| Research on the evolution of foreign-owned subsidiaries and subsidiary development in host countries has increasingly garnered scholarly attention in international business (Ambos, Andersson, & Birkinshaw, 2010; Cavanagh & Freeman, 2012; Meyer, Mudambi, & Narula, 2011; Paterson & Brock, 2002). Recent studies based mostly on case study research argue that the role of subsidiaries evolves by accessing and assimilating knowledge via extensive relationships embedded in both internal and external networks (Achcaoucaou, Miravitlles, & León-Darder, 2014; Erkelens, Hooff, Huysman, & Vlaar, 2015; Figueiredo, 2011; Yamin & Andersson, 2011). The findings in this stream of work demonstrate a positive association between an aggregate level of knowledge linkages and subsidiary performance, assuming that these linkages bring in useful knowledge pertaining to capability development, problem solving, and opportunities for strategic investments. Insofar as subsidiary evolution is concerned, however, not all subsidiaries learn and adapt to their environments equally because their relationships embedded in the networks continue to change over time (Andersson, Forsgren, & Holm, 2002; Forsgren, Holm, & Johanson, 2005). Moreover, past research has focused primarily on the competence or the importance of the subsidiary as an outcome, overlooking subsidiary development in such areas as subsidiary scope which can similarly be influenced by the network advantage and learning initiative of the subsidiary. Therefore, this study aims to fill the research gaps by verifying the effects of internal and external embeddedness on the development of competence and scope at a subsidiary level. A subsidiary is simultaneously embedded in internal and external networks (Achcaoucaou et al., 2014; Andersson et al., 2002; Mudambi & Navarra, 2004). An internal network consists of multinational corporation (MNC) headquarters (HQ) and all its subsidiaries, whereas an external network includes customers, suppliers, and competitors in the host country. The MNC networks literature shows that relational embeddedness develops over time between HQ and subsidiaries to facilitate the transfer of knowledge from HQ; HQ in turn leverages subsidiary-specific advantage by sharing knowledge between sister subsidiaries. Moreover, individual subsidiaries evolve to assimilate external knowledge from the local environments in order to perform their designated functions more competently and efficiently relative to their local competitors. As such, the role of subsidiaries and their performance can be shaped by both types of networks, through communicating and processing information and knowledge these subsidiaries acquire from the networks. With the notable exceptions of Achcaoucaou et al. (2014), Ciabuschi, Holm, and Martín (2014), Figueiredo (2011), Jindra, Giroud, and Scott-Kennel (2009), and Najafi-Tavani, Axele, and Andersson (2014), few studies systematically verify the simultaneous impact of internal and external embeddedness on different aspects of subsidiary development. Furthermore, little attention has been paid to the learning process of the subsidiary to internalize knowledge for its own development (Eapen, 2012). |