Abstract
The scan and assessment of an unfamiliar institutional environment and its influence
on the effect of the subsidiary's dynamic capabilities (DCs) on its exploration and exploitation
are required to fully embrace potential market opportunities and get better insights regarding
existing interdependencies. Drawing on prior research in strategic management and analysing
datasets from 2010 and 2011 with 445 observations of foreign subsidiaries, this study applies
institutional theory and enriches existing literature by providing more support for informal —
Indulgent vs Restraint (IVR) and formal institutions — Government Effectiveness (GE), as
well as for the association between DCs and innovation performance (IP). In short, the research
reveals a positive relationship between the subsidiary's DCs and exploration and exploitation.
However, the Government Effectiveness (GE) and Indulgent vs Restraint (IVR) show negative
moderating effects on the aforementioned association. The result indicates that if the parent
company establishes its subsidiary intending to increase its exploration, then a thorough
evaluation of the region and public authorities and societal norms/beliefs should be conducted
since a distinct institutional environment has a negative and significant impact on the
relationship between the subsidiary's DCs and exploration and exploitation. However,
lawmakers and society might improve this negative moderating effect by ameliorating the
quality of the policies, regulations, social norms/beliefs, and behaviours, thereby improving
the institutional environment's effectiveness on local and foreign subsidiary IP.
Keywords: dynamic capabilities, formal and informal institutions, institutional theory, foreign
subsidiary, innovation performance, exploration, exploitation, government effectiveness, indulgent vs
restraint, multinational corporations.
-4-
The scan and assessment of an unfamiliar institutional environment and its influence
on the effect of the subsidiary's dynamic capabilities (DCs) on its exploration and exploitation
are required to fully embrace potential market opportunities and get better insights regarding
existing interdependencies. Drawing on prior research in strategic management and analysing
datasets from 2010 and 2011 with 445 observations of foreign subsidiaries, this study applies
institutional theory and enriches existing literature by providing more support for informal —
Indulgent vs Restraint (IVR) and formal institutions — Government Effectiveness (GE), as
well as for the association between DCs and innovation performance (IP). In short, the research
reveals a positive relationship between the subsidiary's DCs and exploration and exploitation.
However, the Government Effectiveness (GE) and Indulgent vs Restraint (IVR) show negative
moderating effects on the aforementioned association. The result indicates that if the parent
company establishes its subsidiary intending to increase its exploration, then a thorough
evaluation of the region and public authorities and societal norms/beliefs should be conducted
since a distinct institutional environment has a negative and significant impact on the
relationship between the subsidiary's DCs and exploration and exploitation. However,
lawmakers and society might improve this negative moderating effect by ameliorating the
quality of the policies, regulations, social norms/beliefs, and behaviours, thereby improving
the institutional environment's effectiveness on local and foreign subsidiary IP.
Keywords: dynamic capabilities, formal and informal institutions, institutional theory, foreign
subsidiary, innovation performance, exploration, exploitation, government effectiveness, indulgent vs
restraint, multinational corporations.
-4-
