Knowledge flows within multinatio...
Strategic Management Journal Strat. Mgmt. J., 21: 473���496 (2000) KNOWLEDGE FLOWS WITHIN MULTINATIONAL CORPORATIONS ANIL K. GUPTA1* and VIJAY GOVINDARAJAN2 1The Robert H. Smith School of Business, The University of Maryland, College Park, Maryland, U.S.A. 2The Amos Tuck School of Business, Dartmouth College, Hanover, New Hampshire, U.S.A. Pursuing a nodal (i.e., subsidiary) level of analysis, this paper advances and tests an overarching theoretical framework pertaining to intracorporate knowledge transfers within multinational corporations (MNCs). We predicted that (i) knowledge outflows from a subsidiary would be positively associated with value of the subsidiary���s knowledge stock, its motivational disposition to share knowledge, and the richness of transmission channels and (ii) knowledge inflows into a subsidiary would be positively associated with richness of transmission channels, motivational disposition to acquire knowledge, and the capacity to absorb the incoming knowledge. These predictions were tested empirically with data from 374 subsidiaries within 75 MNCs headquar- tered in the U.S., Europe, and Japan. Except for our predictions regarding the impact of source unit���s motivational disposition on knowledge outflows, the data provide either full or partial support to all of the other elements of our theoretical framework. Copyright ��� 2000 John Wiley & Sons, Ltd. In recent years, researchers in organization theory (Levitt and March, 1988), economics (Nelson and Winter, 1982), as well as strategic management (Prahalad and Hamel, 1994 Schendel, 1996) have identified organizational learning as one of the most important subjects for scholarly inquiry. Aimed at further deepening our understanding of a key topic within this broad area viz., intra- firm flows of organizational knowledge, this paper reports the results of a theoretical and empirical investigation into the determinants of internal knowledge transfers within multinational corpo- rations. The following four observations underlie the motivations for this study. First, every firm constitutes a bundle of knowl- edge. As a corollary of the ���resource-based view of the firm��� (Barney, 1991 Penrose, 1959 Wer- Key words: knowledge flows, multinational corpo- rations, subsidiaries *Correspondence to: Anil K. Gupta, The Robert H. Smith School of Business, The University of Maryland, College Park, MD 20742, U.S.A. Received 27 August 1997 Copyright ��� 2000 John Wiley & Sons, Ltd. Final revision received 1 August 1999 nerfelt, 1984), this observation is now so widely accepted as to have become almost axiomatic (Grant, 1996 Huber, 1991 Kogut and Zander, 1992 Nelson and Winter, 1982 Nonaka, 1994). In the context of this paper, it is particularly important to note that, of all possible resources that a firm might possess, its knowledge base has perhaps the greatest ability to serve as a source of sustainable differentiation and hence competitive advantage (Dierickx and Cool, 1989 Lippman and Rumelt, 1982). Second, the primary reason why MNCs exist is because of their ability to transfer and exploit knowledge more effectively and efficiently in the intra-corporate context than through external mar- ket mechanisms. This ���internalization of intan- gible assets��� argument, originally advanced by Hymer (1960), has been subjected to numerous confirmatory empirical tests and is now widely accepted as the ���received theory��� on why MNCs exist (Buckley and Casson, 1976 Caves, 1971, 1982 Ghoshal, 1987 Kindleberger, 1969 Porter, 1986 Teece, 1981). Of course, external markets
474 A. K. Gupta and V. Govindarajan continue to become more open, efficient, and global on an ongoing basis. Notwithstanding the increasing sophistication of external markets, they remain relatively ineffective mechanisms for knowledge transfer on at least two grounds: one, bulk of the specialized knowledge of any firm exists in a tacit and thereby non-tradeable form two, market-based transfers of knowledge are often associated with negative externalities such as involuntary expropriation and the risk of cre- ating a new competitor. Third, the notion that MNCs exist primarily because of their superior ability (vis-a-vis markets) to engage in internal knowledge transfer does not in any way imply that such knowledge transfers actually take place effectively and efficiently on a routine basis. In perhaps the only study to date on the actual costs of cross-border knowledge transfers, Teece (1981: 84) examined a sample of 26 technology transfer cases and reported that ���[T]he resource cost of international transfer is nontrivial. Transfer costs ranged from 2.25 percent to 59 percent of total project costs with a mean of 19.16 percent.