unit) and can be relatively easily and effectively communicated to specialised production subsidiaries. These in turn can, as noted earlier, supply the product to a range of markets using their own adaptation capabilities of differentiate it in ways needed to respond to any specific requirements of individual national markets in their target region. In electronics too it may be that the factors that might provoke the need for U.S. or Japanese companies to develop specific European product variants can also take a clearly documented or codified form (regulations or technical specifications), rather than being the type of diffused and evolving taste-related characteristics that need subsidiary-level marketing expertise to detect, and in-house technological capacity to respond to adequately and sensitively. If the relevant specifications or characteristics are defined relatively precisely then development of a European product can again be carried out away from the specialised production facility, either in the home country or in a dedicated R & D unit serving all European operations.

Sources of Technology In the Subsidiaries

Traditionally it has been accepted that the role played by overseas subsidiaries in MNEs has been determined by factors that are predominantly related to market orientation and the availability and cost of physical inputs into the production process. Once such influences have determined the role that is to be allocated to a subsidiary within the MNE's overall operations, its basic technological needs will follow and can then be supplied from within the group's established knowledge capacity, In these circumstances the upper limit to the individual technological capacities required within a subsidiary would be the ability to assimilate the relevant knowledge effectively, and to discern the need for, and to secure the effective implementation of any product or process adaptation necessary to optimise the standard technology's applicability to its particular market and operating conditions. Now the ability of individual subsidiaries to develop their own creative competences, often reflecting the wider scientific and knowledge (educational) background of their host country, may to some extent be reversing the direction of causation.

The emergence in subsidiaries of creative competences (managerial, technological, marketing) that provide a scope that extends beyond that needed in the more traditional roles underwrites their pursuit of and accession to, the higher-value-added product development activities that increase both their own autonomy and the wider competitiveness of their group. Ultimately the skills and technology available to the subsidiary will determine its role, rather than an externally allocated role determining its needs with regards to such assets. Thus subsidiaries go through a creative transition s in which distinctive attributes increasingly differentiate their position in the group, whose overall competitive scope is thereby extended. The ability of a subsidiary to achieve an effective creative transition both depends upon, and enhances the return to, a host country's knowledge (scientific and educational) background.

Against this background we proceed by analysing the relative importance of seven possible sources of technology that could be used in MNEs' overseas subsidiaries, using information derived from the survey of such operations in the U.K. In Table 2 the replies are summarised with average responses in order to show the variation in the use of the sources according to industry and the home country of the MNE. Table 3 extends the analysis by looking at the manner in which use of particular technology sources varies according to the role of the subsidiary. Thus for each source of technology an AR is calculated for subsidiaries that reported a particular role as either their only one or their predominant one.

Table 2. Relative Importance of Sources of Technology in MNE Subsidiaries in the U.K., by Industry and Home Country,

Sources of technology:

A -- existing technology embodied in established products we produce.

B -- technology of our MNE group from which we introduce new products for the U.K./European market, that differ from other variants introduced in other markets.

C -- R & D carried out by our own laboratory.

D -- R & D carried out for us by another R & D laboratory of our MNE group.

E -- R & D carried out in collaboration with another firm.

F -- R & D carried out for us by local scientific institutions (e. g. Universities: independent labs: industry labs).

G -- development and adaptation carried out less formally by members of our engineering unit and production personnel.

(*) Respondents were asked to grade each source of technology for their operation as (i) our only source, (ii) a major source, (iii) a secondary source, (iv) not a source.

(**) The average response is calculated by allocating a value of 4 to `our only source', 3 to a major source,' 2 to `a secondary source, (iv) not a source.

(***) Includes subsidiaries of MNEs from Australia and Canada

Table 3. Relative Importance of Sources of Technology in MNE Subsidiaries in the U.K., by Role of Subsidiary.

Sources of technology:

A -- existing technology embodied in established products we produce.

B -- technology of our MNE group from which we introduce new products for the U.K./European market, that differ from other variants introduced in other markets.

C -- R & D carried out by our own laboratory.

D -- R & D carried out for us by another R & D laboratory of our MNE group.

E -- R & D carried out in collaboration with another firm.

F -- R & D carried out for us by local scientific institutions (e. g. Universities: independent labs: industry labs).

