cross cultural resource management

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Managing knowledge transfer in MNCs: theimpact of headquarters control mechanisms

Ingmar Bjorkman1,2

Wilhelm Barner-Rasmussen2

and Li Li2

1

INSEAD, Fontainebleau Cedex, France;2Department of Management and Organisation,

Swedish School of Economics, Helsinki, Finland

Correspondence:

I Bjorkman, Swedish School of Economics,

Post Box 479, 00101 Helsinki, Finland.

Tel: 358 9 43133273;

Fax: 358 9 43133275;

E-mail: [email protected]

Received: 16 February 2003

Revised: 31 January 2004

Accepted: 31 March 2004

Online publication date: 1 July 2004

Abstract

In this paper we explore the impact of organisational mechanisms on inter-unit

knowledge flows in multinational corporations (MNCs). A comprehensive

model, based on agency theory and socialisation theory, is tested on a sample

of 134 Finnish and Chinese MNC subsidiaries. Our findings indicate that MNCs

can influence inter-unit knowledge transfer by specifying the objectives of thesubsidiary and by utilising corporate socialisation mechanisms. However, wefound no support for the hypothesised impact of management compensation

systems and the use of expatriate managers on the extent of knowledge

transfers from foreign subsidiaries to other parts of the MNC.Journal of International Business Studies(2004), 35, 443455.

doi:10.1057/palgrave.jibs.8400094

Keywords: agency theory; socialisation theory; control; headquarters; knowledgetransfer; multinationals

IntroductionStrategy and management scholars now widely agree that globally

distributed networks of subsidiaries constitute a potentiallyimportant source of competitive advantage for multinationalcorporations (MNCs) (Ghoshal and Bartlett, 1990; Birkinshawand Hood, 1998; Rugman and Verbeke, 2001). By accessing theknowledge residing in these networks, MNCs can both exploitexisting repositories of knowledge and combine these sources ofknowledge to explore new issues (Frost, 2001). This argument,highlighting the potential importance of knowledge as a strategicresource, has brought the transfer of competence across units intofocus as a central challenge for MNC management. It has alsotriggered a considerable amount of research on factors influencinginter-unit knowledge transfer patterns within the differentiated

MNC (e.g., Zander and Kogut, 1995; Szulanski, 1996; Simonin,1999; Gupta and Govindarajan, 2000).

In view of frequent observations about the challenges involved insuccessfully transferring knowledge across MNC units (Szulanski,1996), a crucial design problem for MNC top management is howto choose organisational mechanisms that enhance knowledgeflows (Foss and Pedersen, 2002). Yet, with certain notableexceptions (e.g., Gupta and Govindarajan, 2000), few efforts havebeen made to examine the influence of organisational mechanismson knowledge sharing within the MNC (Foss and Pedersen, 2002).In particular, although a sizable body of research on MNC controland coordination exists (for reviews, see Martinez and Jarillo, 1989;

Journal of International Business Studies (2004) 35, 443455& 2004 Palgrave Macmillan Ltd. All rights reserved 0047-2506 $30.00

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Doz and Prahalad, 1993), there is a lack of researchon the strategies that MNC headquarters may use toensure that the competence of subsidiaries istransferred across different units. The questionaddressed in this paper is therefore: How do

different organisational mechanisms impact onflows of knowledge from a foreign-owned subsidi-ary to other parts of its parent MNC?

Research has indicated that barriers to knowledgetransfer include, among others, motivational fac-tors (Szulanski, 1996). For instance, a subsidiarymay be reluctant to transfer knowledge to otherunits for fear of losing a position of superiority, orbecause it is insufficiently compensated for theefforts and costs involved in the process of knowl-edge transfer (Szulanski, 1996; Forsgren et al.,2000). Given a situation of information asymmetry

between MNC top management and the focalsubsidiary, it may therefore be in the subsidiarysself-interest not to transfer knowledge to otherMNC units, even though this would enhanceoverall MNC performance. Agency theory has beenused extensively in MNC research during recentyears, and in several applications a view of theheadquarterssubsidiary relationship as a principalagent relationship has been proposed (Roth andODonnell, 1996; Chang and Taylor, 1999; ODon-nell, 2000). We accordingly hypothesise in thispaper that headquarters will use several kinds ofmechanism as safeguards against opportunism onthe part of the subsidiary. However, it has also beenpersuasively argued that self-serving behaviour onthe part of managers can be mitigated by corporatesocialisation (Lubatkin et al., 2001). Research hasfound knowledge flows in MNCs to be positivelyrelated to the use of corporate socialisationmechanisms (Gupta and Govindarajan, 2000), andthe existence of close relationships among MNCunits (Szulanski, 1996; Tsai and Ghoshal, 1998).Hence, in this paper we use socialisation theory(Van Maanen and Schein, 1979) to hypothesise acontrasting set of factors influencing foreign sub-sidiary transfers of knowledge.

Our contribution to the research on this impor-tant question breaks new ground in severalrespects. First, we explore the impact of a range ofmechanisms that has not previously been studied.Second, the operationalisation of some of theconstructs we employ is arguably more fine-grainedthan that used in previous research. Third, bydrawing upon agency theory and socialisationtheory to develop and test a model of foreignsubsidiary knowledge transfer, our discussion of the

topic is well rooted in existing organisationaltheories. Fourth, and finally, we base our findingson an extensive data set collected through struc-tured interviews with the presidents of 134 Wes-tern-owned subsidiaries located in Finland and

China.

