conventional and reverse knowledge flows in multinational corporations

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Conventional and Reverse Knowledge Flowsin Multinational Corporations†

Qin YangSchool of Business, Robert Morris University, Moon Township, PA 15108

Ram Mudambi* Department of Strategic Management, Fox School of Business, Temple University, Philadelphia, PA 19122

Klaus E. MeyerSchool of Management, University of Bath, Claverton Down, Bath BA2 7AY, UK

Leveraging knowledge from geographically disparate subsidiaries is a crucial source of competi-

tive advantage for multinational corporations (MNCs). This study investigates the determinants of

knowledge transfers to and from newly acquired subsidiaries in three transition economies inCentral and Eastern Europe. It is hypothesized that the determinants of conventional knowledge

transfers from MNC parents to subsidiaries and reverse knowledge transfers from subsidiaries to

MNC parents are based on different transfer logics. A sample of 105 acquired subsidiaries

revealed that organizational characteristics are important in conventional knowledge flows from

headquarters, so that subsidiaries acquired with competence-creating objectives receive signifi-

cantly larger inflows. Knowledge characteristics are important in reverse flows to headquarters so

that subsidiaries whose knowledge is more relevant are able to transmit significantly larger out-

flows. Host country locations have significant moderating effects. The significance of the direc-

tional context in knowledge transfers is an important new finding.

Keywords: knowledge management; knowledge relevance; acquisitions; multinational sub-

sidiaries; transition economies

Knowledge is a fundamental resource for firms to develop and retain competitive advan-tages (Grant, 1996; March, 1991). The ability of multinational corporations (MNCs) to lever-age their knowledge across dispersed foreign subsidiaries has become essential for achievingand sustaining competitive performance (Gupta & Govindarajan, 1991; Mudambi, 2002,

882

Journal of Management, Vol. 34 No. 5, October 2008 882-902

DOI: 10.1177/0149206308321546© 2008 Southern Management Association. All rights reserved.



884 Journal of Management / October 2008

Internal Knowledge Transfer and Knowledge Relevance Theory

Knowledge transfer is a process in which an organization re-creates a complex, causally

ambiguous set of routines in new settings and keeps the routines functioning. These routinesappear in the form of know-how, R&D capabilities, managerial techniques, and so on. Butknowledge, especially when it is tacit, does not necessarily flow easily within the MNC(Cantwell & Santangelo, 1999). Stickiness connotes the difficulty experienced in the transferprocess (Szulanski, 1996). Recent studies suggest that such factors as knowledge character-istics, source and target units’ characteristics, the organizational contexts of transfer, andenvironmental factors are likely to affect knowledge transfer (Cui et al., 2006; Foss &Pedersen, 2002; Gupta & Govindarajan, 2000; McCann & Mudambi, 2005; Szulanski,1996). In sum, knowledge-related barriers and the interaction of knowledge transfer partici-pants are key factors in effective knowledge transfer.

Relevance is a term used to describe how pertinent, connected, or applicable some infor-mation is to a given matter. According to relevance theory, a piece of information is charac-terized as relevant to an individual when processing it yields cognitive effects, that is, whenit permits new inferences or the revision of previously held assumptions (Sperber & Wilson,1986). The greater these cognitive effects, the greater the relevance; the greater the process-ing effort used to achieve these effects, the lesser the relevance.

Knowledge relevance is defined as “the degree to which external knowledge has thepotential to connect to local knowledge” (Schulz, 2003: 442). Following relevance theory,the more the provider’s knowledge has implications for the receiver and the easier it is for theknowledge receiver to derive these implications, the more the knowledge is relevant. Asthe overlap between provider knowledge and extra-unit receiver knowledge increases, thelikelihood of connections or relatedness also increases. Knowledge relevance provides anapproach to link the transferring and receiving ends of knowledge flows and is consistentwith the notion of relative absorptive capacity (Lane & Lubatkin, 1998). For a given level of provider willingness to undertake the transfer and a given level of knowledge tacitness, themore the knowledge is connected, the more effective the transfer. A number of argumentscan be made to support this line of reasoning.

First, researchers in social psychology have found that similarity and attraction are posi-tively associated (Sabini, 1992). Firms manage international business units more efficiently

with a high degree of relatedness (Palich & Gomez-Mejia, 1999). Thus, decision makersconsider relevant knowledge to be of high value (Feldman & March, 1981). Second, if theknowledge to be learned is related to the firm’s current knowledge, the firm can quickly rec-ognize the potential benefits of the new knowledge and thus be motivated to take measuresto assimilate and use it (Mudambi & Navarra, 2004). Third, knowledge evolves through thecontinuous incorporation of new knowledge into the existing knowledge base. Schulz notedthat “knowledge can change other knowledge the more it is related to it or can be related toit” (Schulz, 2003: 442). The more new knowledge is connected with current knowledge, thehigher the capacity to absorb it, apply it, and integrate it into the organization. Units’absorp-tive capacity is “largely a function of their preexisting stock of knowledge” (Szulanski, 1996:

31). Knowledge relevance therefore improves a firm’s willingness and capacity for learning,



Yang et al. / Knowledge Flows in Multinational Corporations 885

two critical factors that affect the extent and success of knowledge transfer (e.g., Gupta &Govindarajan, 2000; Mudambi, Mudambi, & Navarra, 2007).

Finally, although knowledge relevance is positively related to absorptive capacity, the two

concepts are theoretically distinct (Mahnke, Pedersen, & Venzin, 2005). For example, if knowledge relevance is low but the transfer is considered a strategic priority, the firm mayinvest resources to create sufficient absorptive capacity.

Hypothesis Development

Knowledge Characteristics

Our core argument is that knowledge relevance has different influences on conventional

and reverse knowledge transfers, attributable to the principal–agent relationships withinMNCs. In conventional knowledge transfer, the parent firm can require the subsidiary toadopt knowledge developed at home through the use of control mechanisms. Such verticaltop-down knowledge transfers appear to be effective in resolving concerns about the rele-vance of new knowledge (Schulz, 2001).

