Knowledge Sourcing: Legitimacy Deficits for MNC Subsidiaries?

56 Pages Posted: 8 Jun 2016

See all articles by Tobias Schmidt

Tobias Schmidt

Deutsche Bundesbank - Research Center

Wolfgang Sofka

Tilburg University; CentER; CIR

Date Written: 2009


Multinational corporations (MNC) search increasingly for lead market knowledge and technological expertise around the globe. We investigate whether their subsidiaries gain access to these valuable sources of host country knowledge to the same degree as domestic rivals. We develop a theoretical framework for "why" and "how" a lack of embeddedness and legitimacy (liability of foreignness) may translate into additional obstacles for foreign subsidiaries. We test these hypotheses empirically using a broad dataset of more than 1,000 innovative firms in Germany. We find that MNCs can compete on an equal footing with host country competitors when it comes to generating impulses for innovations from universities. They are significantly challenged by liabilities of foreignness, though, when host country customers are involved. The disadvantages are especially pronounced when the host country industry is at the technological forefront. We suggest that the disadvantages arising from liability of foreignness in the host country are particularly relevant when promising lead customers have to be identified and their tacit and often unarticulated impulses have to be transferred, understood and prioritized.

Keywords: Liability of foreignness, knowledge spillover, globalization

JEL Classification: O31, F23, D83, O32

Suggested Citation

Schmidt, Tobias and Sofka, Wolfgang, Knowledge Sourcing: Legitimacy Deficits for MNC Subsidiaries? (2009). Bundesbank Series 1 Discussion Paper No. 2009,09. Available at SSRN:

Tobias Schmidt (Contact Author)

Deutsche Bundesbank - Research Center ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431

Wolfgang Sofka

Tilburg University ( email )


CentER ( email )

P.O. Box 90153
Tilburg, 5000 LE

CIR ( email )

Warandelaan 2
Tilburg, 5000 LE

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