Elsevier

Long Range Planning

Volume 47, Issues 1–2, February–April 2014, Pages 49-63
Long Range Planning

Reverse Knowledge Transfer in MNEs: Subsidiary Innovativeness and Entry Modes

https://doi.org/10.1016/j.lrp.2013.08.013Get rights and content

It is now well recognized that multinational enterprises (MNEs) are differentiated networks wherein subsidiaries vary in terms of their ability to create new knowledge and competencies for their parent groups. In much of this theory, it is taken for granted that subsidiary innovativeness has a positive correlation with the extent of reverse knowledge transfers to the parent MNE. Relying on the headquarters-subsidiary view of the MNE, we argue that, beyond a point, increasing subsidiary innovativeness will be associated with lower reverse knowledge transfers. Further, we argue that this relationship is sensitive to the subsidiary entry mode. Using data from a sample of 293 Italian subsidiaries, we find strong support for our hypotheses. In particular, our results confirm that the effect of subsidiary innovativeness on reverse knowledge transfers displays an inverted-U shape, and that the curvilinearity is greater for greenfield entries relative to acquisition entries. The U-shaped relationship between subsidiary innovativeness and reverse knowledge transfers, as well as the sensitivity of this result to entry mode are important new findings in the literature on the role of subsidiaries in competence creation.

Introduction

It is generally recognized that knowledge, and more specifically leveraging it across geographic boundaries, is the basis for the formation of sustainable competitive advantage in multinational enterprises (MNEs) (Grant, 1996, Kogut and Zander, 1993, Rugman and Verbeke, 2001, Tallman and Phene, 2007). The MNE's ability to undertake explorative R&D (Mudambi and Swift, 2013) and mobilize the knowledge resources that exist within its network of subsidiaries is one of its key sources of value creation (Bartlett and Ghoshal, 1989, Morck and Yeung, 1991, Narula, 2002). Knowledge transfer is a key aspect of knowledge mobilization and has been defined as the process through which one unit in an organization is affected by the experience of another and can be measured by changes in the knowledge of the recipient unit. In this paper, we study “reverse” knowledge transfers from subsidiary to parent, i.e., subsidiary experiences that are transferred to parent companies. These can be measured through changes in parent companies' knowledge stocks and entry into new technologies (Blomkvist et al., 2010, Dierickx and Cool, 1989).

Early literature on knowledge transfer was based on the home-centric view of the MNE wherein knowledge flowed from the parent to its subsidiaries (e.g., Porter, 1990, Vernon, 1966). More recent literature recognized the critical importance of strategically locating and leveraging knowledge resources from subsidiaries (Bartlett and Ghoshal, 1989, Benito et al., 2003, Criscuolo and Narula, 2007, Frost and Zhou, 2005, Nielsen and Michailova, 2007, Zander, 1999). However, the MNE is a differentiated network within which subsidiaries vary widely in terms of their roles and responsibilities (Nohria and Ghoshal, 1994). Some MNE subsidiaries have evolved through headquarters' mandates, as well as through their own entrepreneurial initiatives, to undertake a greater range of substantial creative roles in their parent organizations (Birkinshaw and Hood, 1998, Blomkvist et al., 2010). Other subsidiaries concentrate on more traditional tasks, exploiting the competencies of their parent firms in their local country environments (Kuemmerle, 1999).

A substantial body of research in international business has investigated the relationship between a range of subsidiary characteristics and reverse knowledge transfers (e.g., Ambos et al., 2006, Gupta and Govindarajan, 2000, Håkanson and Nobel, 2000, Rabbiosi, 2011, Yang et al., 2008). However, we claim this literature has not adequately distinguished between the ability of a subsidiary to engage in reverse knowledge transfers and its actual willingness to do so. Failing to recognize the possibility of subsidiary pursuit of its local interests rather than the global interests of its parent MNE can lead to systematic overestimates of the extent of reverse knowledge transfers associated with subsidiary innovativeness. This also suggests that in order to fully exploit competence-creating subsidiary mandates, it is necessary to implement strategies to minimize the extent of incentive misalignment between headquarters and subsidiaries (Ghoshal and Nohria, 1989).

Parent companies incur the costs of reverse knowledge transfers because these transfers are expected to drive new value creation (Ambos et al., 2006, Mudambi, 2008, Subramaniam and Venkatraman, 2001). The costs of knowledge transfer and the nature of the relationship between the source and the target have direct implications for the extent of rents generated through the knowledge transfer. Therefore we cannot fully investigate the factors influencing reverse knowledge transfer without recognizing that subsidiary innovativeness can have both positive and negative effects on reverse knowledge transfers.