Theoretical frameworkPrevious research has uncovered a number ofbarriers to intra-MNC competence transfer, asso-ciated with the competence itself, with the char-acteristics of its senders and recipients, and withthe relationship between them. For instance, it hasbeen argued that idiosyncratic, specific, tacit, and/or non-codified knowledge is difficult to transferfrom one unit to another, owing to the problem of

separating such knowledge from the unit thatcarries the knowledge and adding it to anotheractors knowledge base (Zander and Kogut, 1995;Grant, 1996; Spender, 1996; Szulanski, 1996, 2000;Hansen, 1999). Other problems have been relatedto the recipients ability or willingness to absorbnew information (Allen, 1977; Cohen andLevinthal, 1990; Szulanski, 1996), to the relation-ship between the sender and receiver, and to thewillingness of a unit to share information withother units (Szulanski, 1996; Forsgren, 1997).

Focusing here on factors associated with thesender subsidiary, we note that several factors mayinduce the subsidiary not to engage in a transfer ofknowledge to other MNC units. First, the complexand idiosyncratic interaction processes between thesubsidiary and its external counterparts producecompetences that cannot easily be used in othercorporate units business contexts. This is becausethe absorptive capacity required to understand andapply the competence is developed within theunique interaction process. Thus, competencedevelopment is to a significant degree contextspecific, or even relation specific (Lane and Lubat-kin, 1998; Forsgren et al., 2000). For instance,extensive long-term cooperation with a specificcustomer or supplier will enhance the subsidiarysabsorptive capacity, its problem-solving capacity,and its ability to create new knowledge within thatcontext. However, the more context specific thesolutions are, the more difficult and costly it will beto transfer the knowledge to other corporate unitsthat do not possess the same relational absorptivecapacity. Therefore, the sender subsidiary may haveto make a significant effort to support the receivingunits (Szulanski, 2003).

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Second, competence development at the subsidi-ary level takes place through both internal devel-opment work and the firms interactions withcustomers, suppliers, research institutions, andother organisations. Regardless of whether the

knowledge is largely internally accumulated, ormostly created on the basis of knowledge inputfrom relations with external organisations, thedevelopment process engages expensive and scarcehuman resources. In order to transfer the compe-tences to other units, the same experts and facilitieswill usually have to be engaged. Taking partsimultaneously in both development and dissemi-nation processes may therefore be costly for thesubsidiary. Hence, there is a probable trade-offbetween resources deployed in competence devel-opment and resources deployed in transfer of

knowledge to other corporate units (Forsgren et al.,2000). Also, efforts to transfer knowledge mayinterfere with the subsidiarys ability to attend toaspects of its operations that subsidiary managersview as more important for the units own perfor-mance (Szulanski, 2003).

Third, subsidiaries tend to have different goalsand often limited incentives to transfer know-howto other units, particularly if it involves the time oftheir best people or proprietary technology thatmight leak out (Porter, 1985; Szulanski, 1996). Bydiffusing knowledge to other MNC units, the focalsubsidiary may also lose some of its uniqueness,thus losing bargaining power within the MNC(Levitt and March, 1988; Forsgren, 1997; thoughsee Foss and Pedersen (2002), for a discussion ofpossible positive long-term effects of knowledgeoutflows from the focal subsidiary). The signifi-cance of the political aspects of knowledge transferis further supported by a review of research showingthat internal competition between subsidiaries is acritical determinant of subsidiary survival (Birkin-shaw and Hood, 1998).

To sum up, there are several reasons whysubsidiaries may perceive it to be against theirown interest to actively engage in knowledgetransfers to other MNC units, even thoughtransferring knowledge would enhance corporateperformance. In other words, conflicts of interestare likely to emerge between subsidiaries andcorporate top management concerning the extentto which the former transfer knowledge to otherMNC units.

We will now proceed to develop a model, basedon agency theory and socialisation theory, of theorganisational mechanisms that may positively

influence a subsidiarys propensity to undertakeknowledge transfers to other parts of the corpora-tion. The model is presented in Figure 1.

Agency theory and knowledge transferAgency theory (Jensen and Meckling, 1976; Eisen-hardt, 1989) has lately found increasing use inMNC research (e.g., Roth and ODonnell, 1996;Chang and Taylor, 1999; ODonnell, 2000). Therelationship between headquarters and a subsidiarycan be viewed as a principalagent relationship. It isin the interest of headquarters (the principal) that asubsidiary (the agent) with valuable capabilitiescontributes to the competence development ofother MNC units. However, as outlined above,owing to the potential asymmetry between thegoals of the headquarters and those of the sub-sidiary, the latter may not act according tocorporate interests. MNCs use a variety of mechan-isms to control and coordinate their foreign sub-sidiaries, with the different mechanisms beingpredominantly complementary rather than substi-tutes (for a review, see Martinez and Jarillo, 1989).Agency theorists generally agree that a combina-tion of outcome (incentive) based and behaviouralcontrol mechanisms should be employed (Tosi andGomez-Meija, 1989; Tosi et al., 1997). Hence, inthis paper we hypothesise that several kinds of

Outward Knowledge

Transfer from Focal

Subsidiary

INDEPENDENT VARIABLES DEPENDENT VARIABLE

Subsidiary Management Compensation

Number of Expatriate Managers

Performance Evaluation Criteria

Agency Theory

Corporate Socialization Mechanisms

Socialization Theory

- Stock of Subsidiary Knowledge

- Subsidiary Scope of Operations

-Mode of Establishment

-MNC Home Region

-Subsidiary Location-Subsidiary Size

Control Variables

Figure 1 Factors hypothesised to influence the outflow transfer

of subsidiary knowledge.


