Abstract: Benefiting from the extensive application scenarios and customer resources in the Chinese market, more and more multinational corporations' subsidiaries in China are gradually growing from local production centers to global innovation centers. However, the mechanism of how global innovation capabilities of overseas subsidiaries is built remains unclear. Based on a longitudinal single case study of Hexagon(China) from 1993 to 2024, this paper explores this mechanism. Our research shows that: firstly, there are three ways for local customers of overseas subsidiaries to participate: information participation, development participation, and innovation participation. At different stages of participation, customers' role changes from information provider to development participant to independent innovator; Secondly, based on customer engagement methods, overseas subsidiaries deeply observe the demand scenarios of local customers, and build innovation capabilities by bridging internal and external resources of multinational enterprises and cross organizational boundary learning, thus forming an inherent mechanism featured with customer scenario observation, resource bridging and cross boundary learning; Third, the innovation capability of overseas subsidiaries upgrades from local innovation to reverse innovation to global innovation, or, to be specific, from adaptive innovation led by parent company, to forward-looking innovation driven by overseas subsidiaries, and then to leading innovation led by overseas subsidiaries. The theoretical model presented in this paper provides important reference for multinational corporations and their overseas subsidiaries to achieve global innovation.

Key words: overseas subsidiaries, global innovation capability, local customer participation, capability building, capability upgrade