Political risk, internal versus global value chain knowledge, and subsidiary operational integration

Abstract

Research summary This study combines transaction cost economics and network learning literature to examine the moderating effect of knowledge from internal versus external local supplier on subsidiary-level intrafirm trade within multinational enterprises' (MNEs) global value chain networks. We conceptualize knowledge in a multidimensional way, disentangling it into institutional knowledge in high-risk countries and internationalization knowledge in all countries. Empirical results from 5,660 observations of 487 Korean MNEs (1995-2013) show that MNEs' institutional knowledge with external local suppliers in high-risk countries has a stronger negative effect on the relationship between political risk and subsidiaries' intrafirm trade integration than with internal suppliers. Internationalization knowledge from external local suppliers in all countries also has a stronger negative effect on the relationship between political risk and subsidiaries' intrafirm trade integration than with internal suppliers. Managerial summary A host country's political risk is a critical consideration for multinational enterprises (MNEs) when entering institutionally hazardous countries. This study shows how MNEs' strategies for operational integration of subsidiaries within global value chain (GVC) networks respond to challenges of political risk in host countries. We studied 5,660 observations of 487 Korean MNEs (1995-2013) and found that MNE capabilities to manage under institutionally hazardous conditions can be developed through various types of knowledge from internal versus external local suppliers, and, consequently, operational integration in the MNE GVC in high-risk countries is less needed. MNEs need to acquire and expand new business opportunities in host countries by accepting heterogeneity through varying institutional and internationalization knowledge and active partnership development based on their GVC networks.