Conventional transfer is likely to be “transplantation” or “supplantation” (Mudambi,2002). It is likely that when an MNC acquires a local firm as a subsidiary, especially whenthe MNC’s objective is to exploit local markets, it will infuse knowledge from home tosupplant the subsidiary’s existing knowledge. This was particularly important in transitioneconomies in the 1990s where local firms typically had weak management and marketing

capabilities (Meyer & Estrin, 2001) and thus were eager to learn from their new foreign own-ers. The subsidiary typically replicates knowledge from the parent. Therefore, knowledgerelevance between parent and subsidiary will not play a key role in knowledge transferbecause of the parent firm’s authority.

Reverse knowledge transfers from a subsidiary to its parent firm are much more difficultthan conventional transfer. Subsidiaries may be motivated to transfer knowledge to theirparent firm because it could strengthen their strategic position in the whole organization(Gupta & Govindarajan, 2000; Mudambi & Navarra, 2004). Yet a parent firm would only beinterested in transfers that it deems to be beneficial from its point of view (Gupta &Govindarajan, 2000; Kogut & Zander, 1993; McDonald, Tüselmann, Voronkova, & Dimitratos,

2005). Reverse knowledge transfer can be beneficial to the parent firm in terms of accessinglocal knowledge, coordinating a global strategy, improving processes in the MNCs network,and providing new products (Ambos, Ambos, & Schlegelmilch, 2006).

However, not every knowledge transfer will equally benefit the receiver (Ambos et al.,2006). Some knowledge transfers may benefit the parent firm a great deal, some might only beused for information and coordination, and others may be too costly to integrate into opera-tions. Moreover, parent firms may not recognize potential benefits and thus not take appropri-ate initiatives to adopt knowledge available from subsidiaries. Because of the principal–agentrelationship, the parent firms’ commitment to learning from subsidiaries is less than the sub-sidiaries’ commitment to learning from their MNC parents. In other words, conventional trans-fer is a teaching process whereas reverse transfer is a persuading process. The subsidiary hasto persuade the parent firm that its knowledge can fit the parent’s needs.




subsidiary roles in terms of the subsidiary mandates proposed by Cantwell and Mudambi(2005): competence creation versus competence exploitation. Parent firms expect “competence-creating” subsidiaries to introduce new knowledge that can be used by other corporate units

or to become centers of excellence (Birkinshaw & Hood, 1998; Frost, Birkinshaw, & Ensign,2002). In contrast, the parent firms expect “competence-exploiting” subsidiaries to use home-based knowledge in local markets. These two subsidiary types help the parent MNC advanceits “exploration” and “exploitation” strategic objectives (March, 1991). The motives foracquisition are categorized accordingly.

Competence-exploiting subsidiaries are expected to transfer and adapt knowledge fromtheir parent to local markets. In the years immediately following acquisition, these sub-sidiaries are engaged in implementing established home-based knowledge effectively inlocal environments (Cantwell & Piscitello, 2000). These processes require continual knowl-edge transfers from parent firms (Cantwell & Mudambi, 2005).

On the other hand, competence-creating subsidiaries are expected to develop knowledgeassets that are new to the MNC network, like new products, technologies, practices, andskills (McDonald et al., 2005; Papanastassiou & Pearce, 1997; Pearce, 1999). Competence-creating subsidiaries are expected to diffuse knowledge to other units of the MNC network(Frost et al., 2002). A greater volume of distinctive and valuable knowledge is likely to beavailable in competence-creating subsidiaries than in competence-exploiting subsidiaries,simply by virtue of their organizational role.

Thus, we expect competence-exploiting subsidiaries to be associated with significantlyhigher conventional knowledge transfers. Conversely, we expect competence-creating sub-sidiaries to be associated with significantly higher levels of reverse knowledge transfers.

Hypothesis 3a: A subsidiary acquired with a competence-exploiting motive has significantly higherconventional knowledge transfers from parent to subsidiary than a subsidiary acquired with acompetence-creating motive.

Hypothesis 3b: A subsidiary acquired with a competence-creating motive has significantlyhigher reverse knowledge transfers from subsidiary to parent than a subsidiary acquired with acompetence-exploiting motive.

Methods

Data

The empirical analysis is based on a questionnaire survey administered by local researchteams in three countries in CEE in 2003: Hungary, Poland, and Lithuania (Meyer & Estrin,2007). The foreign direct investment (FDI) attracted by CEE countries has increased rapidlysince the early 1990s (e.g., Brouthers, Brouthers, & Werner, 2001; UNCTAD, 2005), includ-ing investments for R&D (Brouthers, Brouthers, & Nakos, 1998). This FDI has grown fromnegligible levels, thus providing an opportunity to investigate the evolution of FDI from itsoutset (Meyer & Peng, 2005) and includes investments by smaller firms (Nakos & Brouthers,

2002). These countries thus provide a suitable context for us to investigate knowledge



transfers in MNCs, especially transfers between units in developed countries and units inemerging economies (Brouthers & Bamossy, 2006).

Moreover, these three countries were chosen because they experienced similar transition

processes with high FDI potential and performance (UNCTAD, 2005). FDI inflows to CEEcountries are highly concentrated in Poland and Hungary, with Hungary leading in the early1990s, whereas Poland became the largest recipient in the late 1990s. Lithuania was for-merly part of the Soviet Union, and its economy has grown rapidly since independence in1991. In the period 1993-2000, cumulative FDI inflows reached US$694 per capita, placingLithuania seventh among CEE countries (Smarzynska, 2004). All three countries are increas-ingly attracting FDI on the basis of high education levels and R&D potential, with low-skill-seeking FDI increasingly locating to countries outside the European Union. With attractivetechnological capabilities (UNCTAD, 2005), these three countries provide a good platformto study the asymmetries of conventional and reverse knowledge flows in the early stage of

MNC subsidiaries’ evolution.The base population of our research included all FDI projects established from 1990 to

2002 that have at least 10 employees and foreign equity participation of at least 10%, as perthe Organization for Economic Cooperation and Development (OECD) definition of FDI(OECD, 1996). The research questions and instruments were designed and developed afterthree meetings of the research teams. Then the questionnaire was translated into local lan-guages and sent to the respondents in both languages.