G -- development and adaptation carried out less formally by members of our engineering unit and production personnel.

(*) Respondents were asked to grade each source of technology for their operation as (i) our only source, (ii) a major source, (iii) a secondary source, (iv) not a source.

(**) The average response is calculated, for respondents that said that a particular role was either their only one or their predominant one, by allocating a value of 4 to `our only source', 3 to `a major source', 2 to `a secondary source', 1 to `not a source'.

The list of potential technology sources begins with two that reflect the fact that, even when they are able to create strong elements of unique creative competence within their own operations, subsidiaries are likely to remain to a substantial degree within a pervasive technological scope that defines the MNE group of which they are a part. Thus respondents were firstly asked to grade as either `our only source of technology', or `a major source', `a secondary source', `not a source', `existing technology embodied in established products we produce'. This then relates to the mature mainstream technology of the group, as already successful embodied in the products whose market success has achieved levels that involve decentralised production in overseas subsidiaries. This emerges as being clearly perceived as the most significant operative source of their technology by the responding subsidiaries. Indeed its pervasiveness is such that Table 2 shows it to be the leading source in subsidiaries in every industry covered and from each of the home countries.

Such established embodied technology is shown in Table 3 to be the major source used in the three subsidiary roles that are either defined around existing products (the first two discussed in the previous section)or are likely to be locked into current supply networks (the third). Though this would have been a clearly predicted outcome, the equally strong prevalence of this source of technology in the operations of the fourth (product development) type of subsidiary is much more surprising. Of some influence on this result is the fact that a number of subsidiaries that rated the fourth role as a predominant one also provided the same rating to one of the others, and included such embodied technology as a major source because of this. This factor, however, is very unlikely to explain more than a small part of the position of this technology in the product development subsidiaries. An explanation that is inherent to the mode of operation of these subsidiaries can be derived from the perception of the evolutionary theory of technological change and the importance of a tacit element of knowledge.(9) Thus the skills and the technological knowledge that underpin the distinctive competences that earn product development subsidiaries their new position are likely to have emerged from, and will therefore have been conditioned by, what they have been doing in their previous dominant role. Though the broad motivation and capability of key personnel in subsidiaries that seek to transcend previous dependent roles clearly reflect their own talent and education, its detailed applicability to the nature of evolving operations will still encompass a strong element that derives from training in the MNE and from the subsidiaries earlier background. Similarly the degree of technological autonomy achieved in such product development activity is likely to reflect a strong evolutionary addition of local knowledge and expertise to the group's mainstream technology, rather than a revolutionary break from it. Established products previously (and perhaps still) produced by the subsidiaries are likely to be a crucial element through which they perceive the group technology which will remain a component in their more idiosyncratic evolution.

The second source of technology available to subsidiaries that reflects a MNE's current predominant technological trajectory was defined as `technology of our MNE group from which we introduce new products for the U.K./European market, that differ from other variants introduced in other markets'. The key difference from the previous type of technology is that this is accessed by the subsidiary in a disembodied form, from which it can itself create the full detail of a product competitive in its own markets. This mode of behaviour suggests first that, at the group level, the technology underpinning a major new innovation emerges. Then, however, rather allowing the innovation process to be completed centrally, in the manner of the original product-cycle model,(10) and subsequently gradually emerge into foreign markets and overseas production, it is likely that the pressures of contemporary competition would dictate that the new good be immediately produced in major markets in forms that fully respond to local needs there.(11) Subsidiaries in such markets therefore pick up the technology that defines the outlines of the new product and use their own distinctive local competences (marketing and technological, etc.) to complete its competitive development. This type of scenario would clearly locate the use of the decentralised creative and scientific competences in the newer type of subsidiary within a technological programme that remains under strong central influence and supervision.

Though of quite widespread relevance (only 23% of respondents felt it played no role in their technology inputs) this source was clearly less significant than the first, Table 3 shows that the expectation that the emergent product development subsidiaries would be the most decisive users of this type of technology is somewhat confounded. It seems that tn their behaviour so far these types of subsidiaries tend to build their distinctive competences as an evolution of their past activity (based around established group technology, as just discussed), rather more than as a systematic involvement with the development and application of new group-level technology. In fact this type of technology appears to be most applicable in the component supply operations of the third type of subsidiary. This provides the first indication from our results that this type of subsidiary may not be a purely dependent operation supplying well-defined inputs (and therefore almost exclusively using established embodied technology) to cost-effective supply networks for a MNE's mature generations of products, Instead at least part of their motivation does seem to involve direct access to group-level technology and through this the creation of new input goods, either to help upgrade existing products in which they are incorporated or as a collaboration with those product development subsidiaries which themselves are working with new group technology in the manner hypothesis.

