Subsidiaries’ Learning: The Role of Dual Relational Embeddedness

Abstract

Knowledge is one of the most important assets of an organization, more so in international business where subsidiaries grapple with challenging foreign environments, fighting liability of foreignness in the effort to acquire new knowledge and strategies for integration into the host economy. Our study investigates the role that subsidiaries’ dual relational embeddedness plays in knowledge acquisition. Understanding that the nature of the parent firm-subsidiary relationship affects the subsidiary-local partners relationship, and vice versa, we employ agency theory to examine the agency problems that may arise. We specifically address the need for the subsidiary autonomy to adapt to the local market while maintaining alignment with the parent firm. Based on the findings from 10 case studies of foreign subsidiaries in New Zealand, we suggest hybridized autonomy as an alternative to the traditional principal-agent authority delegation because of its (hybridized autonomy’s) propensity to act as an anchor stabilizing the subsidiary’s relational embeddedness duality by minimizing the conflicts rooted in agency problems and reversing authority delegation uncertainties, consequently resulting in multidirectional learning. Hybridized autonomy also reinforces subsidiary-parent firm collaboration and enhances their strategies guided by the host country market conditions. Ultimately, this study attempts to answer the research question by arguing that subsidiary dual relational embeddedness empowers the subsidiary to surmount liability of foreignness and to establish legitimacy in the host economy in order to achieve multidirectional learning from internal and external networks by securing and leveraging hybridized autonomy advantages.

Keywords: foreign subsidiaries, multinational enterprise, relational embeddedness, agency theory, knowledge acquisition, subsidiary autonomy, parent-subsidiary relationship

JEL Classification: F23