Foreign subsidiaries as vehicles of industry 4.0: The case of foreign subsidiaries in a post-transition economy
Introduction
The fourth industrial revolution is called Industry 4.0 (I4.0). It is built on Cyber-Physical Systems (CPS) that comprise smart machines, storage, and production facilities able to autonomously exchange information, trigger actions, and control each other independently of human supervision (Hermann, Pentek, & Otto, 2015). The term Industry 4.0 embraces a wide array of interdisciplinary technologies – with different levels of maturity and market availability – which facilitate digitization, automation, and process integration along value chains (Kagermann, Wahlster, & Helbig, 2013). In this article, we use I4.0 and business digital transformation interchangeably, as synonyms. Ghobakhloo (2019) explains Industry 4.0 in terms of key design principles and technology trends, but also architectural design. He defines I4.0 as an integrative system of value creation. Manufacturers must get used to this new reality, although there is no one best strategy for all companies, and each firm needs a roadmap that should respect the company’s core competencies, motivations, capabilities, priorities, and budgets.
Available studies highlight that many firms have implemented only a fraction of I4.0 solutions, increasing the polarization among different entities, which threatens that the gap between leaders and laggards may only further increase (Atomico, 2017; Cifolli & Muscio, 2018; De Propris, 2018). The threat seems to be extremely dangerous for countries – and, in particular, firms in these countries – that would regrettably find themselves in the hollowing out middle that will consist of locations neither cheap enough to remain attractive as production sites nor leading enough to benefit from first-mover surpluses. Unfortunately, this is the position of post-transition countries, especially the Central and Eastern European states that are no longer like emerging economies but still remain behind the advanced mature market economies.
For post-transition economies, I4.0 can offer a unique chance to further modernize economies and climb up the value chains. However, I4.0 can materialize only in an adequate context, when elementary digital infrastructure is provided, required skills and capabilities are nurtured and safeguarded, and the application of modern technologies is properly prompted. On the one hand, such conditions will attract valuable knowledge-intensive Foreign Direct Investment (FDI), and on the other hand, they will translate into an attractive environment for generating one’s own digital entrepreneurship. Attracting FDIs in the digital era implies smart plugging of host economy into global value chains (GVCs) and global production networks (GPNs). This requires a wider integration of domestic start-ups and SMEs into such ecosystems by pursuing adequate policies that may exceed classic FDI-attracting measures (Ganne & Lundquist, 2019).
Thus, we ask whether foreign subsidiaries (FSs) of multinational enterprises (MNEs) can act as vehicles of I4.0 transformation in post-transition economies. FDI belongs to the most frequent channels that enable the cross-border transfer of new technologies (Borensztein, De Gregorio, & Lee, 1998). In the context of FDI, this usually means spillover effects of tacit knowledge (Amesse & Cohendet, 2001; Borensztein et al., 1998; Crespo & Fontoura, 2007; Ferragina & Mazzotta, 2014; Fritsch & Kauffeld-Monz, 2010; Gugler & Brunner, 2007; Kokko, 1994). Subsidiaries of MNEs play a prominent role in these processes.
In our research, we primarily treat knowledge as a private good, even though we acknowledge specific attributes of knowledge as a public good. We are fully aware that knowledge flows between headquarters (HQ) and FSs are bi-directional, and this type of flows derives mainly from the main motivation underlying the establishment of FDIs, be it technology/knowledge-seeking/exploring or its exploiting and augmenting (Cantwell, 1989, 1994; Dabić & Kiessling, 2019; Eden, 2009; Ha & Giroud, 2015; Isaac, Borini, Raziq, & Benito, 2019; Jiménez-Jiménez, Martínez-Costa, & Sanz-Valle, 2020; Michailova & Mustaffa, 2012; Moon & Roehl, 2001; Peng, 1995). What further matters here are location attractiveness – hence the possibility to source foreign and more advanced know-how – and the position of an FS, which entails the mandate and autonomy – or bargaining power – it enjoys within the MNE network. These are the main modulators that further shape knowledge flows among entities that constitute MNEs.
An obvious strategy to cope with the challenge is the transfer of I4.0-related know-how and the adoption of new technologies in these economies. Foreign investors may decide to transfer advanced technological solutions to their subsidiaries abroad and follow the strategy of sharing, but they may also seek to keep new solutions to themselves and adopt the strategy of appropriation. We argue that the strategic behavior of headquarters (HQ) is the first critical element that impacts the possibility of FSs to become the vehicles of I4.0 transformation in host economies (input). Besides, one might, argue that the foreign subsidiary (FS) role as a vehicle for I4.0 would depend on the subsidiary’s innovation capacity level, which can assure the necessary compatibility/maturity (innovation), and on the embeddedness in local economic environment that guarantees the transition of knowledge (impact). Hence, we propose a three “I’s” model for FSs as I4.0 vehicles. Our focus on input-innovation-impact components – ideally satisfied simultaneously – also reflects recent calls to account for the interplay between all three elements of the OLI conditions when exploring foreign direct investments (FDIs).
