In order to increase a foreign subsidiary’s contribution to international competitiveness of theindustrial firm it is decisive to be aware of boundaries to the subsidiary’s differentiationstrategy that may hamper its performance. Based on a literature review, this article develops atheoretical model in which the differentiations components of innovativeness and customerresponsiveness build on dynamic capabilities. The model contributes to theory by proposing anegative contingency effect of competitive dynamics on foreign subsidiary’s positiverelationships between innovativeness/responsiveness and performance. Also, the modelproposes that an appropriate value-adding mandate assigned to the subsidiary strengthens thedirect relationships. Implications and further research are discussed.