The reporting of this source of technology by subsidiaries of the first two types, which are mandated to manufacture products for already strongly established markets, may occur when they do sufficient adaptive work on the existing product to feel an involvement in the creative process. This perception of their position with regard to the technology of the products they supply may reflect a frustration in such subsidiaries at their dependent position, and indicate an incipient attempt to move towards the more fully-fledged product-development role. Also, in some industries, there may exist a phase in the application of a particular piece of knowledge where it is not easy to distinguish between the adaptive evolution of existing products and the creation of distinctly new ones.

The evidence so far, therefore, clearly indicates that overseas subsidiaries in MNEs still operate within the confines of well-defined group-level technology. However, it is a strong thesis of this paper that to sustain true global competitiveness it is desirable for MNEs to allow their overseas subsidiaries to mediate in the effective application of this group technology in their various market and production environments, either by adapting products which already embody established group knowledge or by developing additional products from its more recently created technology. The remaining five sources of technology covered in the survey therefore relate predominantly to ways in which subsidiaries can obtain the ability to add their own creative efforts to the core technology secured from within their group.

The first of this second group of sources was `R & D carried out by our own laboratory'. One of the most visible manifestations of the widening of the geographical dimensions of technological activity in MNEs in recent years has been the growth in the number of their overseas R & D units, whilst the range of roles played by such facilities endorses the newer perspectives on global competitiveness pursued through subsidiaries.(12) Of the 179 respondents which evaluated this source 73 (40.8%) said it did not play any role in their technology, 36 (20.1%) rated it a secondary source, 64 (35.8%) believed it to be a major source of their technology and 6 (3.4%) the only one. This suggests that over half of the subsidiaries in the survey possessed their own R & D operation as a means of implementing group technology, and of extending their distinctive capabilities and capacities.

As would have been expected it is the product development type of subsidiaries that find the strongest position for a R & D laboratory within their operations (Table 3). The second place taken by the specialist component supply subsidiaries in terms of finding a need for their own R & D units reinforces the emerging perception that performance of this role is somewhat less technologically dependent than might have been expected, and takes on its own distinct element of creativity. The less strong position for their own R & D in the two types of subsidiaries that supply established products reflects the fact that their needs should be limited to product adaptation and assistance in implementing an existing production process, so that where they have a lab its contribution is likely to be quite constrained.(13)

The use of their own R & D is much less well developed in the Japanese subsidiaries in the U.K. than in those with U.S. or European parents (Table 2). This parallels the relatively limited emergence of the product development role in these usually recently established operations, and, as already speculated, greater familiarity with the local environment may enable them to move towards the incorporation of more technological scope and complementary increase in subsidiary creativity and autonomy.(14) The industry in which respondents reported the strongest use of their own R & D was food. In line with earlier observations it may be that the U.S. subsidiaries that are prevalent in the sector set up labs early to assist in the adaptation of established products for the U.K. market, and the dynamic generated by their success then underpined a move towards the complementary incorporation of the product development role, which in turn increased the importance of the labs within their overall operations. The importance of such in-house R & D in instruments and industrial and agricultural chemicals again parallels the relatively strong presence of the product development role in the subsidiaries. Use of their own R & D is also very important in pharmaceutical subsidiaries despite the relative weakness of the product development role. We peculated earlier, however, that the strong export role in this industry might involve the supply of adapted variants of a centrally-created product to meet particular government regulations and health service requirements in several different market Implementing these adaptations in such a technologically sophisticated industry may then need the commitment of a dedicated R & D unit to support the production facility.

