Revisiting the external impact of MNCs: An empirical study of the mechanisms behind knowledge spillovers from MNC subsidiaries Christina Hallin *, Christine Holmstro ¨m Lind Department of Business Studies, Uppsala University, Box 513, 75120 Uppsala, Sweden 1. Introduction With the expectation that inward foreign direct investment (FDI) will serve as a channel for knowledge and technology transfer to the host country, attracting foreign investment is a highly ranked task on the agenda of national policy makers. Knowledge spillovers, i.e., the unintentional transfer of knowledge between firms, are widely believed to benefit firms in the host country, resulting in, e.g., productivity growth among domestic firms. Traditionally, the multinational corporation (MNC) is ascribed superior technologies and management skills that allow it to compete successfully against indigenous firms. Through the intra-organisational transfer of knowledge, MNC subsidiaries can benefit from the knowledge and competence developed within different parts of the MNC. However, the MNC cannot capture all the economic rents from its operations (cf. Caves, 1974) because of the difficulty of controlling the unwanted diffusion of intangible assets, such as knowledge. Thus, the proprietary knowledge of the MNC may also come to benefit firms that are located in the near proximity (cf. Jaffe, Trajtenberg, & Henderson, 1993). Traditionally, research on knowledge spillovers has largely been dominated by economists (e.g., Aitken & Harrison, 1999; Blomstro ¨m & Kokko, 2003; Blomstro ¨m & Sjo ¨ holm, 1999; Go ¨rg & Strobl, 2001; Haddad & Harrison, 1993) and political scientists (e.g., Moran, 2001). Apart from some early studies investigating the link between multinational corporations, FDI International Business Review 21 (2012) 167–179 A R T I C L E I N F O Article history: Received 5 October 2007 Received in revised form 18 December 2010 Accepted 21 December 2010 Keywords: Competition Embeddedness Innovation Knowledge spillovers Knowledge transfer MNC subsidiary A B S T R A C T The majority of studies of knowledge spillovers from the presence of multinational corporations (MNCs) have focused on whether or not, rather than how knowledge spillovers occur from MNC subsidiaries to local host country firms. Using survey data from 210 MNC subsidiaries in Sweden, a composite model is developed examining the impact of two different environmental conditions on the occurrence of knowledge spillovers arising from innovation transfer within MNCs. We distinguish between horizontal knowledge spillovers (i.e., to competitors) and vertical knowledge spillovers (i.e., to customers and suppliers), and emphasise the conceptually important distinction between the two. The former are largely unintentional by nature whereas the latter can be considered as intentional knowledge diffusion. The results show that competitive pressure in the recipient subsidiary’s local environment gives rise to unintentional knowledge spillovers, whereas it is negatively related to intentional knowledge diffusion. The results also support the notion that the degree of embeddedness of in a subsidiary’s business network in the host country is positively related to intentional knowledge diffusion. An important finding of the study is that there is a positive relationship between intentional knowledge diffusion and unintentional knowledge spillovers. ß 2011 Elsevier Ltd. All rights reserved. * Corresponding author. Tel.: +46 18 471 14 94; fax: +46 18 471 68 10. E-mail address: christina.hallin@fek.uu.se (C. Hallin). Contents lists available at ScienceDirect International Business Review jo ur n al ho mep ag e: www .elsevier .c om /lo cate/ib u s rev 0969-5931/$ – see front matter ß 2011 Elsevier Ltd. All rights reserved. doi:10.1016/j.ibusrev.2010.12.003