The survey’s sample frame was constructed from multiple locally available databases tomaximize the coverage of FDI (complete databases of FDI projects in these countries do notexist). The questionnaire was sent to the chief executive of each foreign subsidiary for whom

contact information was available in the database. In most cases, this was followed up withtelephone calls and personal interviews. A total of 4,027 foreign subsidiaries were contacted,and we obtained responses from 535, representing a response rate of more than 13%. Therewere 200 respondents in Poland, 111 in Lithuania, and 224 in Hungary, representing responserates of 10%, 11%, and 22%, respectively. The databases often reported very imprecise firminformation, such that some contacted firms were not actually in operation (especially inPoland) or not actually foreign owned (in Hungary) and should theoretically not have been inthe sample frame. Thus, the aforementioned response rates are low estimates.

Of these foreign-affiliated units, 105 (44 in Poland, 21 in Lithuania, and 40 in Hungary)

became MNC subsidiaries through international acquisitions. This is the dataset used in thecurrent study. The headquarters of the acquiring MNCs were mostly located in WesternEurope (80%), whereas relatively few were located in North America (12%). This is consis-tent with patterns described in the early research on the importance of proximity for FDI inCEE enterprises (Meyer & Peng, 2005). The remainder of the parent companies originatedfrom other CEE countries, East Asia, and Australia.

The acquisitions in our sample cover a broad range of industries. Most of the acquisitionstook place in manufacturing, with foreign investment a little bit higher in light manufacturing(30%) compared with heavy manufacturing (23%). Twenty percent of the acquisitionsoccurred in business and financial services and 13% in sales. Other industries such as utilities,

construction, hotel and restaurants, chemicals, transportation, and communication also appearin the sample.




The questionnaire covered different aspects of the characteristics, activities, and knowl-edge of both parent and subsidiary units. We used the focal acquired subsidiary as our unit of observation. The next subsection introduces the variables and describes them in detail.

Variables

Dependent variables. The dependent variables are the extent of knowledge transfersbetween parent and subsidiary. One variable measures the extent of conventional flows fromparent to subsidiary. The other variable measures the extent of the reverse flows fromsubsidiary to parent.

Six questions were asked to measure the extent of conventional transfer: (1) To whatextent have you used technical innovation capabilities from the parent’s existing business to

assist the acquired business? (2) To what extent have you transferred know-how in manu-facturing to the acquired business? (3) To what extent have you integrated acquired productsinto your existing sales networks? (4) To what extent have you shared brand names with theacquired business? (5) To what extent have you transferred financial resources for R&D tothe acquired business? (6) To what extent have you transferred managerial capabilities to theacquired business?

For reverse transfers, the following questions were asked: (1) To what extent have youused the acquired business’s technical innovation capabilities to assist the parent’s existingbusiness? (2) To what extent have you used acquired the business’s know-how in manufac-turing? (3) To what extent have you used the acquired business’s sales networks? (4) To what

extent have you used the acquired business’s brand names? (5) To what extent have you usedthe acquired business’s financial resources for R&D? (6) To what extent have you used theacquired business’s managerial capabilities?

Knowledge is composed of know-how and capabilities that “refer to a firm’s capacity todeploy resources to affect a desired end. They are information based, tangible or intangibleprocesses that are firm specific and are developed over time through complex interactionsamong the firm’s resources” (Amit & Schoemaker, 1993: 35). There are different types of knowledge that could be transferred between parent and subsidiary. Gupta and Govindarajan(1994) distinguished six types of knowledge: market data on customers, market data on com-petitors, marketing know-how, distribution know-how, technology know-how, and purchas-

ing know-how. Schulz (2003) identified three types of organizational knowledge: knowledgeabout technologies; knowledge related to sales and marketing; and knowledge pertaining togovernment agencies, competitors, and suppliers. In this study, we measured the followingtypes of transferred knowledge: knowledge about technological know-how, knowledge aboutsales and marketing, knowledge about financial resources, and knowledge about manage-ment. The measures ranged from not at all to a very large extent on a 5-point Likert-typescale. The Cronbach’s alphas for the scales of conventional knowledge transfer and reverseknowledge transfer were .851 and .866, respectively.

Independent variables. The independent variables are related to knowledge character-istics and organizational characteristics. Knowledge characteristics mainly relate to the




knowledge relevance between parent and subsidiary, whereas organizational characteristicsrelate to the MNC parent’s motives for acquisition.

We defined knowledge relevance as the extent to which the knowledge in the parent and

the knowledge in the acquired subsidiary overlapped or were similar. From a relevance theoryperspective, Schulz argued that “extra-unit knowledge is relevant to a subunit the more it hasimplications for the subunit, and the easier it is to derive these implications” (2003: 444). Hemeasured the following factors to determine knowledge relevance: local knowledge base,codification of knowledge, extra-unit knowledge base, and the dyadic relationship. Drawingfrom these factors, we measured this construct directly by asking the respondents how simi-lar the knowledge of the parent firm and the acquired firm was before acquisition with respectto five items: technology, product range, markets, customers, and competition. Responseswere reported on a 5-point Likert scale, with higher scores representing a greater degree of relevance. The Cronbach’s alpha for the aggregate index is .772.

The motives for the acquisitions are differentiated into two categories: competence cre-ation and competence exploitation. We used the subsidiary mandate types from Cantwell andMudambi (2005) to differentiate the firm’s motives. This variable is operationalized in termsof the foreign parent’s strategic objectives with regard to the acquired subsidiary’s mission.Because there are only two strategy objectives, the generated variable is a dummy. If the sub-sidiary’s responsibilities are to deliver access to local researchers and skilled employees, toimprove efficiency of the parent MNC’s global production network, or to control specificstrategic assets in the host country, the subsidiaries are considered to be competence creat-ing. There were four items measured using a 5-point Likert scale, coded from 1 (not at all

important ) to 5 (very important ). If the subsidiary’s responsibilities are to provide access to

local markets, to obtain local natural resources, or to use a local low-cost labor force, thesubsidiaries are considered to be competence exploiting. There were three items measuredon a 5-point Likert scale reverse coded from 1 (very important ) to 5 (not at all important ).The seven items were summed, and subsidiaries with high scores (above the mean) weredesignated as competence creating and those with low scores (below the mean) as compe-tence exploiting. In other words, competence-creating subsidiaries are strategically outwardoriented, whereas competence-exploiting subsidiaries are inward oriented.