The survey also investigated the relevance a a source of subsidiary technology of `R & D carried out for us by another R & D laboratory of our MNE group'. Of 181 respondents that evaluated this 48 (26.5%) did not use it, for 5.4 (30.4%) it served as a secondary source of technology, 69 (38.1%) considered it a major source and 9 (5.0%) said it was their only one, The derived AR of 2.22 thus places this source somewhat ahead of subsidiaries' own R & D (2.02). R & D from other labs may have secured this position either by substituting for in-house R & D, by enabling a subsidiary to secure certain knowledge inputs for which it would otherwise have needed to create its own facility, or by complementing it by providing extra specialized expertise that can fill out a research programme. We have already noted that only 26,5% of respondents did not make any use of R & D supplied by another group lab, whilst 40.8%, did not use R & D from a lab of their own, This would suggest that until the need for R & D support becomes extensive or persistent subsidiaries seek to secure it elsewhere and avoid the expense of an in-house unit. It can also be observed that amongst respondents that did use their own R & D results, only 34.0% considered this only a secondary source of technology, whilst 41.4% of those that received R & D from another lab felt its use was limited to the secondary level. This would provide modest backing for the view that once a subsidiary has its own lab this is then more likely to supply key technological inputs, with externally acquired R & D becoming more of a supplementary source.

A logical extension of this view is that a subsidiary's own laboratory is likely to develop R & D programmes that support its wider objectives, and may complement this by commissioning specialised support from other group facilities when relevant, Thus the R & D from other labs may substitute for a subsidiary's own in-house operations up to a certain level of technological need or ambition, after which a lab of its own may move towards the core of the subsidiary's technical activity, with the acquisition of R & D from elsewhere now serving as a complementary source. Overall these perspectives suggest that even as subsidiaries increasingly pursue certain degrees of creative autonomy, the scope for technological interdependence throughout a MNE group remains an important asset. Creative autonomy should not mean technological autarchy.

It emerges in Table 3 that R & D carried out in another laboratory of the MNE group takes an important position, and clear precedence over a subsidiary's own R & D, where the main roles are the two involving supply of established products. This is likely to be a case where subsidiaries may need assistance in assimilating and/or adapting existing technology, but often do not feel that the problems are sufficiently deep or extensive to merit the creation of their own lab. In addition they may be able to secure this support from another group lab which already has experience of the technology at issue, either having been involved in its creation or having assisted in its implementation in another context. In product development subsidiaries, and to a lesser extent in those producing components, the use of R & D from other labs takes second place to in-house work. Thus once a subsidiary's level of ambition moves from supply of a standardised good to product creation its own R & D laboratory takes a position at the centre of its technology, with continued access to inputs from elsewhere in the MNE group's R & D network now serving as a useful auxilliary source.

Use of R & D inputs from another group lab is of notable importance in automobiles, an industry where the substantial presence of product development subsidiaries does not result in a strong commitment to in-house R & D. It seems likely that in this case the product development responsibility in U.K. subsidiaries (which also complements a strong position for the export of established products) is often allocated by Europe-level planning in MNEs (rather than resulting from the creative initiative of the subsidiaries), and is implemented through close and systematic collaboration with key centralised labs which play leading roles in supporting their groups' Europe-wide operations. A preference for strong centralised labs supporting a Europe-wide network of supply facilities is also likely to explain the more extensive use of R & D inputs from elsewhere in their MNE group by electronics subsidiaries in the U.K. The significant position of this source both in industrial and agricultural chemicals and in pharmaceuticals suggests that a relative ease of knowledge communication in these industries enables in-house facilities to collaborate with other group labs to ensure the most effective assimilation and adaptation of their MNE's staple technologies by U.K. subsidiaries.

As a source of technology for MNE subsidiaries in the U.K. `R & D carried out in collaboration with another firm' emerged in a very minor position. Thus 106 (58.9%) of 180 respondents said it played no role, and 63 (85.1%) of those that did allocate it some position in their technology supply considered it to be only a secondary one. Though inter-firm technology collaboration has grown in importance in recent years(15) it is likely that when such alliances involve joint R & D work this serves a predominantly strategic function,(16) mainly focusing on basic and precompetitive research, with the programmes articulated through central-laboratory planners and not involving labs in subsidiaries (or directly supporting their production operations).

