The role of knowledge development and flow of knowledge on the performance of foreign subsidiary companies

PurposeThis study examines the relationship between external embeddedness (EE), subsidiary knowledge development (SKD), knowledge flow (KF) and their collective impact on foreign subsidiary performance (FSP). It investigates whether SKD mediates the relationship between EE and KF, particularly in the context of knowledge-intensive business services (KIBS) in Malaysia. By integrating network theory and the resource-based view (RBV), the research explores how multinational enterprises (MNEs) leverage external networks to foster knowledge acquisition and competitive advantage.Design/methodology/approachA quantitative, mixed-method approach integrates survey-based analysis (2017-2018) and longitudinal panel regression analysis (2017-2024). The study employs purposive sampling to ensure representation across diverse foreign subsidiaries operating in Malaysia. Data collection consists of primary data from 293 survey responses from foreign subsidiary managers and secondary data from OneSource, Orbis (Bureau van Dijk), WIPO patents and annual reports for financial performance validation. Analytical techniques include structural equation modeling in AMOS 26 and panel regression in Stata, using fixed effects, random effects, and Hausman tests to assess direct and mediating relationships.FindingsThe results indicate that EE positively influences SKD and KF, demonstrating that subsidiaries with stronger local and global ties acquire and transfer knowledge more effectively. KF significantly enhances FSP, confirming its strategic role in fostering innovation and adaptability. The findings also establish that SKD mediates the relationship between EE and KF, suggesting that subsidiaries must internalize and develop acquired knowledge to maximize performance. Additionally, panel regression results validate that these relationships remain stable, even amid technological disruptions and post-pandemic shifts.Originality/valueThis research emphasizes the importance of EE for foreign-owned subsidiaries in terms of knowledge creation, knowledge diffusion and performance. Establishing a strong connection with the local business community can enhance these subsidiaries' technological capabilities, gain access to external knowledge sources and enhance their innovative and service-oriented performance. Policy implications indicate that these advantages may be improved by fostering a more profound integration with local business communities, stimulating innovation and enhancing overall performance.