Control variables. A number of location, industry, and firm variables were included as

controls. These included host country, home country/region, acquisition industry, the acqui-sition experience, international experience, and relative size of the acquiring MNC as wellas the age of the acquired subsidiary and its absolute size.

To capture differences in host country contexts, the location of the subsidiary was repre-sented by two dummy variables; one each for Poland and Lithuania with Hungary as thebaseline. In addition, the home country/region contexts were controlled as dummy variablesto represent different home country contexts. Three different home region contexts wereincluded: European countries, North American countries, and other countries in the world.European countries were used as the baseline.

The industry context is also likely to have an influence on knowledge transfer within an

organization. Manufacturing industries have different patterns of knowledge flows comparedwith industries that are service based (Grosse, 1996; Lahti & Beyerlein, 2000). Following




Gupta and Govindarajan (2000), Kuemmerle (1999), and others, we used a dummy variableto indicate whether the subsidiary was in manufacturing or services, with services serving asthe base case.

At the firm level, it has been argued that firms with prior experience do better than thosewithout such experience (Lubatkin, 1983) and that firms can develop their dynamic capabili-ties by learning from repeated practices (Eisenhardt & Martin, 2000). We therefore controlledfor the parent’s experience, in terms of both acquisition and international operations. We mea-sured acquisition experience by the number of acquisitions the acquiring firm had madeworldwide before the focal acquisition took place. We measured international experience bythe number of countries in which the acquiring firm had affiliates in the year of the acquisi-tion. In the case of cross-border acquisitions, the relative size of the acquiring and target firmshas been shown to have a significant effect, rather than the absolute size of the acquirer (Lee& Caves, 1998; Seth, Song, & Pettit, 2002). Hence we controlled for the relative size of the

acquiring MNC and the target subsidiary using the relative sales of the two parties.We also controlled for acquisition age, measured as the duration from the year that the

subsidiary was acquired to the year that this survey was conducted. We controlled for sub-sidiary size measured by the natural log of its number of employees. This serves as a proxyfor many subsidiary characteristics, including the extent of local linkages, economies of scale and scope, and importance within intra-firm and external networks.

To deal with concerns about common methods variance, we performed Harman’s one-factor test (Podsakoff & Organ, 1986) on items included in our analysis to examine whethercommon-method bias augmented relationships. If common-method bias exists in the data, asingle factor will emerge from a factor analysis of all measurement items included in the study,

or one general factor that accounts for most of the variance will result. The factor analysesreported good properties, supporting the validity of the data. Specifically, four factors emergedwith eigenvalues greater than one. The first factor (eigenvalue = 2.36) explained 14.35% of the variance, whereas the cumulative variance explained by all four factors was 72%.

Results

The correlation matrix of all variables is shown in Table 1. The mean number of prior for-eign acquisitions was about 18. This indicates that many MNCs had considerable interna-

tional acquisition experience before they acquired the current subsidiaries. Subsidiary agewas 6 years on average, which shows that most of these acquired subsidiaries were in theearly stage of their development. The average age was slightly lower in Lithuania (just under5 years) and slightly higher in Hungary (just under 8 years). However, the data reveal sub-stantial differences in size. The acquired subsidiaries in Poland were the largest (averageemployment 1,300) and those in Hungary were the smallest (average employment 250).Conventional as well as reverse knowledge transfers were significantly correlated with knowl-edge relevance, the competence-creating motive, and host country dummies.

Focusing on the core issue of this article, we examined the differences between conven-tional and reverse knowledge transfers. Our research hypotheses were tested using hierar-chical regression analysis on internal knowledge transfers. Only control variables were




892

T

a b l e 1

C o r r e l a t i o n M a t r i x

a n d D e s c r i p t i v e S t a t i s t i c s

V a r i a b l e s

M e a n

S D

1

2

3

4

5

6

1 . R

e v e r s e k n o w l e d g e t r a n s f e r

2 . 3 2

1 . 0 7

1

2 . C

o n v e n t i o n a l k n o w l e d g e t r a n s f e r

3 . 4 9

1 . 0 3

0 . 1 4

1

3 . K

n o w l e d g e r e l e v a n c e

2 . 8 3

0 . 9 8

0 . 2 9 *

0 . 1 6

1

4 . C

o m p e t e n c e - c r e a t i n g m o t i v e

0 . 3 0

0 . 4 6

0 . 0 6

0 . 3 0 *

0 . 0 8

1

5 . P

o l a n d

0 . 4 2

0 . 5 0

– 0 . 1 6

– 0 . 1 2

– 0 . 1 5

– 0 . 0 5

1

6 . L

i t h u a n i a

0 . 2 0

0 . 4 0

0 . 3 1 * *

0 . 0 7

0 . 1 6

0 . 0 7

– 0 . 4 3 * *

1

7 . H

u n g a r y

0 . 3 8

0 . 4 9

– 0 . 1 1

0 . 0 8

0 . 0 2

– 0 . 0 1

– 0 . 6 7 * *

– 0 . 3 9 * *

8 . I n d u s t r y

0 . 5 0

0 . 5 0

– 0 . 0 2

0 . 1 6

– 0 . 0 2

0 . 0 0

0 . 0 7

– 0 . 1 7

9 . N

o r t h A m e r i c a

0 . 1 2

0 . 3 3

0 . 0 6

– 0 . 2 1

– 0 . 1 0

– 0 . 1 9

0 . 3 3 * *

– 0 . 1 9

1 0 . E

u r o p e a n c o u n t r i e s

0 . 8 5

0 . 3 6

– 0 . 0 4

0 . 1 4

0 . 1 2

0 . 2 1 *

– 0 . 3 4 * *

0 . 2 1 *

1 1 . A

s i a / o t h e r

0 . 0 3

0 . 1 7

– 0 . 0 5

0 . 1 6

– 0 . 0 5

– 0 . 1 0

0 . 0 9

– 0 . 0 9

1 2 . A

c q u i s i t i o n e x p e r i e n c e ( L o g )

