The Effect Of Internal Embeddedness Of Subsidiaries On Innovation Performance

Embeddedness is crucial to the innovation performance of subsidiaries,which explains why some subsidiaries are more successful than others.Through building the trust relationship with stakerholders,Subsidiaries gain resources within the network by exchanging resources,knowledge,technology and information sharing,which is benefit to subsidiary innovation.In recent years,more and more literature studies the influence of network embeddedness on the innovation performance of transnational subsidiaries,and the embeddedness has become the research focus of business groups.However most of the literature focuses on multinational subsidiary and the host country's external stakeholders embeddedness,ignoring that the subsidiary as an important member of business group,has a close relationship with headquarters and other subsidiaries.In the context of imperfect external market system in China,headquarters can implements centralized strategy for subsidiary,have authority to allocate internal resources,and play a complementary or alternative role of external market.The advantages and disadvantages of internal embeddedness directly involve the reason that business groups are set up.Now,the relationship between internal embeddedness and subsidiary innovation has not yet come to an agreement,can not provide suggestions for headquarters how to manage subsidiaries.Based on the basic elements of the company's operation:"people,capital and goods",this paper divides the embeddedness of subsidiaries into two dimensions:administrative embeddedness and market embeddedness.Administrative embeddedness involves the headquarters-subsidiary related personnel office conditions,including two dimensions of embedded directors and executives embedded,belonging to the human resources allocation within business groups.personnel embeddedness reflect the longitudinal centralized management mode of business groups.Internal market embeddedness refers to the exchange of internal resources of the group,such as produc,asset capital and mutual guarantee,etc.,which is an embedded relationship formed by informal rules.In this paper,the market embeddedness is divided into two sub-dimensions,namely,internal product embeddedness and capital embeddedness,to study the influence of internal market trading relationship on the innovation performance of subsidiaries.Further,this paper introduce group internal control level,the external system environment and uncertainty factors as different boundary conditions,to study the effect context of internal embeddedness and subsidiary innovation linkage.Our sample is from listed firms of the Shanghai and Shenzhen Stock Exchange from the 2010-2016.Some variables,such as administrative embeddedness,market embeddedness and pyramid control level,are from the listed firms' annual reports.Other variables of each firms are from the CSMAR database,one of the largest database about the listed firms in China.using STATA software to poisson panel data fixed effects model analysis,we get the following conclusion:Firstly,directorate embeddedness is benefit to subsidiary innovation,and executive embeddedness is negatively ralted to subsidiary innovation.Hence,it is better to send some personnel on behalf of headquarters to working in subsidiary as directors,ensuring the consistency of headquarters-subsidiary strategy,at the same time,headquarters should grant subsidiary operational power to deal with daily business affairs by themselves.The product embeddedness in the internal market of the business group is related to the innovation performance of the subsidiary,and the capital embeddedness has an inverted U-shape affect on subsidiary's innovation performance.Therefore,subsidiary with different embedded forms has various innovation performance.which partially explain the ambiguous results of internal embeddedness and subsidiary innovation linkages.Secondly,subsidiaries under the bottom of the control chain have higher innovation inotiave.However,the close personnel embeddedness of headquarters-subsidiary constraints subsidiaries to the internal notwork,and weaken the positive relationship between control level and subsidiary innovation.In the same way,subsidiaries under the bottom of the pyramid control chain have higher authority to build close relationship with outside stakeholder,and can gain resources from external environment.Thus,internal capital embeddednsee weaken the inverted u-shaped relationship between control level and subsidiary innovation.Thirdly,the institutional environment significantly affects the innovation performance of subsidiaries.In relatively perfect system of region,directorate embeddedness is benefit to innovation performance.In contrast with complete system areas,product embeddedness and capital embeddedness have more significant influence on subsidiary innovation in the impefect environment.Therefore,in the context of China's institutional environment,directorate embeddedness plays a more positive role to subsidiary innovation in the system of perfect region,while internal market embeddedness(product embeddedness,capital embeddedness)have a more significant effect on subsidiary innovation in the imperfect environment.Finaly,products updated frequently prompt the subsidiary to continuously innovate to adapt to the changing environment.Personnel embeddedness of headquarters-subsidiary reduces the information asymmetry among companies,which is advantageous to the subsidiary rapid response to changing external environment,and seize the potential development opportunities.namely personnel embeddedness improve the subsidiary's ability to deal with uncertainty problem.From the perspective of market transaction,a subsidiary's dependence on one embeddedness will inevitably reduce the other.The higher the degree of uncertainty,the more the subsidiary needs to face the external market and grasp the innovation opportunities,thus the embeddedness of the internal market of the group constraining the improvement of the subsidiary's innovation ability.Based on embedded theory,agency theory and transaction cost theory,this paper studies the influence of different embedded forms of subsidiaries on innovation performance within business groups.The contributions lie in:Firstly,the research clarified the boundary conditions of the relationship between subsidiary internal embeddedness and innovation performance.In this paper,the subsidiary embeddedness is divided into two dimensions:administrative embeddedness and internal market embeddedness,which enriches the embedd theory and enterprise network literature,extending the existing research.Through the research of the relationship between different forms of embeddedness and subsidiary innovation performance,our paper demonstrated that internal embeddedness has a significant influence on competitive advantage of business groups through affecting subsidiary innovation.Subsidiary within the group embedded in different form,the impact on innovation performance has significant differences,revealing the ambugious results of internal embeddedness and innovation performance relationship.Secondly,the research clearly answers whether the parent company's interference in subsidiaries can improve subsidiary innovation ability.In general,subsidiary autonomy is can improve subsidiary performance.In this paper,through theoretical deduction and empirical data,we find that under the existing market system in China,the parent company tend to keep the strategic control to subsidiaries,namely the interference of subsidiary may not damage subsidiary value,on the contrary,maintaining a certain degree of strategic control to subsidiary can improve the strategic status of subsidiaries within business groups and get more support from headquarters to improve subsidiary innovation ability.The conclusions provide future research directions that whether give subsidiary strategic decision-making,if granted,how much is more appropriate.Thirdly,the research clarified the boundary conditions of the internal market effectiveness of business groups.The results that internal transaction markets play a"premium" or "discount effect" have not yet come to an agreement.Our paper divided internal market embeddedness into two parts:capital transactions and products trading,and found that the group internal trading category is different,subsidiary company also has a significant difference between the influence of innovation performance.Thus,the advantages and disadvantages of group internal market transactions need to analyze the specific transaction type,which clarified the internal market embeddedness and subsidiary innovation relationship.