The effect of external linkages on subsidiary product innovation performance in a transition economy: the moderating role of institutional distance

Purpose This study aims to investigate the moderating effects of institutional distance on the association between a subsidiary’s external linkages and its product innovation performance in a transition economy. Design/methodology/approach The data of 1,680 subsidiaries located in Vietnam were extracted from the survey of General Statistics Office of Vietnam of Vietnam. The Tobit regression model is used to estimate the moderating effects of institutional distance on the association between a subsidiary’s external linkages and its product innovation performance. Findings The findings revealed that the higher the subsidiary’s linkages with local input suppliers and local sales in a transition economy, the higher it will achieve product innovation performance. Formal institutional distance positively moderates the association between backward linkages and product innovation performance; informal institutional distances positively moderate the associations between both backward and forward linkages and product innovation performance. Research limitations/implications The findings imply the need for multinational enterprises’ (MNEs) subsidiaries to establish a close connection to local input suppliers and local sales to gain potentially valuable knowledge and acquire legitimacy to survive and maintain competitive advantages in a transition economy; they can do so by communicating and adopting a local working approach to local input suppliers, host country’s local sales and use the supporting policies of a host government to strengthen their product innovation performance. The findings confirmed that simultaneously adopting business network theory and the “paradox effects” of institutional distance in institutional theory to study location-specific advantages exploitation of subsidiaries is relevant and important not only in developed economies but also in transition economies. Practical implications The findings imply the need for MNEs’ subsidiaries to establish a close connection to local input suppliers and local sales to gain potentially valuable knowledge and acquire legitimacy to survive and maintain competitive advantages in a transition economy; they can do so by communicating and adopting a local working approach to local input suppliers, host country’s local sales and use the supporting policies of a host government to strengthen their product innovation performance. Originality/value By leveraging business network theory and institutional theory, the study developed a theoretical model about the moderating effects of institutional distance on the association between a subsidiary’s external linkages and its product innovation performance in a transition economy.