The use of local scientific institutions (e. g. universities; independent or industry-funded labs) to carry out R & D for the subsidiary also takes a relatively limited position in their technology supply. Of 181 respondents that evaluated this source of technology 102 (56.4%) considered that it had no role, and a further 73 (40.3%) that it was restricted to a secondary position. Use of this source of R & D does appear in Table 3 to be somewhat more prevalent in the product development and component supply subsidiaries than in those that are more oriented to the manufacture of established products. Thus, as would be anticipated, R & D of local universities etc. seems more likely to be called into play to supplement efforts that are already established within subsidiaries, than as a source of direct solutions to their technology problems. This tends to be confirmed by the fact that 4 of the 5 industries that have an above average use of this source of R & D are the 4 that provide distinctively the strongest role for R & D carried out by their own labs (Table 2). In fact earlier analysis has shown(17) that the MNE labs that are most likely to establish links with local scientific institutions tend to be standalone facilities (not committed to support an associated production unit), carrying out basic/precompetitive research as part of group-supported programmes.

The final source of technology that the subsidiaries were asked to evaluate was `development and adaptation carried out less formally by members of our engineering unit and production personnel.' With 1 (0.6%) of 178 respondents considering this its only source, 41 (23.0%) rating it a major source, 97 (54.5%) a secondary source and only 39 (21.9%) believing it played no role, it emerges in Table 2 with an identical AR to the other in-house source of technology, i.e. `R & D carried out by our own laboratory'. Table 3 shows that, compared with the more formal in-house R & D, the creative use of engineering and production personnel was somewhat more prevalent in the subsidiaries supplying established goods to U.K. markets, of equal relevance in those exporting established goods or components, and relatively of less importance in those doing product development. Talented engineers and production personnel are likely to embody tacit knowledge derived predominantly from their training and day-to-day experience within the MNE group. This type of knowledge is therefore strongly firm specific, and of considerable value when the subsidiary is applying established group technology. Even when the technology to be used is new to the subsidiary it will be within a tradition such personnel understand, so they can therefore usually make a significant contribution (sometimes in association with a laboratory) to its effective assimilation. When a subsidiary's motivation is more decisively oriented to product development and the desire to make a distinctive technological contribution that extends the scope of the group, these extra dimensions (because they to some degree transcend the tradition that the engineers and production personnel are familiar with) often need to be pursued through a more extensive formalised R & D effort. Thus, whereas this role of engineers adds to group technological cohesion and coherence, it may also be the first step towards the emergence of new subsidiary-level knowledge scope.

Two industries in which this source of technology input is of above average importance, and which also report an above average orientation to product development work but a relatively limited use of in-house R & D, are mechanical engineering and metal manufacture and products. In both these cases it seems likely that the predominant form of product development will be the derivation of customised goods for individual clients. Where this occurs the goods will usually be created from a staple established technology, rather than needing a research-based extension of the industry's scope, so that it can be implemented through engineering, production, design or other shop-floor personnel who have a sustained involvement with the company's knowledge background. With the exception of instruments, the industries that have extensive in-house R & D (food, chemicals, pharmaceuticals) find relatively limited need to depend on creative inputs from engineering and production personnel.

Conclusion

An important recent development in the literature of the MNE has been an understanding of the range of roles that can be played by subsidiaries in the context of their group's wider strategies.(18) Within this strand of the literature a very relevant emphasis is now often placed on the ability of subsidiaries to differentiate their technological scope and competences in ways that earn them distinctive positions within their MNE group.(19) This type of subsidiary positioning both augments the range of knowledge sources available to the group and also facilitates an increasingly effective application of this technological scope to the needs of global competitiveness. It is therefore perceived that the level of response to the needs of the more dynamic global competitive environment can valuably be increasingly decentralised, with creative subsidiaries extending the range of response to market signals and enhancing the scope of new technological inputs in the group. The survey evidence discussed in this paper indicates that product development is now a clearly established role in MNE subsidiaries in the U.K.

