1. ¹David Eccles School of Business, University of Utah, Salt Lake City, USA
2. ²McDonough School of Business, Georgetown University, Washington DC, USA

Correspondence: A Phene, David Eccles School of Business, University of Utah, 1645 East Campus Center Drive, Salt Lake City, UT 84112, USA. Tel: +1 801 587 9055; Fax: +1 801 585 5966; E-mail: anu.phene@business.utah.edu

Received 14 February 2005; Revised 18 July 2007; Accepted 25 September 2007; Published online 3 April 2008.

Abstract

Subsidiaries of multinational firms play an important role in the globalization of innovation, yet we have an incomplete idea of the influences on their innovative activity. Drawing on prior research in international business and strategy, we identify two sets of factors that influence the absorption and utilization of knowledge in multinational corporation subsidiaries: (a) the range of external and internal knowledge sources available; and (b) the subsidiary capabilities associated with knowledge absorption and utilization. We find that knowledge absorbed from the host country is useful to subsidiary innovation. We also find support for the role of subsidiary capabilities: both sourcing capability and combinative capability have a significant influence on the scale and quality of innovation.