Role of context in knowledge flows: Host country versus headquarters as sources of MNC subsidiary knowledge inheritance

Abstract Research Summary We respond to calls in the strategy and international business literature for elucidating how multinational subsidiaries develop contextual intelligence in host countries and how they use the local context as a source of valuable opportunities for learning. Applying the theoretical lens of subsidiary absorptive capacity and building on a gravity model, we propose an approach that can distinguish and compare the influences of the host country context and headquarters over the subsidiary knowledge production. Some subsidiaries may become global second headquarters and innovation hubs, as evidenced qualitatively in the paper with the case of Cisco. Essentially, subsidiaries, characterized by higher stocks of knowledge and greater number of locally hired employees are likely to absorb relatively more knowledge from the local host country context. Managerial Summary Managers at multinational companies have to carefully balance acquiring knowledge from the headquarters, vis‐a‐vis acquiring knowledge from the local context of countries where the firm has subsidiaries. In contrast to a “headquarter‐centric” approach where most of the knowledge management activities are centered around the MNC headquarters, we argue that larger subsidiaries, often characterized by a large presence of local R&D workers, might disproportionately draw knowledge from the local context, rather than from the headquarters. In addition to developing theoretical propositions along these lines, we provide an illustrative example of how Cisco opened a “second headquarters” in India, to learn from the rich local context.