The influence of business network openness on MNC sub-units evolution John A. Cantwell, Rutgers Business School Lucia Piscitello, Politecnico di Milano ABSTRACT Connections with external local business networks (BNs) in a host country have been recognized as a crucial factor in explaining the capacity of MNC subsidiaries for locally exploratory activity. Yet the notion of embeddedness in local BNs has typically been supposed to be inherently geographically confined. This paper relies instead on a concept of embeddedness in a wider perspective, in a network of actors that is not necessarily locally bounded. Relying on data on the innovative activities of the world's largest industrial firms over the period 1930-95, we find that a key element in the capacity of local BNs to generate an evolution towards competence creating (CC) activities in co-located subsidiaries is the international connectedness of those networks. The more open are the BNs in which MNC subsidiaries are embedded, the greater is the scale of local subsidiary technological efforts (for all industries at a national level), and the greater is the relative extent of subsidiary CC development (for industries whose BNs are more open compared to other industries in the same country). 1. INTRODUCTION Since the mid-1980s, attention has increasingly focused on the emergence of internal and external networks for innovation in MNCs (multinational corporations). The new view has drawn heavily on an evolutionary view of the firm (Nelson and Winter, 1982), which may be extended to consider the co- evolution of the internal and external networks of firms (Volberda and Lewin, 2003). MNC technological activities cumulatively interact both with local networks in each vicinity in which they are sited, and cross-border knowledge exchange in international in-house networks (Nohria and Ghoshal, 1994). MNC internal networks may evolve towards increasingly exploratory kinds of learning as selected subsidiaries in an MNC group evolve towards more locally competence creating activities, partly by tapping into host country capabilities (Cantwell, 1995; Cantwell and Mudambi, 2005). Connections with external local business networks in a host country have been a crucial factor in explaining the capacity of MNCs for locally exploratory activity (McEvily and Zaheer, 1999; Andersson and Forsgren, 2000; Andersson et al., 2002; Forsgren et al., 2005). Yet the notion of embeddedness in local business networks has typically been seen to be inherently geographically