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Knowledge transfer capacity and its implications for the theory of the multinational corporation

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Abstract

This study updates and extends research on foreign entry modes by examining the impacts of knowledge transfer capacity and knowledge tacitness. Research on international corporate expansion has long emphasized that deploying intangible knowledge-based assets is required for successful international expansion. More recently, research from a ‘knowledge-based’ perspective has addressed the role of tacitness in constraining a firm's ability to transfer knowledge internationally. We combine these perspectives to describe how knowledge tacitness affects the relative suitability of four archetypal entry modes: exporting, licensing, establishing an alliance, and wholly owned entry. We then examine and develop conceptually a seldom-studied firm characteristic, knowledge transfer capacity. We offer predictions that describe the combined effects of knowledge tacitness and transfer capacity on entry mode choice. We distinguish between the transfer capacity of the organization that develops knowledge (source transfer capacity) and that of the organization that seeks to access that knowledge (recipient transfer capacity). The discussion addresses how our model generalizes to knowledge-seeking strategies and to the study of ongoing multinational networks. The study enriches and reconciles multiple theoretical perspectives on entry strategy. It brings together the study of knowledge characteristics and firm heterogeneity in the theory of the multinational corporation, and in international and strategic management more generally.

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Notes

  1. In order for firms to determine the net present value of the costs associated with particular entry modes, we must assume that they have access to the information necessary to assess those costs over time (Rugman, 1981).

  2. Although the licensing and alliance options generally involve the sharing of production costs between source and recipient, we include C* among the costs relevant to the source firm in examining the license and alliance options. We do so because this facilitates comparisons with the export and WOS alternatives (see also Hirsch, 1976; Rugman, 1981). This is analytically convenient and duly recognizes that, if the productive knowledge is used abroad, then the source firm and/or its partner must incur production costs in the host location. Furthermore, these costs should be deducted from the project's revenues in arriving at the potential profits to the source firm. Our specification recognizes that C* represents a deduction from revenues that, regardless of entry mode, will affect the net income available to the source firm. We thank two anonymous reviewers for helpful comments on these issues.

  3. The cost minimization approach is also consistent with the broader international business literature, including internalization arguments, and with many models that describe cost minimization as a means of studying profit-maximizing strategies (see Buckley and Casson, 1976; Williamson, 1991; Varian, 1992; Hennart, 1993; Caves, 1996). Two simple assumptions facilitate such a comparison among entry modes. First, the source firm is the only firm that possesses the knowledge-based assets at first (Hirsch, 1976; Dunning, 1993; Caves, 1996). Second, there exist several potential partners in the host location (Rugman, 1981). Such conditions allow the monopolist to extract the profits from any partnership (see also Buckley and Casson, 1998). Then, assuming that demand is independent of the mode of entry used by firms, cost minimization is strictly equivalent to profit maximization (Hirsch, 1976; Rugman, 1981; Williamson, 1991; Hennart, 1993).

  4. The basic model assumes that the net present value of gross revenues is equal across entry modes. However, should any systematic difference in revenues exist across modes, these could be accommodated in the model as shifts of equivalent magnitude in the various cost components. For example, if we were to assume that a technology must be exploited extremely rapidly, and that licensing (partnering) inherently allows faster entry (notwithstanding knowledge transfer issues), then increases in A*, and possibly M*, could accommodate the opportunity cost of not licensing (partnering). Alternatively, D* could be shifted downwards.

  5. In the section ‘Extending the model’, we discuss alternative potential means of shielding knowledge, including secrecy and intellectual property rights.

  6. The presumption that the knowledge can be transferred deserves further attention, because tacit knowledge may be inherently difficult to transfer. We return to this issue below.

  7. Although α+β<1 is a necessary condition for an alliance to be preferable to licensing and WOS, it is not a sufficient condition. If D* sufficiently exceeds A*, or vice versa, then the condition will not by itself allow an alliance to outperform both a WOS and a license. Conversely, the condition is sufficient to ensure that an alliance is the preferred mode in a range where A* and D* are approximately equal.

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Acknowledgements

We are thankful for comments from Sanjeev Agarwal, Jean-Luc Arregle, Peter Buckley, Witold Henisz, Michael Lenox, Joanne Oxley, Alan Rugman, Anju Seth, Myles Shaver, Bernard Wolf and Bernard Yeung. We are also grateful for comments from the editor and anonymous reviewers. All remaining errors are our own.

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Authors and Affiliations

  1. Faculty of Economics and Business Administration, Tilburg University, Tilburg, The Netherlands and Stern School of Business, New York University, New York, USA

    X Martin

  2. Marshall School of Business, University of Southern California, Los Angeles, USA

    R Salomon

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  1. X Martin
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  2. R Salomon
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Correspondence to X Martin.

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Accepted by Tom Brewer, Outgoing Editor, 28 February 2003.

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Martin, X., Salomon, R. Knowledge transfer capacity and its implications for the theory of the multinational corporation. J Int Bus Stud 34, 356–373 (2003). https://doi.org/10.1057/palgrave.jibs.8400037

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  • DOI: https://doi.org/10.1057/palgrave.jibs.8400037

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