Multinational enterprises (NMEs) operate in vastly different international environments. The intellectual property (IP) held by their foreign subsidiaries is thus at risk of appropriation by outsiders—sometimes even more at risk than the IP of the parent company. While legal and other external measures are obviously important to reduce such risk, Jiatao Li of HKUST and colleagues reveal that how a subsidiary is internally structured can also help to protect against IP leakage. This has important implications for managers. By looking at IP risks associated with internal network structures, the study “addresses a critical gap in the field,” the researchers say.

The researchers base their study on the familiar idea that “it’s a small world”—a phrase often used after discovering surprising connections between seemingly unrelated individuals. The researchers used the idea of “small-worldness” to represent the degree of compactness of networks within an MNE’s foreign subsidiary. Two types of networks were considered: internal collaboration networks (ICNs) and networks comprising knowledge elements (such as theories and methods), known as internal knowledge networks (IKNs). Networks of either type that were relatively compact, with closely related elements, were categorized as high in small-worldness.

“Given that a small-world structure affects knowledge search and transfer efficiency,” say the researchers, “it may have significant implications for firm knowledge protection.” They hypothesized that small-worldness can substitute for an inadequate external environment in various ways. “The ICN complex small-world structure can result in social complexity,” they say, “hindering other firms’ socially-based search efforts to interpret and imitate its activities.” Therefore, a foreign subsidiary should build an ICN with high small-worldness to prevent its knowledge from leaking to others. Meanwhile, as learning is generally inter-related, a foreign subsidiary should build an IKN with low small-worldness, “to decrease its knowledge-relatedness and increase imitators’ difficulties in deciphering its core knowledge.”

The results of the study, which analysed data from 401 foreign subsidiaries of 121 pharmaceutical firms over 37 years (1980–2017), confirmed these expectations. The effects were especially marked when the parent firm lacked prior experience within the subsidiary’s host country. As the researchers explain, “the need for maintaining small-worldness [in internal networks] will depend on what other defense mechanisms are available.” For example, in situations where the parent firm is well established in the host country, existing links with government departments and key stakeholders may be more important.

What practical management tools to increase IP protection can be distilled from this research? To increase the small-worldness of ICNs, the authors suggest, interdepartmental seminars could be held to build cooperation and information-sharing. For IKNs, decreasing small-worldness might involve some cunning. “A subsidiary may … employ some confusing or deceptive technologies to deceive imitators,” the researchers suggest.

But there are limitations to how far such measures are likely to be applicable. As the researchers point out, “reshaping internal networks has some costs.” While increasing small-worldness in collaborative networks and decreasing it in knowledge networks might be beneficial, “investigating the cost-benefit trade-offs” of such changes is advisable, they conclude.