Exploitation versus exploration: The impact of network embeddedness on the innovation of subsidiary firms

This paper aims to draw on the network perspective of organizational innovation to present an argument on how a subsidiary should select innovation behavior.

In this framework, the paper analyzes middle- and high-level managers of subsidiaries from various industries located in the Chinese Mainland.

The results suggest the following ideas: internal embeddedness is positively related to exploitation innovation, external embeddedness is inverted-U related to exploration innovation, the availability of alternatives positively moderates the main effects, whereas restraint in the use of power negatively moderates them.

The current study has a few limitations that provide meaningful research directions for future investigations. First, it only considers the industry and ownership as control variables. Second, this study was conducted in the Chinese context.

The analysis of the relationship between embeddedness and innovation behavior also shows that focal subsidiary must dynamically adjust the way of embeddedness on the basis of its strategy, and it can reasonable leverage strategic assets for exploitation innovation or exploration innovation. From the perspective of headquarters, establishing deep embeddedness with a subsidiary and giving it indispensable support are important to promote that subsidiary’s exploitation innovation.

The focal subsidiary should establish relationships with more alternative partners and develop relationships with power-advantaged partners through strategies such as a long-term contract, establishing an R&D alliance and entering a joint venture. Besides this, more powerful partners in the internal network should adopt various power usage strategies to promote focal subsidiary exploitation innovation and more powerful partners in the external network should show restraint in the use of power toward any subsidiary in an over-embedded situation. The result shows environment dynamism affects subsidiary exploration innovation more deeply than exploitation innovation. Consequently, managers should recognize the importance of dynamic adaptation to environmental changes and adjust their firms’ innovation behavior accordingly, especially when they are implementing an exploration innovation strategy.

The extent of embeddedness in an innovation network shapes the subsidiary innovation behavior, and this effect is moderated by power. The focal subsidiary should dynamically and strategically adjust its innovation behavior considering various its type and level of embeddedness.