Balancing the Trade-Off between Learning Prospects and Spillover Risks : MNC Subsidiaries' Vertical Linkage Patterns in Developed Countries

This study investigates local vertical linkage patterns of foreign subsidiaries. Specifically, we look at the dual role of such linkages as conduits for learning as well as potential channels for spillovers to competitors. On the basis of data from 97 subsidiaries and their most important local partners (customers and suppliers), we analyze the quality of such linkages under varying levels of competition and subsidiary capabilities. We capture the quality of local vertical linkages using a multidimensional measure that focuses on mutual adaptation and breadth of interaction between the subsidiary and the local partner. Our theoretical development and the results from our empirical analysis document a far more complex and dynamic relationship between levels of competition and MNCs' local participation in knowledge intensive activities, i.e. learning and spillovers, than previous studies do. We find a curvilinear relationship between the extent of competitive pressure and the quality of local linkages confirming our argument of a trade-off between learning prospects and spillover risks. In situations of a lot of competition, our subsidiaries seem to shy away from further increasing the relationship quality to their most important customers and suppliers. Furthermore, the level of subsidiary capabilities moderates this relationship. These are truly new findings with interesting implications for the study of FDI, local vertical linkages, and the MNC literature