Sharing knowledge across borders has proven to be especially relevant to multinational corporations (MNCs). Foreign subsidiaries have become active players in these knowledge flows. However, the network effects of interacting with multiple agents on the evolution of the R&D role played by subsidiaries are still undeveloped. The present study focuses on changes in subsidiary capabilities and on the dynamic mechanisms by which their R&D role might evolve, especially, as a consequence of their interaction with a variety of knowledge networks. We examine this issue by conducting four longitudinal case studies of subsidiaries operating in Spain. Using an inductive approach to theory building, we develop a general theoretical framework considering the subsidiary's embeddedness in the knowledge networks within the MNC (internal) and within the host country (external). We find that evolving towards a competence-creating mandate is characterised by the simultaneous growth of embeddedness in both internal and external networks; otherwise, a subsidiary may gravitate away from upgrading its R&D role. Thus, the contribution of this paper is to present a dynamic model that sheds light on how internal and external knowledge embeddedness interact in generating outcomes for subsidiary R&D roles.