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mechanisms will be used successfully to reduce theagency problems of MNC headquarterssubsidiaryrelationships. In other words, we propose thatdifferent organisational mechanisms put in placeby MNC headquarters will contribute to increasing

the level of knowledge transfer from the focalsubsidiary to the rest of the corporation.

Specification of performance evaluation criterionThe criteria used by headquarters to evaluatesubsidiary performance are likely to influence whatsubsidiary managers pay attention to and focus onin their operations (ODonnell, 2000). It is espe-cially important to specify the measures used toappraise performance in control situations wherethe information asymmetry between the principal(headquarters) and the agent (the subsidiary) is

large, making direct supervision by the headquar-ters difficult to apply. This situation is often foundin MNCs. For instance, if headquarters are per-ceived to emphasise the transfer of knowledge toother MNC units, it is in the interest of subsidiarymanagers to pay special attention to this issue asthey know that they will be explicitly or at leastimplicitly evaluated based on how well the unitperforms on this dimension. In other words,subsidiary managers perception of the importanceattached by headquarters to knowledge transfer as aperformance evaluation criterion is likely to

increase their efforts to share knowledge with otherMNC entities.

It should be noted that the specification ofknowledge transfer as a criterion of subsidiaryperformance is likely to influence subsidiary deci-sion-making also in situations where there is noconflict of interests between headquarters and thesubsidiary. As pointed out by Hendry (2002), anagent may lack knowledge of the objectives that theprincipal holds. If this is the case, by devotingresources to specifying and communicating theobjectives that headquarters have for the subsidiary

and the criteria used to evaluate its performance,the principal (MNC headquarters management)may guide the actions of the agent (subsidiarymanagement) in accordance with its goals. Basedon this reasoning, the following hypothesis can beformulated:

Hypothesis 1: The higher the perceived impor-tance attached to knowledge transfer by head-quarters when evaluating the performance of thesubsidiary, the more the knowledge transferredfrom the subsidiary to other corporate units.

Subsidiary management compensationIn addition to defining and clarifying the criteriaused to assess foreign subsidiary performance, MNCheadquarters may put in place financial compensa-tion systems that encourage knowledge transfer. In

agency theory terms, the principal may design anincentive system that encourages the agent topursue the principals objectives (Eisenhardt,1988; Stroh et al., 1996). An example of this wouldbe the basing of subsidiary managements bonusesnot only on the subsidiarys result, but also on theregional and/or global performance of the MNC (cf.Roth and ODonnell, 1996). As competence trans-fers to other MNC units are likely to contribute totheir performance, it is in the self-interest ofsubsidiary managers to actively engage otherMNC entities in knowledge transfers. Based on

similar arguments, Gupta and Govindarajan (2000)hypothesised a positive relationship betweenknowledge outflows and the extent to which asubsidiary presidents bonus is MNC network basedrather than subsidiary focused. Although notsupported by their data, this theoretical argumentnevertheless seems valid. However, we argue that,in addition to the financial incentive systems forthe subsidiary president him- or herself, the way inwhich other members of the subsidiary top man-agement team are financially compensated is alsolikely to influence the knowledge-sharing beha-viour of the subsidiary. We consequently hypothe-sise that:

Hypothesis 2: The greater the importance ofregional and corporate performance as criteria fordetermining the financial compensation of sub-sidiary senior management, the more the knowl-edge transferred from the subsidiary to othercorporate units.

However, both the specification of subsidiaryperformance evaluation criteria and the use ofglobal and/or regional MNC performance as thebasis for subsidiary management compensation areat best imperfect mechanisms to reduce the agencyproblems in headquarterssubsidiary relationships.First, the extent to which the subsidiary has in facttransferred knowledge to other MNCs is difficult forheadquarters to measure and thus follow up.Agency theorists argue that, in situations of lowoutcome measurability, principals should use mon-itoring as a control strategy (Eisenhardt, 1989).Second, the regional and/or global MNC perfor-mance is influenced by a host of factors otherthan the competences transferred from the focal


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subsidiary. Subsidiary managers may therefore con-clude that it is not in their self-interest to spendlimited resources on knowledge sharing. Giventhese limitations, MNC headquarters may use whatin the agency theory literature has been labelled

monitoring or behavioural control strategies to ensurethat the agent behaves in accordance with theprincipals interests. To staff a foreign subsidiarywith expatriate managers can be viewed as aheadquarters strategy to monitor the unit.

The use of expatriate subsidiary managersThe use of expatriates has been extensively studiedin the MNC literature (e.g., Edstrom and Galbraith,1977; Boyacigiller, 1990), recently often from anagency theory perspective (e.g., ODonnell, 2000;

Harvey et al., 2001). From a headquarters controlperspective, there are at least two reasons whyexpatriate subsidiary managers can be expected tobe more likely than local managers to act in theprincipals best interest. First, compared with localmanagers, expatriates future career prospects aremore likely to be significantly influenced by head-quarters evaluation of how well the subsidiarycontributes to the performance of the wholecorporation. Second, as expatriates tend to identifyless with the subsidiary than do local managers,being instead more likely to have been socialisedinto the parent company (cf. Lubatkin et al., 2001),they may be less inclined to take a narrowsubsidiary perspective when deciding on subsidiaryactivities.