0 . 7 6

0 . 5 9

0 . 2 4

0 . 0 6

0 . 1 4

0 . 2 3

– 0 . 0 9

0 . 0 8

1 3 . A

c q u i s i t i o n a g e

6 . 0 5

3 . 4 8

– 0 . 1 4

0 . 1 8

– 0 . 0 6

0 . 0 5

– 0 . 0 6

– 0 . 2 0

1 4 . S

u b s i d i a r y s i z e ( L o g )

2 . 2 6

0 . 6 9

– 0 . 0 6

0 . 1 3

– 0 . 1 4

0 . 0 6

0 . 3 0 * *

– 0 . 0 3

V a r i a b l e s

7

8

9

1 0

1 1

1 2

1 3

1 4

7 . H

u n g a r y

1

8 . I n d u s t r y

0 . 0 7

1

9 . N

o r t h A m e r i c a

– 0 . 1 8

– 0 . 0 3

1

1 0 . E

u r o p e a n c o u n t r i e s

0 . 1 7

– 0 . 0 5

– 0 . 8 9 * *

1

1 1 . A

s i a / o t h e r

– 0 . 0 2

0 . 1 7

– 0 . 0 6

– 0 . 4 0 * *

1

1 2 . A

c q u i s i t i o n e x p e r i e n c e ( L o g )

0 . 0 2

0 . 0 5

– 0 . 0 2

– 0 . 1 1

0 . 0 6

1

1 3 . A

c q u i s i t i o n a g e

0 . 2 7 *

0 . 3 0 * *

– 0 . 1 3

0 . 1 0

0 . 0 7

– 0 . 1 9

1

1 4 . S

u b s i d i a r y s i z e ( L o g )

– 0 . 2 8 * *

– 0 . 0 2

0 . 0 9

– 0 . 2 0

0 . 2 4 *

– 0 . 1 3

0 . 0 1

1

N o t e

: N =

1 0 5 .

* p <

. 0 5 ( t w o - t a i l e d )

* * p <

. 0 1 ( t w o - t a i l e d )



entered in the first specification. In the second specification, we entered the main effects forknowledge characteristics (knowledge relevance) and organizational characteristics (themotives for the acquisition). In the third specification, we entered interaction terms. The

parameter estimates of the regression models of both directions of knowledge transfers areprovided in Table 2. Model 3 (reverse knowledge flows) and Model 4 (conventional knowl-edge flows) present the overall results, controlling for location, industry, and firm effects.The adjusted R2 values for models 3 and 4 are .06 and .10, respectively. In Model 5 (reverseknowledge flows) and Model 6 (conventional knowledge flows), we included the interactionsbetween knowledge relevance and the host environments. We observed that the insertion of these interaction effects improved the explanatory power, with the adjusted R2 increasing inModels 5 and 6. The absolute values of the adjusted R2 are very similar to those reported inrecent studies of knowledge transfer in MNCs (e.g., Minbaeva, 2007; Williams, 2007). TheF statistics’ significance levels improve as the main effects and interaction terms are added,

supporting the chosen model specifications. Furthermore, the variance inflation factors in allmodels are not significant.

In both Models 3 and 5, relating to reverse knowledge transfers, knowledge relevance ishighly statistically significant. In other words, increased similarity or overlap between thesubsidiary’s knowledge and that of the parent is associated a higher level of reverse knowl-edge transfer. However, in Models 4 and 6, knowledge relevance is not significant in explain-ing the extent of conventional knowledge transfer. Thus, Hypothesis 1 is strongly supportedby the results, suggesting that the knowledge relevance between source and target is impor-tant in determining the extent of reverse knowledge transfer. These results clearly confirmour argument that there is an asymmetry between conventional and reverse knowledge flows

in terms of the effects of knowledge relevance.Moreover, we found that the host country has a significant moderating effect on the rela-

tionship between knowledge relevance and knowledge transfers, as predicted in Hypothesis2. As expected, location in the large and strategically important Polish market negativelymoderates the effect of knowledge relevance on reverse knowledge transfer in acquired sub-sidiaries. Hence, the effects of knowledge relevance on reverse knowledge transfers are sig-nificantly less important in Polish subsidiaries compared with subsidiaries in the other twohost locations.

A more subtle examination of the moderating effect of location on the relationship

between knowledge relevance and reverse knowledge transfer (Model 5) is provided inFigure 1. Here we depict the relationship between knowledge relevance and reverse knowl-edge flows separately for the different host locations. The estimated values are computed atthe average values of all other regressors in Table 2. Figure 1 shows that knowledge rele-vance for reverse knowledge transfers was much more important for subsidiaries located inthe smaller markets of Hungary and Lithuania.

The motive for acquisition was significant in determining the extent of conventionalknowledge transfers. However, we found that conventional knowledge transfers were largerin the case of subsidiaries established with competence-creating motives. This contradictsHypothesis 3a. Furthermore, the motive for acquisition was not significant in the case of

reverse knowledge transfers, so that Hypothesis 3b was not supported.




894

T

a b l e 2

H i e r a r c h i c a l R e g r e s s i o n

A n a l y s i s o f K n o w l e d g e F l o w s

K n o w l e d g e F l o w s ( C o n t r o l V a r i a b

l e s )

K n o w l e d g e F l o w s ( M a i n E f f e c t s )

K n o w l e d g e F l o w s ( I n

t e r a c t i o n s )

R e v e r s e

C o n v e n t i o n

a l

R e v e r s e

C o n v e n

t i o n a l

R e v e r s e

C o n v e n t i o n a l

V a r i a

b l e s

( M o d e l 1 )

( M o d e l 2 )

( M o d e l 3 )

( M o d

e l 4 )

( M o d e l 5 )

( M o d e l 6 )

C o n s

t a n t

1 . 9 3 ( 3 . 7 9 ) * *

2 . 8 8 ( 5 . 7 9 ) * *

1 . 2 8 ( 2 . 2 1 ) *

2 . 4 9 ( 4

. 4 9 ) * *

0 . 7 1 ( 1 . 0 3 )

2 . 8 3 ( 4 . 2 0 ) * *

L o c a

t i o n e f f e c t s

H o s t : L i t h u a n i a

0 . 5 9 ( 2 . 3 0 ) * *

0 . 1 5 ( 0 . 6 0 )

0 . 5 3 ( 2 . 1 1 ) *

0 . 1 1 ( 0

. 4 3 )

0 . 8 6 ( 1 . 0 4 )

– 0 . 0 3 ( 0 . 0 4 )

H o s t : P o l a n d

– 0 . 0 7 ( 0 . 5 0 )

– 0 . 1 7 ( 0 . 7 8 )

– 0 . 0 6 ( 0 . 2 7 )

– 0 . 1 8 ( 0

. 8 5 )

0 . 9 9 ( 1 . 7 8 ) †

– 0 . 8 4 ( 1 . 5 5 )

H o m e : N . A m e r i c a

0 . 3 1 ( 1 . 0 7 )

– 0 . 4 0 ( 1 . 4 4 )

0 . 3 6 ( 1 . 2 5 )

– 0 . 2 5 ( 0

. 8 8 )

0 . 2 8 ( 0 . 9 8 )

– 0 . 2 0 ( 0 . 6 9 )

H o m e : A s i a / o t h e r

– 0 . 1 0 ( 0 . 1 8 )

0 . 3 4 ( 0 . 6 1 )

– 0 . 0 5 ( 0 . 1 0 )

0 . 5 3 ( 0

. 9 9 )

– 0 . 0 8 ( 0 . 1 4 )

0 . 5 5 ( 1 . 0 2 )

F i r m

a n d i n d u s t r y e f f e c t s

I n d u s t r y

0 . 1 1 ( 0 . 5 5 )

0 . 1 5 ( 0 . 8 0 )

0 . 1 0 ( 0 . 5 1 )

0 . 1 4 ( 0

. 7 5 )

0 . 0 7 ( 0 . 3 6 )

0 . 1 5 ( 0 . 8 4 )

P a

r e n t a c q u i s i t i o n e x p e r i e n c e ( L o g )

0 . 3 6 ( 1 . 4 4 )

0 . 0 1 ( 0 . 0 4 )

0 . 3 0 ( 1 . 1 9 )

– 0 . 1 5 ( 0

. 5 5 )

0 . 2 6 ( 1 . 0 5 )

– 0 . 1 1 ( 0 . 4 3 )

P a

r e n t f i r m r e l a t i v e s i z e

0 . 0 4 ( 0 . 6 6 )

0 . 0 3 ( 0 . 4 1 )

0 . 0 3 ( 0 . 4 6 )

0 . 0 0 ( 0

. 0 1 )

0 . 0 2 ( 0 . 3 5 )

0 . 0 1 ( 0 . 1 0 )

P a

r e n t f i r m i n t e r n a t i o n a l e x p e r i e n c e

0 . 0 0 ( 0 . 0 4 )

0 . 0 1 ( 1 . 8 2 ) †

0 . 0 0 ( 0 . 2 8 )

0 . 0 1 ( 1

. 9 0 ) †

0 . 0 0 ( 0 . 1 0 9 )

0 . 0 1 ( 1 . 7 8 ) †

A c q u i s i t i o n a g e

– 0 . 0 2 ( 0 . 7 0 )

0 . 0 4 ( 1 . 2 7 )

– 0 . 0 2 ( 0 . 5 9 )

0 . 0 4 ( 1

. 5 1 )

– 0 . 0 1 ( 0 . 4 3 )

0 . 0 4 ( 1 . 4 0 )

A c q u i r e d s u b s i d i a r y s i z e ( L o g )

– 0 . 0 2 ( 0 . 1 2 )

0 . 0 8 ( 0 . 5 0 )

– 0 . 0 0 ( 0 . 0 2 )

0 . 0 6 ( 0

. 4 7 )

0 . 0 2 ( 0 . 1 2 )

0 . 0 5 ( 0 . 3 4 )

K n o w l e d g e v a r i a b l e

K n o w l e d g e r e l e v a n c e

0 . 2 3 ( 2 . 2 7 ) *

0 . 1 5 ( 1

. 5 2 )

0 . 4 4 ( 2 . 7 3 ) * *

0 . 0 2 ( 0 . 1 5 )

O r g a

n i z a t i o n v a r i a b l e

C o

m p e t e n c e - c r e a t i n g m o t i v e

0 . 0 5 ( 0 . 2 2 )

0 . 4 8 ( 2

. 3 4 ) * *

– 0 . 0 2 ( 0 . 0 9 )

0 . 5 2 ( 2 . 5 2 ) * *

I n t e r a c t i o n e f f e c t s

R e

l e v a n c e ×

L i t h u a n i a

– 0 . 1 2 ( 0 . 4 7 )

0 . 0 5 ( 0 . 2 1 )

R e

l e v a n c e ×

P o l a n d

– 0 . 4 0 ( 2 . 0 7 ) *

0 . 2 5 ( 1 . 3 4 )

A d j u

s t e d R 2

0 . 0 3

0 . 0 4

0 . 0 6

0 . 1 0

0 . 0 8

0 . 1 0

F s t a

t i s t i c ( p v a l u e )

1 . 2 3 ( 0 . 2 5 )

1 . 4 2 ( 0 . 1 9 )

1 . 5 5 ( 0 . 1 2 )

1 . 9 2 ( 0

. 0 4 )

1 . 6 8 ( 0 . 0 7 )

1 . 7 9 ( 0 . 0 5 )

N o t e

: N =

1 0 5 . V a l u e s a r e c o e f f i c i e n t s .

† p <

. 1 0

* p <

. 0 5

* * p <

. 0 1




Discussion and Conclusions

The objective of this study was to understand how knowledge and organizational andlocation characteristics affect hierarchical knowledge transfers between an MNC parent

and its acquired subsidiary. Specifically, we studied the influence of knowledge relevanceand acquisition motives on internal knowledge transfers after controlling for location factors.Our findings indicate that these factors have an asymmetrical influence on knowledge trans-fers. Thus, conventional and reverse knowledge transfers are different processes, and ourempirical results provide insights into the determinants of these differences.