��� The ���tacitness��� or ���causal ambiguity��� of knowledge is one of the most widely recognized barriers to its transfer and replication (Lippman and Rumelt, 1982 Polanyi, 1966 Zander and Kogut, 1995). Levinthal and March (1993), Simon (1991), Szulanski (1996) and others have suggested additional barriers to knowledge transfer e.g., barriers rooted in moti- vational dispositions and absorptive capacity. Finally, notwithstanding the criticality of inter- nal knowledge transfers within MNCs, with some notable exceptions (e.g., Ghoshal and Bartlett, 1988 and Zander and Kogut, 1995), very little systematic empirical investigation into the deter- minants of intra-MNC knowledge transfers has so far been attempted. As Ghoshal, Korine, and Szulanski (1994: 97) have observed, ���A number of publications emphasize the importance of inter- unit communication for effective MNC man- agement%but in none of them is the construct operationalized or measured, nor are the factors that influence such communication empirically explored.��� Building on these observations, the primary objective of this paper is to advance the state of our theoretical as well as empirical understanding of the determinants of intra-MNC knowledge transfers. Data for this study were collected directly from the presidents of 374 subsidiaries Copyright ��� 2000 John Wiley & Sons, Ltd. Strat. Mgmt. J., 21: 473���496 (2000) belonging to 75 major MNCs headquartered in the U.S., Japan, and Europe. In order to ensure reliability, data on the most critical variables (pertaining to knowledge transfers) were collected also from the immediate HQ-level superiors of the presidents of a large subset of the sampled subsidiaries further, the tests for the hypotheses were conducted after controlling for the possible effects of the parent corporation���s country-of- origin, the resource characteristics of the parent corporation���s industry, and the nature of the sub- sidiary���s operations. THE PHENOMENON OF INTEREST Because MNCs are complex multi-dimensional entities, knowledge flows within such enterprises occur not only along multiple directions but also across multiple dimensions, e.g., the flow of information pertaining to the Brazilian subsidi- ary���s financial performance over the last quarter to corporate headquarters, the transfer of packag- ing technology from a Swedish factory to one in India, or the transfer of customer service skills from a Japanese subsidiary to one in the U.S. In this study, we focus on the transfer of largely procedural types of knowledge (e.g., product designs, distribution know-how, etc.) but not on the transfer of largely declarative types of knowl- edge (e.g., monthly financial data). In other words, this study focuses on the transfer of knowl- edge that exists in the form of ���know-how��� rather than on the transfer of knowledge that exists in the form of ���operational information.��� As Ghoshal and Bartlett (1990), Gupta and Govindarajan (1991), and Hedlund (1994) have suggested, knowledge transfers within the MNC take place within the context of an interorgani- zational ���network��� of differentiated units. Thus, flows of knowledge through the network can be studied from at least three different levels of analysis: nodal (i.e., a focus on the behavior of individual units), dyadic (i.e., a focus on the joint behavior of unit pairs), and systemic (i.e., a focus on the behavior of the entire network). Given the highly complex nature of the phenomenon under investigation and the relative dearth of previous empirical work on it, in this study, we have chosen to limit our investigation to the ���nodal��� level. More specifically, we focus on individual subsidiaries only and examine the determinants of knowledge flows in each of the following
Knowledge Flows within Multinational Corporations 475 four domains: (i) knowledge outflows to peer subsidiaries, (ii) knowledge outflows to the parent corporation, (iii) knowledge inflows from peer subsidiaries, and (iv) knowledge inflows from the parent corporation. THEORY An overarching theoretical framework As Krone, Jablin, and Putnam (1987) have observed in their review of communication theory, even though different communication scholars have focused more (or less) heavily on different elements of the communication process, virtually all of them recognize the following as the basic elements of any two-person communi- cation: a message, a sender, a coding scheme, a channel, transmission through the channel, a decoding scheme, a receiver, and the assignment of meaning to the decoded message. Consistent with these ideas from communication theory, we conceptualize knowledge flows (into or out of a subsidiary) to be a function of the following five factors: (i) value of the source unit���s knowledge stock, (ii) motivational disposition of the source unit, (iii) existence and richness of transmission channels, (iv) motivational disposition of the tar- get unit, and (v) absorptive capacity of the target unit. Barriers or facilitators to the transfer of knowledge can manifest themselves in any or all of these five factors: (a) