Embeddedness creates knowledge: environmental competition, external relational embeddedness, and foreign subsidiary knowledge creation

Purpose This study aims to investigate how environmental competition influences both absorptive capacity (AC) and knowledge creation in foreign subsidiaries through the mediating role of external relational embeddedness. It highlights how relational embeddedness enables subsidiaries to transform competitive pressure into enhanced learning and knowledge development outcomes. Design/methodology/approach This study obtained data through a survey of 189 subsidiaries in Shanghai, Mainland China. Data were collected from CEOs or senior managers. A sophisticated data analysis was performed using structural equation modeling. Findings The results indicate that environmental competition positively influences subsidiary external relational embeddedness, which in turn enhances both AC and knowledge creation. External relational embeddedness fully mediates the effects of environmental competition on these two outcomes, serving as a key mechanism for transforming external pressure into knowledge development at the subsidiary level. This finding underscores the critical role of external relational embeddedness in strengthening subsidiaries’ AC and fostering knowledge creation. Research limitations/implications This study has several limitations that suggest directions for future research. Future studies could examine distinct aspects of environmental competition, refine the measurement of key constructs and consider institutional contexts. Longitudinal or case-based designs are also recommended to address issues of causality and endogeneity. Practical implications This study highlights that environmental competition is crucial for subsidiary knowledge creation, with host country characteristics essential for global competitiveness. External relational embeddedness positively impacts AC and knowledge generation, emphasizing the need for managers to pursue partnerships and adopt best learning practices to enhance subsidiaries’ capabilities and strengthen their contributions to the global value chain. Originality/value This study integrates environmental competition and external relational embeddedness, offering new insights into how subsidiaries acquire and create knowledge in competitive host environments. The results show that external relational embeddedness fully mediates the effects of environmental competition on both AC and knowledge creation. By being embedded into local external networks, subsidiaries can enhance their ability to absorb external knowledge and improve their knowledge creation performance. These findings highlight the critical mediating role of external relational embeddedness in supporting subsidiary knowledge development and provide a relational extension to the knowledge-based view of international business.