Knowledge Relevance

Our approach of using knowledge relevance links the knowledge to the organization; that

is, we focused on the levels of knowledge relatedness between the source and target. This is incontrast to the approach adopted in much of the literature, where knowledge characteris-tics such as tacitness, causal ambiguity, and complexity are not linked to the organization.However, our approach is consistent with the notion of absorptive capacity (Cohen &Levinthal, 1990) and more specifically the notion of relative absorptive capacity (Lane &Lubatkin, 1998). This is because we expected knowledge relevance to increase relative absorp-tive capacity in the dyad and thus to be positively related to the ability of a unit to understandand adopt knowledge inflows. We found that relevance is an important factor influencingknowledge flows within multinational organizations, which concurs with ideas in the literature(e.g., Hansen & Løvas, 2004; Schulz, 2003). However, we found relevance to be important in

reverse knowledge transfer rather than conventional knowledge transfer. The significance of the directional context in knowledge transfers is an important new finding.

–0.40

–0.20

0.00

0.20

0.40

0.60

0.80

1.00

1.201.40

–1 SD Mean +1 SD

Knowledge Relevance

K n o w l e d g e F l o w s

( R e v e r s e )

Poland

Lithuania

Hungary

Figure 1

Reverse Knowledge Transfer Across Host Countries



This asymmetry could result from the different nature of learning processes in conventionaland reverse knowledge transfers. The transfer of knowledge from parent to subsidiary is aprocess of either knowledge supplantation or knowledge transplantation (Mudambi, 2002).

That is, the parent company transplants its home-based knowledge or uses it to supplant anexisting knowledge base in the acquired subsidiary. In addition, the parent company has theauthority and power to require the acquired subsidiary to adopt the knowledge inflow. In con-trast, the transfer of knowledge from subsidiaries to parents is a process of searching for recog-nition and acceptance. To transfer knowledge, the subsidiary first needs to make the parentinterested in it. An effective way for a subsidiary to attract its parent’s attention is to show howits knowledge can support the parent’s products or processes. When the subsidiary’s knowledgeis highly related to the parent’s knowledge base, it is easier for the subsidiary to establishrapport with personnel at the parent and gain recognition (Mudambi et al., 2007).

Acquisition Motives

We explored the relationship between subsidiary roles and knowledge transfers. Wefound that MNC parents transfer more knowledge to acquired subsidiaries if they have acompetence-creating motive rather than a competence-exploiting motive. Our results here arecounter to our hypotheses. However, they reflect the nature of our sample, which is made upof acquisition targets in transition economies, few of whose knowledge assets will be usablewithout major knowledge “investments” by the parent firm. We observed the early period,when the parent was making large knowledge start-up investments to develop the subsidiary.

Although knowledge was also transferred to competence-exploiting subsidiaries and suchflows were likely to be continual, they did not have large start-up type investments in theearly years.

Competence-creating subsidiaries in transition economies must transplant knowledgeinflows (Mudambi, 2002), developing absorptive capacity relative to the specific knowledgebase of their new MNC parents (Lane & Lubatkin, 1998). They must integrate the trans-planted knowledge with their locally existing knowledge (McCann & Mudambi, 2005).These processes of transplantation and integration require large knowledge transfers fromthe parent in the early years after acquisition. The greater the extent of the subsidiary’s com-petence creating mandate, the more the investment of both knowledge and other resources

from parent to the acquired unit.This is in line with the subsidiary evolution literature in international business (Birkinshaw

& Hood, 1998; Cantwell & Mudambi, 2005), wherein a predominant determinant of subsidiarymandates is headquarters assignment. Subsidiaries are strategically assigned roles and man-dates early in their existence. However, they grow into these mandates over time, progress-ing to higher levels of responsibility through headquarters support. High levels of knowledgetransfers in the early years of the subsidiary’s existence can be seen as an aspect of head-quarters’ support of its competence-creating mandate assignment.

In this early stage of subsidiary evolution, knowledge transfer processes are governed by

hierarchy rather than the parity that would be characteristic of more evolved subsidiaries.Eventually we would expect these competence-creating subsidiaries to act like their counterparts





in developed economies, that is, to exhibit higher levels of reverse knowledge transfers ashypothesized.

Location Context

The host country context significantly influences reverse knowledge transfers, mainly bymoderating the relationship between knowledge relevance and transfer (Figure 1). Thus, thelocation of the subsidiary has very important effects on the implementation of knowledgetransfers.

Although CEE economies share many features, they vary with respect to institutional envi-ronment and market size, which are likely to moderate MNC knowledge transfer (Meyer,2007). This allowed us to adopt a three-country study design that overcomes a major limita-

tion of many prior studies in the literature that used single-context datasets (e.g., Cantwell &Mudambi, 2005; Lyles & Salk, 1996). Specifically, our results suggest that location had amoderating effect on the relationship between knowledge relevance and knowledge transfer.Relevance was less important for reverse knowledge transfers in Poland relative to Hungaryand Lithuania. This is graphically illustrated in Figure 1, where the slope effect for Polishsubsidiaries is small compared with subsidiaries in Hungary and Lithuania.

Poland has by far the largest domestic market of the three host locations and also had afaster rate of transition in the study period (Meyer & Estrin, 2007). This is supported in ourdata, where the Polish subsidiaries were considerably larger in terms of employment thanthose in Hungary or Lithuania. This suggests that the Polish subsidiaries were strategically

more important to their parent groups and therefore had less of a problem convincing theirparent MNCs that their knowledge is valuable. This would account for the fact that a Polishlocation negatively moderates the effect of knowledge relevance.

Hungary had the largest flow rate of FDI during the study period (UNCTAD, 2005). Thisis reflected in our data, where the Hungarian subsidiaries were acquired earlier, on average.These subsidiaries also had the smallest average employment in our sample, suggesting ahigher level of capital intensity. It is likely that these subsidiaries are more highly special-ized. Both small size and greater specialization would account for the greater importance of knowledge relevance in reverse knowledge transfers.

