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We build on extant theory of the Multinational Enterprise (MNE), MNE subsidiaries and absorptive capacity (AC) to develop a framework that allows us to explore the role of MNE subsidiaries in the global sourcing of knowledge and MNE performance. We develop and test hypotheses using primary questionnairecollected data. Our results support the idea that subsidiaries realized AC can be improved by the realized and potential AC of the MNE group and the subsidiary and in turn may improve the performance of the subsidiaries and the MNE group as a whole.

We test for the determinants of Multinational Enterprise (MNE) headquarters decisions to augment the innovative capabilities of the MNE group by granting mandates to their subsidiaries to set-up own R&D labs in UK regions, using a unique primary data set.Our findings suggest that the best predictor for a subsidiary receiving a mandate, is the strength of its `productive opportunity (the interaction between internal competencies and external environment). We employ a measure that augments the external environment to include regional agglomeration characteristics.Our findings highlight the importance of subsidiary, industry and locational characteristics, as well asMNE strategy to leverage subsidiary skills in determining the location of R&D activity in the global economy and in enhancing MNE innovative potential.