Furthermore, knowledge transfer is carried outwithin the context of interpersonal relationshipsbetween the sending and the receiving unit, andthere are several reasons why expatriates are morelikely than locals to be actively involved in theknowledge transfer process. First, expatriates aremore likely to have stronger and longer-tenuredsocial ties with managers at headquarters and inother MNC units (Gupta and Govindarajan, 2000).Second, and related to the first point, expatriatemanagers may be perceived as more trustworthythan local managers. Therefore, managers in receiv-ing units may be more likely to engage in processesof knowledge transfer with subsidiaries headed byexpatriates. Third, expatriate managers are likely tobe better positioned to understand the added valueof the subsidiarys knowledge base for other parts ofthe MNC. Finally, there may be fewer communica-tion problems between expatriate managers andtheir colleagues in other MNC units (Gupta and

Govindarajan, 2000). The following hypothesis willtherefore be tested:

Hypothesis 3: The higher the number of expatri-ate managers, the more the knowledge trans-ferred from the subsidiary to other corporateunits.

So far we have relied on agency theory argumentsto develop hypotheses on the organisationalmechanisms influencing outward flows of subsidi-ary knowledge. However, several writers haveemphasised that the propensity of managers tobehave opportunistically may also be affected bysocialisation (Ouchi, 1979; Ghoshal and Moran,1996; Lubatkin et al., 2001). Below, we thereforehypothesise on how subsidiary knowledge transfermay be affected by corporate socialisation.

Corporate socialisationThe aim of corporate socialisation is to establish ashared set of values, objectives, and beliefs acrossMNC units (Nohria and Ghoshal, 1994), providingthem with a strong sense of a shared mission and aunitary corporate culture (Hedlund and Kogut,1993). From a knowledge-sharing perspective, theunderlying rationale is that the more different unitsshare long-term visions and goals, the more likelythey are to transfer resources and exchange com-plementary knowledge. Empirical research on theknowledge-based view of the firm indeed suggeststhat the existence of close interpersonal networksfacilitates the diffusion and creation of new knowl-edge across units within a corporation (Tsai andGhoshal, 1998; Tsai, 2001). Szulanski (1996) viewsthe absence of pre-existing relationships amongunits as a factor creating stickiness in knowledgesharing. Similarly, drawing on a social networkperspective on organisational learning, Tsai (2001)argues that inter-unit knowledge transfer in MNCsoccurs in a shared social context in which differentunits are linked to one another. In his studyaddressing the roles of inter-unit ties in sharingknowledge in MNCs, Hansen (1999) notes thatefficient knowledge sharing is typically charac-terised by tight coupling between people fromdifferent organisation subunits. Interpersonal tiesbetween MNC units provide channels throughwhich both information and resources flow. Socialinteractions among different business units blur theboundaries of those units and stimulate the spreadof information and knowledge.

Corporate socialisation mechanisms refer tothose organisational mechanisms that facilitate


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the development of interpersonal ties in the MNC(Van Maanen and Schein, 1979), which in turn canbe expected to enhance the communicationbetween the parties, including transfer of knowl-edge. Gupta and Govindarajan (2000) indeed found

that corporate socialisation mechanisms, as well aswhat they called formal integration mechanisms(including the use of permanent committees), werepositively related to knowledge transfer to peersubsidiaries and (partially) to the parent organisa-tion. Therefore we predict the following relation-ship between the use of corporate socialisationmechanisms and a subsidiarys knowledge transferto other MNC units:

Hypothesis 4: The more extensive the use ofcorporate socialisation mechanisms, the morethe knowledge transferred from the subsidiary to

other corporate units.

Data and methodsData for this study were collected through struc-tured face-to-face interviews with top managers ofFinnish and Chinese subsidiaries of foreign MNCs.Subsidiary top managers were chosen as respon-dents because, given the broad scope of theresearch instrument, they were likely to be theindividual subsidiary employees best able to pro-vide perceptional data on the full range of ques-tions. Finland and China were chosen so as to testthe hypotheses with data from two differentcontexts one small Western industrial countryand one large Asian developing country. In bothcountries, we began the data collection process bycontacting subsidiary presidents by mail. In Finlandwe targeted the 150 largest foreign-owned subsidi-aries, and in China some 300 foreign-ownedsubsidiaries, whose contact information was avail-able to us. The letter described the project andemphasised the confidentiality of individualresponses. The respondents were then contactedby telephone to book interviews. The result was aninitial sample of 164 subsidiaries. For the analysespresented here, deleting cases with missing valuesresulted in a final sample of 134 observations.

The interviews, which lasted 45120 min, wereconducted in 20002002. During the interviews,the respondents and the researchers went through apre-tested questionnaire together. The question-naire language was English; any terms that respon-dents had difficulty understanding were explainedto them in another language they felt comfortablewith (Finnish, Swedish or Mandarin).

Measures

Dependent variableThe outward transfer of subsidiary knowledge asthe dependent variable was used to assess the

extent to which the subsidiary knowledge had beentransferred to other MNC units. The approach issimilar to that of Gupta and Govindarajan (2000),Holm and Pedersen (2000), and Schulz (2001). On aseven-point Likert scale, where 1not at all (usedby others) and 7very much (used by others),respondents were asked to rate the extent to whichthe subsidiarys distinctive competences within fivebusiness activities had been used by the corpora-tions other units. The activities were: generalmanagement, manufacturing, marketing and sales,service, and R&D. Note that the operationalisationdoes not imply a full replication of the knowledgein the receiving unit. Indeed, transfer of knowledgeis typically associated with modification of theknowledge in the receiving organisation. Hence weagree with Argote and Ingram (2000, 154) thatknowledge transfer occurs when experience in oneunit of an organisation affects another unit. Theoutward transfer of subsidiary knowledge constructis a multi-item construct calculated as the total sumof scores reported by respondents for all the fivebusiness activities mentioned above divided by thenumber of items (alpha0.81).