Viewing the MNE from the headquarters-subsidiary perspective, we argue that subsidiary innovativeness has a positive correlation with the extent of reverse knowledge transfers to the parent MNE up to a certain point, beyond which increasing subsidiary innovativeness will be associated with lower reverse knowledge transfers. Further, we argue that this relationship is sensitive to subsidiary entry mode. We test our conceptual model using data from a sample of 293 Italian subsidiaries, and find strong support for our hypotheses. Our results confirm that the effect of subsidiary innovativeness on reverse knowledge transfers displays an inverted-U shape, and that the curvilinearity is greater for greenfield entries relative to acquisition entries. The U-shaped relationship between subsidiary innovativeness and reverse knowledge transfers as well as the sensitivity of this result to entry mode are important new findings in the literature on competence-creating subsidiaries.

The paper is organized as follows. We begin by highlighting the theoretical questions explored in our study. Then, we develop our theoretical model and explain how it advances the existing theory with regard to MNE knowledge management processes. Our theory development leads to the specification of a set of research hypotheses relating reverse knowledge transfers to subsidiary innovativeness. In the following sections we describe our data, estimation methodology, and empirical results. Finally, we discuss the implications of our findings for knowledge management in MNEs and relate them to the wider literature on headquarter-subsidiary relationships.

Section snippets

Theoretical background

To an increasing extent, the success of MNEs is considered to be contingent upon the ease and speed with which knowledge is disseminated throughout the organization (Bartlett and Ghoshal, 1989, Gupta and Govindarajan, 2000). Foreign direct investment (FDI) resulting in the formation of foreign subsidiaries has become an important means of spurring the dynamic process of learning and competence creation within the MNE (Cantwell and Piscitello, 1999, Cantwell and Piscitello, 2000). There has been

Hypotheses development

The transfer of knowledge from a foreign subsidiary to its parent company can take place when the subsidiary has a stock of knowledge that is valuable for the MNE. This seems a trivial matter. Therefore, at the first glance, the higher the level of innovativeness of the subsidiary, the more knowledge will be available in the subsidiary that can be transferred to the parent company and the greater will be the levels of reverse knowledge transfer. However, it is less trivial to expect that the

Sample and data collection

The sample frame used is the population of all Italian MNEs with more than 50 employees and operating in manufacturing industries. The sample comes from the Reprint database1

Measures

Following Schulz (2001), we identified three general domains of knowledge through informal interviews with a pilot sample of parent company heads4

Results

Table 3 shows the descriptive statistics and correlations for the variables used in the analyses. We found evidence of reverse knowledge transfer in 93 of our sample of 293 parent company-foreign subsidiary dyads, which corresponds to an overall incidence of about 32%. In particular, 26 dyads reported reverse knowledge transfer to be “high”, 35 dyads reported it to be “medium”, and 32 dyads reported it to be “low”. Although the above picture seems to suggest that parent firms continue to serve

Robustness tests

We undertook a series of tests to examine the robustness of our results. First, our results are based on the two extreme entry modes of greenfield and acquisition (Blomkvist et al., 2014). As there are intermediate or mixed entry modes, the latter are likely to fall in between the two extreme entry modes we study here. Accordingly, in our first robustness test, we estimated our models for JVs.

The JV benefits from the established internal network brought from the parent company but also from an

Discussion and conclusion

In this paper, we study reverse knowledge transfer in MNEs and link it to subsidiary innovativeness. In much of the literature on competence-creating subsidiaries, there is the implicit assumption that subsidiary specific advantage is translated directly into competitive advantage for the MNE. This approach can be traced to the Kogut and Zander's (1993) conception of the MNE as a “social community”. In this view, cooperation arises as a dominant strategy for subsidiaries that are socialized to

Ram Mudambi is a Professor and Perelman Senior Research Fellow at the Fox School of Business, Temple University, USA, and a Visiting Professor at the University of Reading Business School. His research focuses on the geography of innovation, knowledge management and strategic entrepreneurship. He holds a Ph.D. from Cornell University, and has been a Visiting Professor at Bocconi University in Milan, Italy, and Copenhagen Business School, among others. His work has appeared in Journal of

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    Ram Mudambi is a Professor and Perelman Senior Research Fellow at the Fox School of Business, Temple University, USA, and a Visiting Professor at the University of Reading Business School. His research focuses on the geography of innovation, knowledge management and strategic entrepreneurship. He holds a Ph.D. from Cornell University, and has been a Visiting Professor at Bocconi University in Milan, Italy, and Copenhagen Business School, among others. His work has appeared in Journal of Political Economy, Strategic Management Journal, Strategic Entrepreneurship Journal and Journal of Economic Geography, among others. E-mail: [email protected]

    Lucia Piscitello is a Professor at the Politecnico di Milano, Italy. Her research focuses on the management of technology in the context of multinational enterprises. She holds a Ph.D. from the Politecnico di Milano, and has been a Visiting Professor at Rutgers Business School in New Jersey, USA. Her work has appeared in Journal of Economic Geography, Industrial and Corporate Change and Strategic Entrepreneurship Journal, among many others. E-mail: [email protected]

    Larissa Rabbiosi is an Associate Professor at the Department of International Economics and Management at Copenhagen Business School. She holds a Ph.D. from the Politecnico di Milano. Her work has appeared in Industrial and Corporate Change, Journal of International Management and Management International Review, among others. E-mail: [email protected]

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