It is also suggested by the survey results that the distinctive competences which provide creative product development subsidiaries with their enhanced positions emerge from their background and experience within the group, rather than constituting more radical perspectives. These subsidiaries add an increased range to decentralised competences which build on, and increase the effective implementation of, the MNE's established technological trajectory rather than comprising a significant challenge to it. Nevertheless the acquisition of an in-house R & D unit does seem to be a characteristic of many such product development subsidiaries, so that their emergency in MNEs should widen the range and scope of the science available to them worldwide and thereby perhaps affect the longer-term evolution of the group's technology. As the experience and aims of the in-house subsidiary R & D labs deepen it may be that they will mediate more in a closer collaboration with other elements in the local scientific community (e. g. universities, other firms' labs), but to date this seems quite limited, Rather more developed so far seems to be the practice of securing R & D support from elsewhere in the MNE group, either to supplement their own lab's work in product development subsidiaries, or to help with the implementation of established products in less technologically ambitious subsidiaries. Overall then the picture is one of substantial evolution in the technological behaviour of MNEs, with new global challenges bringing forth more globalised perspectives on the creation and use of their knowledge base.

Endnotes

(1) See also Bartlett (1986), Bartlett and Ghoshal (1986), Ghoshal and Nohria (1989), Hedlund (1986), for discussion of the emergence of heterogeneous subsidiary competences in the contemporary MNEs' strategic evolution,

(2) The questionnaire was sent, in late 1993/early 1994, to all the relevant subsidiaries that could be identified from the National Register Publishing Company's International Directory of Corporate Affiliations. It was addressed, in the first instance, to the Managing Director, though there is evidence that in some cases the responsibility for reply was delegated to senior subordinates.

(3) By industry the highest response rates were achieved in electronics and electrical appliances (30.5%), pharmaceuticals (27.9%) and instruments (25.5%) and the lowest in food (19.1%) and mechanical engineering (19.4%). By home country of subsidiary Japanese respondents provided clearly the best response rate (33,7%) with the U.S. (21.0%) and Europe (19.5%) both slightly below average, Since it also appears that the response rate was generally rather higher amongst larger and longer established subsidiaries the higher response rate in Japanese subsidiaries may suggest a proportionately greater extension into relatively smaller and newer subsidiaries, if this is so it may reinforce the view in the paper that Japanese subsidiaries are less far (compared to U.S. and European) down the path of implementation of in-house technology and adoption of product development roles.

(4) Overall 5.8% of European subsidiaries' replies evaluating particular roles said they were the only one, compared with 5,3% of all replies, However only 23.7% of European subsidiaries' replies related to predominant roles compared with 29.4% of all replies. By contrast 45. 1% of European replies were `not a part of our role' compared with 34,0% of U.S. subsidiaries replies and 40.4% of Japanese,

(5) See Pearce (1992) and Eden (1991) for discussion of the changes in the competitive environment that underwrite this role for subsidiaries,

(6) This is compatible with other evidence from the survey which shows that the subsidiaries of European MNEs were more likely than U.S. or Japanese to see the U.K. market as their only one, and were also clearly the least export oriented overall.

(7) Only 17.6% of Japanese subsidiaries had been set up before 1980. This compares with 76.5% of U.S. and 71.1% of European.

(8) See Papanastassiou and Pearce (1994a).

(9) See Nelson and Winter (1982), Cantwell (1991), Dosi (1988).

(10) See Vernon (1966),

(11) See Papanastassiou and Pearce (199,4b) for discussion of globalised approach to innovation in MNEs.

(12) See Pearce (1989), Pearce and Singh (1992)

(13) Of the subsidiaries playing (either exclusively or predominantly) the role of supplying established products to the U.K. market 48.1% did not consider their own R & D to be a source of technology, and 19.0% only rated it a secondary source. For those exporting established goods to European and other markets the comparable figures were 35.6% and 24.1%, and for the component supplying subsidiaries 33.3% and 16.7%. Only 22.2 of the product development subsidiaries did not use their own R & D as a Source of technology and only 11.1% fell it was limited to a secondary source.

(14) In fact JETRO data (see Papanastassiou and Pearce 1994c) indicates a notable increase in Japanese MNE's R & D units in the U.K. in the last few years.

(15) See Dunning (1993), Chesnais (1988) and Hagedoorn (1993) for discussion of the emergence of strategic technology alliances.

(16) See Hagedoorn and Schakenraad (1991) for evidence on the position of R & D-driven alliances amongst all `strategic technology alliances.

(17) Pearce and Singh (1992).

(18) For a valuable delineation of the position of analysis of subsidiary roles in the wider evolution of MNE literature see Birkinshaw (1994).