Independent variables

(1) Subsidiary knowledge transfer as performance eva-luation criterion. The variable was measured byasking respondents what importance theyattached to the criterion Transfer of knowledgeto other units when subsidiary performancewas evaluated by the headquarters. The respon-dents were requested to estimate the perceivedimportance of this evaluation criterion on aseven-point Likert scale, where 1not at allimportant, and 7very important.

(2) Subsidiary management compensation. The mea-

sure used to assess subsidiary managementcompensation is similar to that of Roth andODonnell (1996). We asked the respondents toreport the percentage weight of the followingcriteria (total100%) when adjusting, respec-tively, the general managers and the subsidiarytop managements bonuses and base salaries: (a)individual performance; (b) performance of thesubsidiary (or parts thereof); (c) performance ofthe MNC in the region; and (d) performance ofthe whole of the MNC. The general managers


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and the subsidiary top managements percen-tage scores were then averaged into mean scoresfor each criterion. The final subsidiary manage-ment compensation construct, based on thesemean scores and following Roth and ODonnell

(1996), was the aggregate weight as a percentagegiven to regional and MNC performance. Theconstruct thus covers the compensation of boththe subsidiarys top manager and the rest of itstop management team, the relatively greateremphasis on the former compared with indivi-dual members of the top management groupbeing motivated by corresponding differencesin power and influence.

(3) Number of expatriate managers. This variablemeasured the number of foreign employees inthe subsidiarys top management team.

(4) Corporate socialisation mechanisms. Three differ-ent measures of lateral socialisation wereincluded in our operationalisation: (a) inter-unit trips and visits; (b) international commit-tees, teams, and task forces; and (c) traininginvolving participants from multiple units. Foreach of the three measures, respondents wereasked to provide data on the number ofmanagers interacting with representatives ofother units within the scope of that type ofinteraction. We then divided these data by thetotal number of subsidiary employees in orderto account for variations in subsidiary size. Theresulting three scores were then added up anddivided by three. Thus, where some previousstudies have used scales where the respondentshave been asked to estimate the use of a certaintype of interaction on a scale from used rarelyto used very often (e.g., Roth et al., 1991), oranswer yes or no to whether a specific typehad been used (e.g., Gupta and Govindarajan,2000), we use an objective estimate of thenumber of people involved in corporate socia-lisation mechanisms. Arguably, this provides amore precise measure (alpha0.76).

Control variables

(1) Stock of subsidiary knowledge. A subsidiary with astock of knowledge that in some capacity isunique and greater than that of other MNCunits is likely to be an attractive collaborationpartner (Davenport and Prusak, 1998; Guptaand Govindarajan, 2000). The existence of acapability gap to other MNC affiliates is there-

fore likely to motivate MNC units to seekknowledge from the focal subsidiary, thusincreasing the likelihood of knowledge transferfrom this subsidiary to other MNC units (Rug-man and Verbeke, 2001). Using acquisition as

mode of entry, subsidiary size, and relativeeconomic level of the host country as proxiesfor the value of the subsidiarys knowledgestock, Gupta and Govindarajan (2000) foundempirical support for the hypothesised positiverelationship between subsidiary knowledgestock level and outward transfers of knowledgefrom the subsidiary to both peer subsidiariesand the parent corporation. It was thereforeessential to control for the subsidiarys stock ofknowledge in the empirical tests. This constructof subsidiary knowledge assesses the subsidiarys

distinctive competence in five business activ-ities: general management, manufacturing,marketing and sales, service, and R&D. Therespondents were asked to indicate, on a seven-point Likert-type scale (with 1very muchlower, and 7very much higher), the extentto which, during the last 3 years, the subsidiaryhad developed knowledge that was superior tothat of other units in the business area for thesefive activities. In testing the hypotheses, a singlecomposite measure based on the total sum of allfive items divided by the number of items wasused. A higher number indicated knowledgesuperiority compared with other MNC units(alpha0.69).

(2) Subsidiary scope of operations. The number offunctions performed by a foreign subsidiaryinfluences its propensity to develop and possessknowledge of potential use for other MNCunits. Subsidiaries with fully fledged operationsin terms of manufacturing, marketing, serviceand R&D are more likely to transcend limita-tions in the technological specialisation of theparent company and take advantage of thecapabilities residing with their local networkpartners (Cantwell, 1992). A subsidiary with awide range of functions in-house may alsobetter integrate and further develop corporateand external knowledge. Furthermore, with ahigher number of functions there is a higherlikelihood that the subsidiary develops MNC-unique knowledge in some functional area.Thus, the scope of operations was controlledfor in the tests of the hypotheses. The variablewas measured by asking respondents to checkall of the following subsidiary functions that


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applied to the subsidiary: manufacturing, sales,

service, and R&D. Hence each subsidiary

received a score of 14.(3) Mode of establishment. The literature on foreign

direct investment (e.g., Hennart and Park, 1993)

has argued theoretically and shown empiricallythat, compared with a greenfield subsidiary, anacquired subsidiarys knowledge base is less

likely to overlap with the knowledge base ofthe rest of the MNC. In fact, an important

motive for an MNC to acquire a local firm canbe to access its knowledge base. Compared with

greenfield subsidiaries, acquired units maytherefore possess knowledge that is more

unique within the context of the MNC. Guptaand Govindarajan (2000) found that acquired

units indeed transferred more knowledge to

peer subsidiaries than did greenfield units. Themode of establishment was therefore includedas a control variable in our analysis. The variable

was measured by asking survey respondentswhether the subsidiary was acquired. It was

coded as 0 and 1, with 0No and 1Yes.(4) MNC home region. A large body of literature

suggests that the country of origin of the MNCmay influence the way in which it operates.

