Innovation in Foreign and Domestic Firms : The Advantage of Foreignness in Innovation and the Advantage of Localness in Innovation

I integrate the literatures on global strategy and innovation management to explain how domestic firms and subsidiaries of foreign firms innovate. Building on the knowledge-based view, I argue that subsidiaries of foreign firms and domestic firms have access to different knowledge sources and manage their employees differently, resulting in them following different innovation paths. Specifically, I propose that subsidiaries of foreign firms may benefit from what I call the advantage of foreignness in innovation, in which their access to global knowledge sources and management of employees to have a multicultural mindset support their global innovation. I also argue that domestic firms may enjoy what I call the advantage of localness in innovation, in which their deep and contextualized local knowledge and management of employees to focus on the local market support their local innovation. As a result, domestic firms and subsidiaries of foreign firms may generate different types of innovations, which provide them with a relative competitive advantage when they face each other depending on whether the innovations are for end-user customers or for other firms, and whether the industry is global or local in nature. Although the strength of these relative advantages diminishes over time as subsidiaries and domestic companies imitate each other, the relative advantages remain because each type of firm faces a particular constraint in its ability to imitate the other type of firm