MNE subsidiaries’ outsourcing and insourcing of R&D: The role of local institutions

Plain language summary: The rules for business vary not only between countries, but within countries. Subsidiaries of multinational enterprises (MNEs) thus have to consider both the national level and the local context when designing their business practices. To examine this impact, we study R&D outsourcing in four Eastern member states of the European Union, and find that local R&D outsourcing is used more frequently where local institutions are strong. However, this local impact depends on the MNEs overall knowledge sourcing practice and is weaker when MNE subsidiaries’ knowledge management prioritizes external sources of knowledge Technical summary: Multinational Enterprises (MNEs) face multiple institutional contexts across and within countries. We analyze sub-national institutions in the local environment of MNE subsidiaries to investigate their impact on subsidiaries’ knowledge sourcing strategies. Drawing on institutional and transaction costs economics, we argue that their degree of local R&D outsourcing is greater in high quality sub-national institutional contexts. However, the quality of local institutions has less impact on the degree of R&D outsourcing by subsidiaries more open to external knowledge. These subsidiaries are more experienced in collaborating with external partners, and thus have developed internal mechanisms to protect their intellectual property even in low quality institutional contexts. We test our arguments on a survey of MNE subsidiaries in four Eastern member states of the European Union. Keyword: contractual hazards, MNE subsidiaries, R&D outsourcing, sub-national institutions, openness to external knowledge