Abstract

This paper examines the innovation performance of MNE subsidiaries and their embeddedness in sources of local knowledge and in a policy framework within the context of an emerging economy. Based on first-hand evidence from multiple case studies we found that: (1) There was variability between the subsidiaries in terms of the cumulative manner and speed at which they improved their innovation performance over time, using progressively levels of accumulated capability as a proxy; (2) These differences in innovation performance improvement reflected heterogeneity between the subsidiaries in terms of the learning efforts made by them to acquire knowledge from local organisations; (3) The varied frequency in which the subsidiaries developed such local relationships reflects their differing responses to a
common industrial policy that makes use of tax incentives to stimulate such links. The paper reveals the limitations of this conventional type of industrial policy in stimulating industrial development and the embeddedness of MNEs. It also suggests that a new direction for policy, which incorporates public-private negotiations and a focus on the firm-centred building of innovation capabilities, should be pursued in order to accelerate the innovation performance progress of latecomer firms.