Accordingly, following Gupta and Govindarajan

(2000), we controlled for the home region of theMNC when testing our hypotheses. All MNCs in

the sample were headquartered in the UnitedStates, the Nordic countries, or the rest of

Europe. Nordic parentage was treated as thebase case, and dummy variables were created forthe two other regions.

(5) Subsidiary location. In this paper, we study

knowledge transfer from Western-owned MNCsubsidiaries located in China and Finland. The

propensity of MNC units to engage in knowl-edge transfer may vary, depending on the

location of the sender unit, and therefore thelocation of the subsidiary was controlled for in

our analysis. The country dummy variableindicated the location of the subsidiary (coded

as 0Finland, 1China).(6) Subsidiary size. It has been shown in several

studies (e.g., Foss and Pedersen, 2002) thatsubsidiary size may influence knowledge trans-

fer. We therefore controlled for subsidiary size,which was measured as the log of the number of

subsidiary employees.

The variables were standardised prior to theanalyses.

ResultsDescriptive statistics and correlation for all of thevariables analysed in this study are provided inTable 1. To assess the effects of the hypothesisedvariables and the control variables on subsidiary

knowledge transfer, we ran OLS regression analyses.Table 2 presents the results of the regressions usedto test the hypotheses.

When testing the hypotheses, we first entered thecontrol variables into the equation. The resultingregression model (Model 1 in Table 2) was statisti-cally significant, with the subsidiarys knowledgestock and its value chain scope being particularlystrongly related to the level of knowledge transfer.Hence, the more extensive the subsidiarys knowl-edge stock and the broader the scope of itsoperations in terms of production, R&D, market-

ing, and service, the more the knowledge flowedfrom the subsidiary to the rest of the MNC.Knowledge outflows were also higher (Po0.05,two-tailed t-test) when the subsidiary had beenestablished through an acquisition.

Subsequently, we entered the independent vari-ables hypothesised as the determinants of subsidi-ary knowledge transfer. As the results in Table 2show, the regression model (Model 2) washighly significant, suggesting support for ourtheoretical framework. The R2 increased from0.348 in the model only containing control vari-ables to 0.427 in the full model. Of the controlvariables, subsidiary stock of knowledge and scopeof operations were significantly related to knowl-edge transfer.

There was strong support for Hypothesis 1 (at

Po0.001, single-tailed t-test) predicting a positiverelationship between knowledge transfer and theperceived importance headquarters attach toknowledge transfer when evaluating subsidiaryperformance. Hypothesis 2 examined the relation-ship between knowledge transfer and top manage-ment being compensated based on the regional orglobal performance of the MNC. Although the

relationship was in the expected direction, nosignificant effect was found; Therefore, Hypothesis2 was not supported. Similarly, the number ofexpatriates in management was hypothesised toimpact positively on the extent of knowledgetransfer, but the number of expatriate managerswas not found to be related to knowledge transfer,implying the rejection of Hypothesis 3.

Hypothesis 4 investigated the relationshipbetween knowledge transfer and the extent oflateral socialisation practices. This hypothesis was


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supported (at Po0.05, single-tailed t-test). Thus,consistent with socialisation theory, the more thesubsidiary managers interact with managers fromother MNC units through visits, during jointtraining programmes, and in cross-unit committees

and task forces, the more the knowledge transferredto other parts of the corporation.

DiscussionThis study builds on and contributes to theexpanding body of previous research on thedeterminants of knowledge flows within MNCs,and in particular the work of Gupta and Govindar-ajan (2000). Our overarching aim was to address thelack of research on the strategies used by MNCheadquarters to control the inter-unit transfer ofsubsidiary competences. Building on agency theory

and socialisation theory, we have explored the wayin which different organisational mechanismsavailable to MNC headquarters impact on knowl-edge outflow from a foreign-owned subsidiary toother parts of the parent corporation. The modelwas tested on a data set consisting of 134 Westernsubsidiaries located in Finland and China.

The results reported here indicate that MNCheadquarters can indeed successfully use certainorganisational mechanisms to enhance knowledgetransfer, and that both agency theory and socialisa-tion theory appear relevant for predicting intra-MNC knowledge flows. More specifically, ourfindings suggest that MNC headquarters can influ-ence the flow of knowledge transfers within thecorporation by tailoring the criteria used to evalu-ate subsidiary performance. This harmonises wellwith an agency theory perspective. In line withresults obtained in previous research (Gupta andGovindarajan, 2000), outward subsidiary knowl-edge transfer was also positively and significantlyrelated with the employment of corporate socialisa-tion practices. Corporations may thus increase thelikelihood for knowledge sharing by organisinginternational training programmmes, by establish-ing international task forces and committees, andby encouraging visits across MNC units. Theoreti-cally, our findings can be interpreted as supportingLubatkin et al.s (2001) suggestion that the originalagency theory proposed by Jensen and Meckling(1976) should be integrated with other theoreticalperspectives, including socialisation theory.

