Professor Catherine Magelssen, from London Business School, will present "The Comparative Impact of Headquarters and Subsidiaries in Managing R&D".

Abstract: We investigate whether R&D subsidiaries generate more innovation when they are controlled by headquarters or a managing subsidiary, particularly amid decreasing costs for remote communication. Using a confidential dataset on 1,004 R&D subsidiaries from 78 multinational enterprises (MNEs) operating across 53 countries and the entities that oversee them, we analyze the management of R&D subsidiaries. We exploit the country-level introduction of broadband communication technology as a shock to communication costs to implement a staggered triple difference-in-difference estimator of the effect of broadband on the relationship between R&D subsidiary innovation and the type of managing entity. Our findings indicate that while R&D subsidiaries managed by headquarters produce more patents prior to broadband introduction, those managed by managing subsidiaries experience significantly greater increases in patent quantity, quality, and market value post-broadband. This effect is attributed to the reduction in communication costs disproportionately benefiting managing subsidiaries by enhancing their ability to share knowledge with the R&D subsidiary and monitor innovation effectively. These results challenge the prevalent argument of the superiority of headquarters in managing R&D and highlight the strategic importance of vertical subsidiary-subsidiary relationships for the firm’s ability to translate technological progress into greater innovation.