In this paper, we conduct our study from the subsidiary perspective. After all, as Meyer, Li, and Schotter (2020) notice, few studies concentrate on the foreign subsidiary as the unit of analysis, address the need to better understand the complexity of multi-embeddedness of MNEs (Kostova & Roth, 2002; Meyer, Mudambi, & Narula, 2011; Nell, Ambos, & Schlegelmilch, 2011), and examine how this complexity responds to changes in MNEs environment. Thus, we will first outline our rationale behind regarding FSs as vehicles of know-how and technology transfer from HQ. Next, we will briefly present the methodological approach we adopted to study the FS role in digital transformation. Then, we will discuss the results obtained and the likely main consequences of these findings.
Results obtained demonstrate that in the post-transition, FDI-dependent economies like Poland, FSs could be vehicles for I4.0 transformation thanks to their local embeddedness and, to a lesser extent, thanks to the inflow of knowledge from their HQs, whereas the innovation capacity level of an FS proved to be insignificant.
The topic of I4.0 or, broader, of business digital transformation in relation to foreign investment flows seems to remain a nascent research area that lacks the availability of only emerging stylized facts. We believe that our study purpose is interesting, as it aligns the new research on digital business transformation – especially I4.0, classified also as radical disruptive innovation – with the activities of MNEs, particularly the role their FSs can play as vehicles that transmit this transformation. The main contribution of our paper derives from combining the challenges of digitalization and globalization by investigating the potential of FDI to serve as the vehicle of I4.0 in a country that has been long regarded FDI-dependent and for which the role and scale of foreign investors cannot be underestimated. Moreover, we also posit a simple – though potentially replicable – model of 3 “I’s,” which incorporates a diagnosed sequence of relations. An analysis embedded in the Polish context enables a more general reference to the nature of post-transition economies in which, on the one hand, I4.0 is seen as the key factor of future development that will allow catching up to more advanced countries, however underdeveloped and insufficiently implemented it may be in post-transition economies. On the other hand, FDIs emerge as key actors that bring – as the last three decades prove – not just capital but also know-how, technologies, and managerial competences. Hence, we believe it is of the utmost importance not only to explore the ongoing digital transformation in relation to the most advanced form of foreign expansion – i.e. FDI – but also to consider it in the context of post-transition countries. After all, post-transition countries recognize the potential of I4.0 for the sustained growth of their economies yet they lag behind in terms of I4.0 adoption and hence must urgently make up for the lost time. Thus, we ask if FDI – undoubtedly a key factor of such economies’ development so far – could further facilitate and accelerate digital transformation in Central and Eastern Europe.
Section snippets
Literature review and hypotheses development
The literature on inward FDI explains that foreign investors often provide superior technologies that create opportunities for local entities to upgrade their own capabilities (Haskel, Pereira, & Slaughter, 2007; García, Jin, & Salomon, 2013; Scott-Kennel & Saittakari, 2020). Furthermore, international business literature provides a great number of studies on the roles of FSs (Cantwell & Mudambi, 2005; Achacaoucaou, Miravitlles, & León-Darder, 2014; Lim, Hemmert, & Kim, 2017). Nevertheless, few
Data collection
To investigate the capability of an FS to become a vehicle of Industry 4.0, we selected the deductive approach, while combining the literature and empirical studies to test our hypotheses. The empirical studies were quantitative in nature and were conducted in 2018 among big and mid-sized FSs established in Poland that operate in the manufacturing industry – according to the NACE Rev. 2.0, and started their operations as parts of MNEs no later than in 2012. The primary, FS-level data were
Single-sample based path analysis
For the tested model (Fig. 2), we used the following fit indices (Hu & Bentler, 1999; Steiger & Lind, 1980; Wheaton, Muthén, Alwin, & Summers, 1977): the chi-square (, the chi-square , the root mean square error of approximation (RMSEA), the comparative fit index (CFI), and the standardized root mean square residual (SRMR). The results are shown in Table 3, and as observed, value indicated that model fits the empirical data well ( = 4.051 at prob. ≤ 0.05 = 0.3221). This is also
Discussion
The uniqueness of presented analysis rests on the fact it pertains to the case of one of the most successful post-transition economies. Poland’s road to market economy manifests itself by 30 years of uninterrupted growth, infrastructure expansion, and wider modernization (Visvizi et al., 2020). Poland has now been a member of the EU for more than 15 years. During that time, Poland’s image on the EU scene evolved from a newcomer, through a “model child,” the champion of growth, to – in some
Conclusion and limitations
Having tested three hypotheses that constitute our three “I’s” model and emphasize the main contribution of this research and article, we arrived at the conclusion that FSs could be vehicles for I4.0 transformation thanks to their local embeddedness (positive and significant influence – H3) and to a lesser extent thanks to the inflow of knowledge from their HQs (positive but less significant – H1), whereas the innovation capacity level proved to be insignificant (H2). When considering
Funding
This work was supported by the grant of the National Science Centre in Poland, grant No UMO-2016/21/B/HS4/03030 - Innovation performance of a foreign subsidiary and its position in the network of a multinational enterprise - the perspective of foreign subsidiaries established in Poland.
Acknowledgement
This study was financed by the grant of the National Science Centre in Poland, grant No UMO-2016/21/B/HS4/03030 - Innovation performance of a foreign subsidiary and its position in the network of a multinational enterprise - the perspective of foreign subsidiaries established in Poland.
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