Although the findings of this study suggest thatthe specification of knowledge transfer as a sub-sidiary evaluation criterion may in itself have animpact on subsidiary behaviour, the results failed toTa

ble

1

Descriptivestatisticsandc

orrelations

Mean

s.d.

1

2

3

4

5

6

7

8

9

10

11

(1)Knowledgetransferoutflow

2.8

8

1.2

8

(2)Knowledgetransferasperformance

evaluationcriterion

3.8

2

1.6

5

0.2

6**

(3)MNCGlobaland/orregionalfo

cus

intopmanagementcompensation

22.6

19.1

0.0

5

0.0

3

(4)Numberofexpatriatemanagers

1.4

8

2.9

0

0.0

4

0.1

0

0.1

1

(5)Corporatesocialisationmechan

isms

0.3

7

0.7

7

0.0

3

0.0

6

0.1

0

0.0

3

(6)Subsidiarystockofknowledge

4.4

0

0.9

3

0.4

0**

0.1

5

0.0

8

0.0

8

0.0

1

(7)Subsidiaryvaluechainscope

2.8

4

1.0

4

0.3

2**

0.0

7

0.0

5

0.0

7

0.1

5

0.1

0

(8)Thesubsidiarywasacquired

0.4

4

0.5

0

0.2

5**

0.1

6*

0.1

1

0.2

3**

0.1

7*

0.0

7

0.0

3

(9)USMNC

0.2

4

0.4

3

0.0

5

0.0

0

0.0

8

0.0

9

0.1

2

0.1

2

0.0

6

0.0

0

(10)European(butnotNordic)MNC

0.4

0

0.5

0

0.0

2

0.0

9

0.2

2**

0.1

8*

0.0

1

0.0

7

0.1

8*

0.0

5

0.4

6**

(11)Subsidiaryhomecountry

(0Finland,

1China)

0.4

6

0.5

0

0.1

6*

0.2

2**

0.1

2

0.4

1**

0.2

9**

0.1

4

0.0

5

0.4

7**

0.2

5**

0.2

2**

(12)Numberofemployees(log.)

4.9

6

1.3

5

0.1

6*

0.0

0

0.1

1

0.2

5**

0.5

4**

0.0

5

0.2

4**

0.2

2**

0.0

2

0.0

6

0.2

7**

*Correlationissignificantatthe0.0

5level(two-tailed).

**Correlationissignificantatthe0.0

1level(two-tailed).


451



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establish any positive effect of management com-pensation on knowledge flows. We found nosupport for the hypothesised impact of a compen-sation system for top management based on theregional or global performance of the MNC, whichtheoretically could be expected to be enhancedthrough successful knowledge transfers. Notably,Gupta and Govindarajan (2000) also failed to findsupport for a similar hypothesis in their study. It isconceivable that the link between knowledgetransfer and MNC performance is perceived as tooelusive by self-interested subsidiary managers for itto influence their conduct. On the one hand, acompensation system that is based more directly onthe subsidiarys contribution to the competencedevelopment of other MNC units may be needed toimpact upon the pattern of knowledge flows. Onthe other hand, to construct and implement asystem that allows headquarters management tomeasure subsidiary knowledge transfer is likely tobe a significant challenge. More research is clearlyneeded on the impact of financial compensationsystems on MNC-internal knowledge transfer.

Contrary to expectations, our data indicate thatthe use of expatriate managers is not significantlyrelated to outward knowledge transfer from sub-sidiaries to other parts of the MNC. We can onlyspeculate on the reasons for this, and encourage

scholars to investigate the issue further in futureresearch. First, it may be that monitoring subsidiaryknowledge transfer is such a small part of expatriatemanagers activities that no effect can be seen inthe regression analyses. Second, it is possible thatextensive use of expatriate managers on relativelyshort-term assignments in the subsidiary has anegative impact on the development of the long-term, trustful relationships between MNC subsidi-aries that are important for extensive competencetransfers to take place (Tsai and Ghoshal, 1998).Third, an expatriate-dominated management groupmay focus the attention of the subsidiarys activitiesmore on MNC-internal processes than on develop-ing relationships with organisations in the localenvironment, and the subsidiary may consequentlyfail to take advantage of the resources residing in itsenvironment to develop competences that areunique within the MNC. The strong positiverelationship between subsidiary stock of knowledgeand knowledge transfer in this study indeedsuggests that corporations aiming at increasingknowledge sharing need to manage their foreignsubsidiaries so as to stimulate the creation ofcapabilities that can then be disseminated to otherparts of the MNC (see Frost et al., 2002). Research byAndersson et al. (2002) has shown that subsidiariesthat are deeply embedded in their environment are

Table 2 Regression analyses for subsidiary knowledge outflow

Independent variables Standardised beta coefficients ( t-statistics)

Model 1 Model 2

Subsidiary stock of knowledge 0.38 (5.12)*** 0.35 (4.83)**

Subsidiary value chain scope 0.34 (4.31)*** 0.33 (4.48) **

The subsidiary was acquired 0.17 (2.10)* 0.15 (1.84)*

US MNC 0.00 (0.05) 0.03 (0.34)

European MNC 0.01 (0.07) 0.00 (0.01)

Subsidiary home country (0Finland, 1China) 0.06 (0.64) 0.05 (0.49)

Number of employees (log.) 0.02 (0.20) 0.10 (1.00)

Knowledge transfer as performance evaluation criterion 0.23 (3.12)***

MNC Global and/or regional focus in top mgt. compensation 0.04 (0.59)

Number of expatriate managers 0.02 (0.22)

Corporate socialisation mechanisms 0.18 (2.03)*

R 0.590 0.653

R2 0.348 0.427

Adj. R2

0.312 0.375F 9.66*** 8.32***

*One-tail Po0.05.**One-tail Po0.01.***One-tail Po0.001.


