Abstract It has been demonstrated that more creative innovative activities of subunits of multinational companies (MNCs) rely upon the munificence of local knowledge in the host country. Here, we argue that the strength of international business network connections of a host location influences the potential accessibility of international knowledge and hence tends to widen the domain of new knowledge search that can be successfully undertaken by anMNCsubunit. This in turn increases the likelihood of anMNCsubunit building new areas of competencies, that is, in fields of competencies which are relatively new to theMNC. Specifically, we suggest that the relevant international business network connections are those involving local actors in theMNCsubunit's relevant industry. Moreover, geographical proximity betweenMNCsubunits and their parent company has an inverse U‐shaped relationship with new competence creation by subunits. Using a balanced panel data set on innovative activities conducted abroad by 194 of the world's largest industrial firms from 1975 to 1995, we find support for our expectations.
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