Innovation policy, competence creation and innovation performance of foreign subsidiaries: The case of South Korea

Abstract

The aim of this contribution is to assess the impact of innovation policy on foreign subsidiaries’ innovation performance. The South Korean government has implemented a series of policies to enhance the innovation capabilities of private firms, whether foreign or locally owned. With more FDI in the country, the position of foreign subsidiaries as main actors for innovation is important. Yet the specific role of South Korean innovation policies in facilitating and promoting innovation by foreign subsidiaries remains under-studied. Further, the literature suggests that a subsidiary's innovation activities depend upon its strategic mandate. This article's fundamental contribution, therefore, is to analyse the influence of innovation policies and strategic mandates on the innovation performance of foreign subsidiaries. Using data from the Korean Innovation Survey, a series of models are constructed explaining the innovation performance of 423 foreign firms in the Korean manufacturing sector. Results suggest that subsidiary innovation is primarily explained by its strategic role, and competence-creating subsidiaries demonstrate higher levels of innovation performance. Innovation policy is found to influence more positively less innovative firms. Two types of policy are found to have a significant effect, namely technical support and tax incentives.