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11/13

more likely to contribute to the competencedevelopment of other MNC subsidiaries. Extensiveuse of expatriate managers might thus over timehave a negative impact on outward subsidiaryknowledge transfer.

How does this study inform us concerning theapplicability of agency theory to control issues inthe context of MNCs? Two of the three hypothesesbased on agency theory were not supported by thedata. Some possible explanations for this lack ofsupport have been discussed above. However, therewas strong empirical support for the hypothesisthat [T]he higher the perceived importanceattached to knowledge transfer by headquarterswhen evaluating the performance of the subsidiary,the more the knowledge transferred from thesubsidiary to other corporate units. This finding

can be explained as being an outcome of rationalsubsidiary top managers acting purely in self-interest, as they believe that their results will beevaluated and that they will personally be rewarded for example, through improved career prospects for how well the subsidiary succeeds in transferringknowledge to other MNC units. On the other hand,the findings may also be an outcome of theperformance evaluation criteria playing an impor-tant role in informing boundedly rational but notnecessarily opportunistically behaving subsidiarymanagers of the subsidiarys key objectives. In otherwords, an assumption of agent opportunism maynot be necessary to explain why the specification ofknowledge transfer as a performance criterionappears to influence subsidiary management beha-viour. Further research on the mechanismsinvolved in specifying, communicating and follow-ing up subsidiary goals would help shed furtherlight on subsidiary knowledge transfers in MNCs.Such work would also contribute to our under-standing of the usefulness of agency theory for thestudy of MNC management and control (see alsoODonnell, 2000).

The hypotheses developed in this paper havebeen tested with a unique data set created throughpersonal interviews with the presidents of 134Western-owned subsidiaries located in Finlandand China. Despite the differences between thesetwo countries, subsidiary nationality did not seemto influence the patterns of knowledge flows,suggesting that certain organisational mechanismsinfluence subsidiary knowledge transfers acrossnational contexts. Our choice to collect datathrough personal interviews has certainly contrib-

uted to our high response rate and helped usascertain that the subsidiary presidents did theirbest to provide us with high-quality information.Still, the study remains subject to certain limita-tions, the addressing of which will provide fruitful

avenues for future research. First, there is apotential risk for common method bias due to ouruse of self-reported, partly perceptual measures. Wereduced this risk by asking the questions includedin the study at different points of time during theinterviews; still, future research where data fromone MNC unit are corroborated by data from otherunits belonging to the same parent corporationwould be desirable. Second, the cross-sectionalnature of our data collection limits our ability toexamine the dynamic interplay between the con-structs studied, highlighting the demand for time

series data on the topic. Third, similar to Gupta andGovindarajan (2000), this study analysed knowl-edge flows at the nodal level of analysis that is,with a focus on the behaviour of individual MNCunits. Future work on other levels of analysis forexample, the dyadic (examining knowledge flowsbetween pairs of units) and the systemic (analysingthe entire network of MNC units) is thus calledfor. Finally, although our data clearly indicate thatthe subsidiarys stock of knowledge is positivelyrelated to outward subsidiary knowledge transfer,we did not examine the impact of the type ofknowledge on knowledge flows (see, for example,Simonin, 1999). Scrutiny of how knowledge char-acteristics interact with the use of headquarterscontrol mechanisms would be one way to furtheraugment our understanding of how organisationalmechanisms can be used to increase knowledgesharing in the differentiated MNC.

We thus conclude with the hope that thisexploration into the mechanisms used by MNCsto enhance knowledge transfer will provide a basefor extensive future research into this importantarea.

AcknowledgementsThis research was carried out within the Academy ofFinland-financed project Managing knowledge crea-tion and transfer in multinational corporations: aFinnish perspective. We thank Anette Bjorkman andPatrick Furu for their contributions to the datacollection. We would also like to thank the editors ofthe focused issue Nicolai Foss and Torben Pedersen, aswell as the three JIBS reviewers for valuable commentsand suggestions on an earlier version of the paper.


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About the authorsIngmar Bjorkman is a professor at the SwedishSchool of Economics, Helsinki, Finland. His workappears in, among others, Journal of International

Business Studies, International Journal of Human

Resource Management and Organization Studies.Bjorkmans research interests focus on interna-tional HRM, M & A integration, and knowledgemanagement in multinational corporations.

Wilhelm Barner-Rasmussen is a research associateat the Department of Management and Organiza-tion, Swedish School of Economics, Helsinki, Fin-land. His research is concerned with knowledgesharing in multinational corporations, with aspecial focus on issues related to language andcommunication.

Li Li is currently a doctoral candidate at theSwedish School of Economics, Helsinki, Finland.His main research interests are knowledge transferin multinational corporations, cross-cultural man-agement, and Western-Chinese business opera-tions.

Accepted by Nicolai Juul Foss and Torben Pedersen, Departmental Editors, 31 March 2004. This paper has been with the author for one revision.


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