Internal Versus External Knowledge Sourcing Of Subsidiaries: An Organizational Trade-Off

When building up competences, a subsidiary of a multinational corporation (MNC) may rely onexternal knowledge sources like customers, suppliers, competitors or local science centers. Internalsourcing is also available through knowledge offered by headquarters or other affiliates. Thequestion is whether the two kinds of sources are mutual exclusive. A dilemma or organizationaltrade-off is foreseeable, since the more the subsidiary adapts its knowledge creation processes tohost country institutions, the less it will be able to utilize internal knowledge sources due to theinstitutional distance between the external and internal networks. However, newer organizationalforms, like the concept of the `differentiated MNC', imply a relatively smooth flow of knowledgeinside the MNC, indicating that we should not expect an organizational trade-off between internaland external sources. The subsidiary's ability to build on two knowledge networks depends on itsscale of resources, absorptive capacity and the role it plays in the corporation.The relationship between internal and external sourcing is tested using a unique dataset that coversmore than 2,000 subsidiaries located in seven different European countries (the Centre of ExcellenceProject). In fact, the results show that, to a certain extent, there is no dilemma between asubsidiary's knowledge development based on both internal, and external knowledge sources.However, the results also show a bell-shaped relationship between the use of internal and externalsources, where a heavily embedded use of internal sources excludes the use of external sources.Keywords: Internal sourcing, External sourcing, Institutional Isomorphism and Subsidiaryknowledge.