This paper examines the determinates of subsidiary product innovation in the Chinese market based on a sample 680 EU subsidiaries over the period of 1998-2009. To date, the literature on EU subsidiaries has failed to consider product innovation in the marketing strategy interplay in approaching new markets overseas. Building on Resource Based view linked with Chinese institutional factors, it empirically examines the inferential product innovation strategy in an EU-China context. By applying the econometric analyses techniques to investigate innovation determinants and to test the presence of agglomeration effect of past innovation activities. The results show EU MNC subsidiaries’ innovation is influenced by both host country institutions and firm capabilities, rendering support to the theory. The analysis indicates EU subsidiaries’ innovation is positively related to firm advertisement, labour training and host market size. R&D expenditure has a negative bearing on innovation. However, openness has a negative and significant effect on product innovation in China. The findings have important implications for theory, practitioners and policy-making. This study contributes to the literature on the evolution of MNCs by exploring determinants of developed foreign subsidiaries’ innovation activities in emerging markets.

This paper analyses the importance of innovation for 680 EU multinationals subsidiaries involved in international marketing in China, the period of 1998-2009, using unbalanced panel data analysis. To date, the literature on EU subsidiaries has failed to consider product innovation in the strategy interplay in approaching new markets overseas. Building on the resource-based view of the firm, linked with host economic and political institutions, the authors empirically examine the inferential marketing strategy in an EU-China context, by applying econometric techniques to investigate innovation capabilities and to test the presence of agglomeration effect of past innovation activities. We find that EU innovation in China is influenced by both host country institutions and firm capabilities, rendering support to the theory. Our analysis indicates EU subsidiaries’ innovation is positively related to firm advertisement, labour training and host market size. R&D expenditure has a negative bearing on innovation. However, openness has a negative and significant effect on product innovation in China. The study findings have important implications for research on international marketing, new venture decision making, and overseas innovation expansion strategies.