(19) Such creative (product mandated) subsidiaries are discussed in Etemad and Seguin Dulude (1946), and are al,so covered in the work of White and Poynter (1984), Roth and Morrison (1992) and Pearce (1989, 1992).

References

Bartlett, C.A., Building and Managing the Transnational: The New Organisational Challenge, in Porter, M.E. (Ed), Competition in Global Industries. Harvard: Harvard Business School Press 1986, pp. 367-401.

Bartlett, C.A./Ghoshal, S., Tap Your Subsidiaries for Global Research, Harvard Business Review, 64, 6, 1986, pp. 87-94.

Birkinshaw, J.M., Towards Heterarchy -- A Review of the Literature on Multinational Strategy and Structure, Advances in Comparative Management, 9, 1994, pp. 111-114.

Cantwell, J.A., The Theory of Technological Competence and its Application to International Production, in McFetridge, D. (ed.), Foreign Investment, Technology and Economic Growth, Calgary: The University of Calgary Press 1991, pp. 33-70.

Chesnais, F., Technical Cooperation Agreements Between Firms, STI Review; 1988, pp. 51-120.

Dosi, G,, The Nature of the Innovative Process, in Dosi, G. et al. (eds.), Technical Change and Economic Theory, London: Printer Publishers 1988, pp. 221-238.

Dunning, J.H., The Globalisation of Business, London: Routledge 1993.

Eden, L., Multinational Responses to Trade and Technology Changes: Implications for Canada, in McFetridge, D. (ed.), Foreign Investment, Technology and Economic Growth, Calgary: The University of Calgary Press 1991, pp. 133-172.

Etemad, H./Seguin Dulude, L. (ed.) Managing the Multinational Subsidiary. London: Croom Helm 1986.

Ghoshal, S./Nohria, N., Internal Differentiation within Multinational Corporations, Strategic Management Journal, 10, 1989, pp. 323-337.

Hagedoorn, J., Understanding the Rationale of Strategic Technology Partnering: Interorganizational Modes of Cooperation and Sectoral Differences, Strategic Management Journal, 14, 1993, pp. 371-385.

Hagedoorn, J./Schakenraad, J., The Role of Interfirm Cooperation Agreements in the Globalisation of Economy and Technology. The MONITOR-FAST Programme Prospective Dossier No. 2. Globalisation of Economy and Technology, 8, Commission of the European Communities 1991.

Hedlund, G., The Hypermodern MNC-A Heterarchy?, Human Resource Management, 25, 1, 1986, pp. 9-35.

Nelson, R./Winter, S., An Evolutionary Theory of Economic Change. The Belknap Press of Cambridge, MA: Harvard University Press 1982.

Papanastassiou, M./Pearce, R.D., Host-country Determinants of the Market Strategies of U.S. Companies' Overseas Subsidiaries, Journal of the Economics of Business, 1, 2, 1994a, pp. 199-217.

Papanastassiou, M./Pearce, R.D., The Creation and Application of Technology by MNEs' Subsidiaries in Europe, and Their Role in a Global-innovation Strategy, University of Reading, Department of Economics, Discussion Papers in International Investment and Business Studies. No. 189, 1994 b.

Papanastassiou, M./Pearce, R.D., The Internationalisation of Research and Development by Japanese Enterprises. R & D Management, 24, 2, 1994c. pp. 155-165. Pearce, R.D., The Internationalisation of Research and Development by Multinational Enterprises, London: Macmillan 1989.

Pearce, R.D., World Product Mandates and MNE Specialisation, Scandinavian International Business Review, 1, 2, 1992, pp. 38-58.

Pearce, R.D./Singh, S., The Globalisation of Research and Development, London: Macmillan 1992.

Roth, K./Morrison, A.J., Implementing Global Strategy: Characteristics of Global Subsidiary Mandates. Journal of International Business Studies, 23, 1992, pp. 715-736.

Vernon, R., International Investment and International Trade in the Product Cycle, Quarterly Journal of Economics, 80, 1996, pp. 190-207.

White, R.E./Poynter, T.A., Strategies for Foreign-owned Subsidiaries in Canada, Business Quarterly, 49, 1984, pp. 59-69.

Manuscript received December 1994, revised November 1995, revised June 1996.

Marina Papanastassiou, Research Fellow Department of Economics, University of Reading, Reading, U.K.

