Specialization

The relationship between MNE internationalization and innovation capability development has evolved from a state in which the two processes were relatively disconnected to a state in which they are mutually reinforcing, as MNEs increasingly access local innovation expertise where they reside (Cantwell and Piscitello, 2000). The product cycle model (Vernon, 1966) provided some of the earliest thinking on patterns of internationalizing innovation activities. This model assumes that demand conditions are the primary drivers of innovation, that home markets are both the primary source of this demand, and the preferred location for developing new technologies due to the availability of the required resources, most notably a skilled workforce (Vernon, 1979). Following this logic, MNEs innovate close to home and then exploit the resulting technology globally through international expansion in order to achieve efficiencies of

scale and scope. This in turn produces path dependencies in both technological development and national comparative advantages in innovation. Furthermore, it implies that practices flow in one direction, from the MNE home location, to the foreign subsidiary, and that no capability enhancement would be obtained.

Under the assumptions that innovation is resource intensive and path dependent (Dosi, 1982; 1988; Jaffe and Lerner, 2004; Nelson and Winter, 1977; 1982; Porter, 1980), and that knowledge spillovers play an important role in technological path development, geographically bounded agglomeration is the expected result (Almeida and Kogut, 1997; Cantwell, 1991; Feldman, 1993; Jaffe, Trajtenberg and Henderson, 1993). As a result of this agglomeration, nations experience the „Matthew effect‟, that is, those rich in resources and capabilities as a result of initial technology development will accrue more, while those which lack adequate resources will have their stock reduced (Merton, 1968; 1988). Hence, only successful innovators in the present would be able to innovate in the future.

A counterpoint to the product lifecycle logic, is the emergence of location-bound expertise either due to the development of a comparative national advantage in specific industries or functions related to innovation (e.g. Cantwell and Janne, 1999; Cantwell and Mudambi, 2005; Cantwell and Piscitello, 2000) or the evolution of subsidiary capabilities which enables downstream movement along the value chain (Birkinshaw and Hood, 1998; Zander 1997). Under these conditions, regional and subsidiary specific centers of

excellence may develop and the role of the MNE in innovation becomes the coordinator and integrator of the various centers (Cantwell and Piscitello, 2000; Frost et al, 2002).

Centers of excellence can refer either to subsidiaries with advanced, high value- added mandates (Fratochii and Holm, 1998; Holm and Pedersen, 2000) or a source of best practices to be exploited abroad (Lyle and Zawacki, 1997; Moore and Birkinshaw, 1998). According to the latter view, a subsidiary may contain several centers of excellence. Frost et al (2000) found that Canadian subsidiaries of MNEs were more likely to develop into centers of excellence when they had access to internal and external sources of competencies, and the MNE has substantially invested in them. To the extent that subsidiaries house centers of excellence, the more unique their competencies, and hence the more specialized their mandate, as compared with other subsidiaries in the MNE innovation network. Such subsidiaries may be sources of competency creating innovation practices, either to be exploited or diffused.

As the type of innovation activity carried out abroad varies in accordance to firm strategy, and the industry-specific advantages of home and host nations (Cantwell and Janne, 1999; Cantwell and Mudambi, 2005), the type and direction of practice flow will also vary. When MNEs follow a strategy of diversifying innovation activities amongst their foreign affiliates in order to enhance existing capabilities (Kuemmerle, 1999b), for example, not all practices of the firm are likely to be transferred, and furthermore, there is greater likelihood that foreign affiliates will adapt and develop their own practices based on host country advantages and traditions, according to their area of expertise.

Conversely, when a MNE replicates its innovation activity to exploit its existing capabilities in foreign nations (Kuemmerle, 1999b) there is greater incentive to transfer a full complement of practices. In this situation, adaptation of existing practices, and adoption of new practices may be detrimental, unless headquarters coordinates and diffuses best practices throughout the firm regardless of their origin. Therefore, for reasons which can mainly be attributed to the evolution of location and subsidiary bound expertise, specialization of the innovation mandate of a foreign affiliate can be categorized according to the extent of its expertise.

If a focal subsidiary has gained its innovation mandate as a result of the local national competitive advantage, then its innovation practices will more closely resemble those prevalent in the host country industry. These practices may be utilized by the MNE either by leveraging their value through integration within the MNE network, or by initiating and encouraging diffusion to other subsidiaries. In contrast, if the subsidiary gained its mandate as a natural evolution of its role within the innovation network, it is more likely that practices will have transferred from within the MNE. As the host country context provides the subsidiary with its source of uniqueness, expertise and strategic importance (Frost et al, 2002), pressures for adaptation of innovation practices will be high. Conversely, subsidiaries which provide less unique capabilities within the MNE innovation network are likely to be recipients of innovation practices, and forces for adaptation will be lower. The integration component of a subsidiary‟s mandate is

examined next, followed by a discussion concerning how these characteristics may influence innovation practice transfer.