Connectivity Infrastructure and Innovation: The Effects of Headquarters versus Subsidiary Management

Abstract

Improvements in connectivity infrastructure can stimulate innovation by reducing information frictions across locations, yet firms benefit unevenly, and the organizational sources of this heterogeneity remain insufficiently understood. This study examines how the locus of managerial authority within multinational enterprises (MNEs)—specifically, whether R&D subsidiaries are managed by headquarters or by another subsidiary—influences the change in innovation from improved connectivity. We use a novel longitudinal dataset covering 1,004 R&D subsidiaries from 78 MNEs and exploit the staggered global rollout of broadband as a quasi-exogenous shock to connectivity. Triple difference analyses using matched samples indicate that broadband increases subsidiary innovation on average, but the effects are driven by R&D subsidiaries managed by other subsidiaries. These subsidiaries experience substantially larger post-broadband increases in innovation productivity, knowledge flows from, and co-inventions with their managing entity than headquarters-managed subsidiaries. Additional analyses indicate that the gap widens when headquarters face greater information complexity, associated with larger MNE size, more extensive international operations, and broader roles, suggesting that headquarters’ heavier information load constrains its ability to leverage improved connectivity. Consistent with information processing under constraints, we find suggestive evidence that headquarters prioritize their most important and technologically proximate subsidiaries. In contrast, subsidiary-managed units achieve innovation gains more broadly. Overall, the findings show that the innovation benefits of connectivity infrastructure hinge on organizational structure, highlighting the pivotal role of subsidiaries in managing innovation and the conditions that can impede or enhance these effects, advancing understanding of both connectivity-enabled innovation and MNE management.