Robert Pearce, Reader in International Business. Department of Economics, University of Reading, Reading, U.K.
Importance of roles(*)
                                         (average response(**))

                                         A      B      C      D
By industry
Food                                     2.56   2.33   1.11   2.67
Automobiles                              2.24   2.33   1.65   2.35
Aerospace                                2.33   2.17   1.33   2.17
Electorates and electrical appliances    2.33   2.53   1.41   1.96
Mechanical engineering                   2.08   2.27   1.33   2.36
Instrument                               2.33   2.10   1.33   2.36
Industrial and agricultural chemicals    2.14   2.03   1.48   2.17
Pharmaceuticals and consumer chemicals   2.27   2.55   1.45   1.91
Metal manufacture and products           2.09   1.90   1.22   2.20
Other manufacturing                      2.44   1.73   1.20   1.80

Total                                    2.26   2.24   1.38   2.15

By home country
U.S.A.                                   2.28   2.24   1.52   2.27
Japan                                    2.31   2.41   1.32   2.03
Europe                                   2.13   2.07   1.29   2.09

Total(***)                               2.26   2.24   1.38   2.15


Importance of sources of
                            technology(*) (average response**)

                             A       B       C       D

By industry
Food                        2.89    2.22    2.50    1.78
Automobiles                 2.72    2.18    1.83    2.65
Aerospace                   2.60    2.50    1.50    1.83
Electronics & electrical    2.79    2.35    1.98    2.33
appliances
Mechanical engineering      2.85    2.46    1.85    2.00
Instruments                 2.82    2.00    2.27    2.18
Industrial & agricultural   3.24    2.21    2.31    2.31
chemicals
Pharmaceuticals &           3.00    2.40    2.30    2.40
consumer chemicals
Metal manufacture           2.91    2.09    1.91    1.82
& products
Other manufacturing         3.13    2.47   1.71     2.14
Total                       2.86    2.30    2.02    2.22

By home country
U.S.A.                      2.78    2.25    21.1    2.18
Japan                       2.88    2.35    1.78    2.23
Europe                      2.91    2.30    2.12    22.1
Total(***)                  2.86    2.30    2.02    2.22

                            Importance of sources of
                            technology(*) (average
                                  response**)

                             E       F       G

By industry
Food                        1.56    1.67    2.00
Automobiles                 1.71    1.39    2.00
Aerospace                   1.17    1.33    2.17
Electronics & electrical    1.43    1.32    2.13
appliances
Mechanical engineering      1.42    1.62    2.19
Instruments                 1.45    1.73    2.50
Industrial & agricultural   1.62    1.52    1.79
chemicals
Pharmaceuticals &           1.70    1.60    1.70
consumer chemicals
Metal manufacture           1.27    1.36    2.09
& products
Other manufacturing         1.29    1.50    1.64
Total                       1.48    1.48    2.02

By home country
U.S.A.                      1.57    1.62    2.06
Japan                       1.31    1.27    2.02
Europe                      1.57    1.55    1.88
Total(***)                  1.48    1.48    2.02


Importance of sources of technology* (average respond**)

                                        A       B      C       D

Roles of subsidiaries
To produce for the U.K. market        2.88    2.27   1.85    2.29
products that are already
established in our MNE group's
product range.

To play a role in the MNE group's     2.92    2.36   2.08    2.27
European supply network by
specialising in the production and
export of part of the established
product range.

To play a role in the MNE group's     2.83    2.62   2.17    2.08
European supply network by
producing and exporting component
parts for assembly elsewhere.

To develop, produce and market        2.86    2.33   2.52    2.05
for the U.K. and/or European
(or wider) markets, new products
additional to the MNE group's
existing range.

                                       E       F       G

Roles of subsidiaries
To produce for the U.K. market       1.41    1.39    2.01
products that are already
established in our MNE group's
product range.

To play a role in the MNE group's    1.52    1.41    2.11
European supply network by
specialising in the production and
export of part of the established
product range.

To play a role in the MNE group's    1.67    1.58    2.17
European supply network by
producing and exporting component
parts for assembly elsewhere.

To develop, produce and market       1.55    1.62    2.13
for the U.K. and/or European
(or wider) markets, new products
additional to the MNE group's
existing range.
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