These findings may generalize to other locational contexts. Large subsidiaries in big mar-

kets may exercise greater intrafirm bargaining power (Mudambi & Navarra, 2004). Thus,they may find it easier to transfer knowledge back to their parents, even if the level of rele-vance is low. On the other hand, specialized subsidiaries in smaller markets may be viewedas peripheral to the value-maximizing objectives of the parent MNC. Relevance may there-fore be a crucial characteristic in ensuring that reverse knowledge transfers take place.

Host country institutional factors are likely to be crucial in determining the broad char-acteristics of the subsidiaries in each location. These broad characteristics are importantdeterminants of the nature of intra-MNC knowledge transfers. Our results therefore under-line the importance of validating results from any single country study by replication in other

country contexts (Meyer, 2007).



Surprisingly, home country and industry factors did not have significant effects on hier-archical knowledge transfer. Regarding home country factors, a possible explanation is thatmost of the acquirers originate from other European countries (84.8%), so that their geo-

graphic and cultural distance to the acquired firms is not very high. With regard to industryfactors, an explanation could be that the acquired subsidiaries are in an early stage of devel-opment, so that the different knowledge trajectories between manufacturing and serviceshave not yet emerged.

Limitations and Directions for Future Research

As with all empirical research, this study has its limitations. All measures were derivedfrom questionnaires, which may result in bias because of the use of a single data-gathering

method. However, supplementary data were gathered using telephone calls and personalinterviews. The responses from these methods corroborated our questionnaire responses,providing support for the veracity of the survey data.

We only used the MNC parent’s motives in acquiring the subsidiary to examine its strate-gic mandate. This is because in the early stage of the acquired subsidiary’s life, parentalassignments are crucial determinants of its strategic context. However, subsidiary mandatesevolve over time with the interaction of parent assignment, subsidiary choice, and the localenvironment (Birkinshaw & Hood, 1998; Cantwell & Mudambi, 2005). Because this studywas based on cross-sectional data, we were not able to observe the process of subsidiary evo-lution. Time will play a role in both conventional knowledge transfer and reverse knowledge

transfer between parent and acquired subsidiaries. Thus, it would be interesting to examinethe evolution of the asymmetries we have uncovered in a longitudinal study.

The data for this study came from acquired subsidiaries in three Central and EasternEuropean countries, and most of the acquirer firms were from nearby Western Europeancountries. This may reduce the influence of geographical distance and cultural heterogeneity.Thus, the results might not generalize to other contexts, such as the emerging market economiesin East Asia.

Our research focused on knowledge transfers in international acquisitions and on hierarchi-cal knowledge flows between parents and subsidiaries. Other foreign investment modes (e.g.,greenfield entries and joint ventures) and lateral knowledge flows among subsidiaries were not

studied. Entry mode could affect the extent of knowledge transfers because the objectives of the investment and the roles of the subsidiary vary with it. Our study did not examine lateralknowledge flows, which may have different characteristics than hierarchical flows. However,such flows may be less important in the early years of a subsidiary’s existence.

Data obtained simultaneously from both sides of the parent–subsidiary dyad would bevery helpful in exploring asymmetries in the perceptions of hierarchical knowledge transfersand the mechanism used. For example, knowledge relevance may be perceived differentlyfrom the two sides of the knowledge transfer relationship. Furthermore, conventional andreverse knowledge transfers may be undertaken using different transfer mechanisms.

Finally, one may conjecture that the organizational levels at which conventional and reverseknowledge flows occur may be different. Anecdotal evidence suggests that conventional





knowledge flows occur through cooperation between headquarters and subsidiary top man-agement so that adoption occurs by fiat (Asakawa, 2001). Reverse knowledge flows tend tooccur through communication between subsidiary middle managers and their counterparts at

headquarters (Mudambi et al., 2007). Such asymmetry in transfer governance may reinforceasymmetries in transfer logics. These topics are fruitful avenues for future research.Our results demonstrate that knowledge and organizational and location factors have

asymmetric effects on internal knowledge transfers. This study goes beyond prior researchin that it examined conventional and reverse knowledge transfers within the same sample of firms. Earlier research suggests that there are many determinants of the success of knowl-edge transfer. We show that the determinants vary with the direction of knowledge flows.

Schulz measured knowledge relevance as an abstract intervening concept. He recom-mended that “this line of research could be significantly strengthened if future studiesdevelop empirical measures of knowledge relevance and explore the direct effects on knowl-

edge flows” (Schulz, 2003: 455). This article implements this recommendation by measuringknowledge relevance directly.

Knowledge transfer is complex. We have demonstrated that the process of knowledgetransfer is different for conventional and reverse knowledge flows as well as for differentsubsidiary strategic types. Hence, it is necessary for both parent and subsidiary to focus onthose factors that are most important to the knowledge transfers being implemented.

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Biographical Notes

Qin Yang is an assistant professor at the School of Business, Robert Morris University. She holds a PhD fromTemple University. Her primary research interests relate to the knowledge management strategies of multinationalfirms. She is also interested in the internationalization of firms from emerging countries, especially issues relatedto R&D strategies, strategic leadership, and entrepreneurial activities. Her work has appeared in the Asia Pacific

Journal of Management .

Ram Mudambi is professor and Perelman senior research fellow at the Fox School of Business at TempleUniversity. He holds a visiting professorship at the University of Reading and an honorary professorship at theCenter of International Business, University of Leeds (CIBUL), and is a member of the advisory council of theUniversity of Bradford Centre in International Business (BCIB). He holds a master’s degree from the LondonSchool of Economics and a PhD from Cornell University. His current research projects focus on the location andR&D strategies of multinational firms. He has published more than 50 peer-reviewed articles, including work in theStrategic Management Journal, the Journal of International Business Studies, and the Journal of Political Economy.

Klaus E. Meyer is a professor of strategy and international business at the School of Management, University of Bath,since autumn 2007. He also holds an adjunct professorship at Copenhagen Business School. He holds a PhD from

London Business School. His research focuses on strategies of multinational enterprises in emerging economies, inparticular the relation of their business strategies to the specific conditions prevailing in each emerging economy. Hiswork has been published in, among other places, Journal of International Business Studies, Journal of Management

Studies, and the Strategic Management Journal. His personal Web site is www.klausmeyer.co.uk.


conventional and reverse knowledge flows in multinational corporations

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