Knowledge flows in MNCs: An empirical test and extension of Gupta and Govindarajan's typology of subsidiary roles
Introduction
In 1986, Porter (1986, p. 17) noted that “we know more about the problems of becoming a multinational than about the strategies for managing an established multinational.” Since the mid 1980s, however, there has been a growing stream of research on the management of headquarters–subsidiary relationships, and in particular on the systems and processes that multinational companies (MNCs) use to coordinate and control their network of subsidiaries (e.g. Egelhoff, 1988, Bartlett and Ghoshal, 1989, Ghoshal and Nohria, 1989, Martinez and Jarillo, 1991). With this has also come the realization that different subsidiaries might play different roles within the MNC network and that this might lead to a need to differentiate control mechanisms across subsidiaries.
One of the most influential contributions in this respect has been Gupta and Govindarajan's (1991) Academy of Management Review article that proposed a typology of subsidiary roles based on knowledge flows within the MNC. The Social Science Citation Index (SSCI) reports more than a hundred citations to this seminal article, 60% of which occurred in the last 5 years alone. Surprisingly, even though from the nineties onwards we find a large number of empirical studies dealing with subsidiary roles (e.g. Ghoshal and Nohria, 1993, Nohria and Ghosnal, 1994, Martinez and Jarillo, 1991, Roth and Morrison, 1992, Birkinshaw and Morrison, 1995, Taggart, 1997a, Taggart, 1997b, Nobel and Birkinshaw, 1998, Ambos and Reitsperger, 2004), the original typology proposed by Gupta and Govindarajan has not been subjected to much empirical verification. Given that this typology has remained so influential even in recent years, it is important to verify whether a subsidiary typology based on knowledge flows is a meaningful way to classify MNC subsidiaries.
As far as we are aware, only Gupta and Govindarajan's (1994) own study provided such a test. In stark contrast to the authors' earlier conceptual article, however, this empirical article seems to have made a rather modest impact on the field. The SSCI lists only twelve citations to it. Moreover, Gupta and Govindarajan's empirical study suffered from a number of limitations. First, following their conceptual study, each of their hypotheses only distinguished two opposite subsidiary roles and simply expected the remaining two roles to fall in between. In our study we clearly differentiate all four subsidiary roles. Second, in Gupta and Govindarajan's study the four subsidiary types were constructed by using median splits. As they acknowledge themselves, however, a median split might lead in some ‘noise’ in the results as it uses an arbitrary cut-off point. Our study will therefore use a K-means cluster analysis to verify whether a natural empirical pattern emerges that confirms Gupta and Govindarajan's theoretical model. Thirdly, even though Gupta and Govindarajan hypothesised differences between subsidiary roles, their analysis only provided an overall ANOVA, without any pairwise tests for specific differences, an aspect that will be duly addressed in our study.
Given that there is increasing recognition that internalization of knowledge flows might well be the most important function of foreign direct investment and that the effective and efficient management of knowledge flows is possibly the most important source of competitive advantage for MNCs (Kogut and Zander, 1993, Doz et al., 2001, Bartlett et al., 2004), it seems appropriate to revisit Gupta and Govindarajan's typology. This article will therefore provide both an empirical test of the Gupta and Govindarajan typology and a test of part of their propositions with regard to control mechanisms. In addition, it will extend the original typology by investigating differences in subsidiary capabilities and product flows. Finally, it will provide a more detailed analysis of the differences between HQ and subsidiary flows as well as a further refinement of the Local Innovator role.
There are several reasons why a typology of subsidiaries can be useful for both academics and students. First, it can reduce the complexity of multinational organizational reality into a manageable number of related characteristics, making it easier to understand and explain the functioning of multinational companies. Second, if meaningful organizational typologies can be discovered they can then be used in a predictive way. When certain characteristics are shown to cluster in distinct typologies, the presence of one or more of these characteristics in other samples can lead to a prediction of the remaining elements. This would make it easier to compare and integrate different studies in the field and may go some way to remedy the ‘lack of (both) conceptual integration and empirical corroboration’ in the field of international business and management (Macharzina & Engelhard, 1991, p. 24).
Section snippets
Previous research on subsidiary roles
Gupta and Govindarajan (1991) see the MNC as a network of transactions that comprise capital flows, product flows and knowledge flows. They argue that of these three, knowledge flows are particularly important given that the proportion of global and transnational MNCs, in which knowledge flows are considered to be particularly important, is rising (Bartlett & Ghoshal, 1989), and that relatively little is still known about the management of knowledge flows, either in a domestic or an
Data collection and sample
Data for this study were collected through a questionnaire survey. The questionnaire was developed after an extensive review of the relevant literature on headquarters–subsidiary relationships. It was subsequently pilot-tested in a focus group consisting of five postgraduate students from five different countries. These students had between 4 and 10 years of managerial work experience in multinational corporations. Pilot testing focused on both content and questionnaire design. After
Results
Table 2 contains the means, standard deviations and zero-order correlations for all variables used in this study. Confirming Gupta and Govindarajan's (2000) findings for knowledge flows, the largest flows take place from headquarters to subsidiaries. The mean inflow from headquarters is virtually identical in both studies (3.81 vs. 3.75). However, the other flows are all substantially higher in our study (Knowledge Outflows to HQ: 3.02 vs. 2.39, Knowledge Inflows from Subsidiaries: 2.86 vs.
Discussion and conclusion
Our results show a high level of support for the predictive validity of the Gupta and Govindarajan typology based on knowledge in- and outflows. However, the specific levels of control mechanisms in the different types of subsidiaries in our study differed from Gupta and Govindarajan's hypotheses. We argued that rather than equating LIs and IPs with regard to their level of autonomy, and GIs and IMs with regard to their level of control by socialization and networks, it would be more consistent
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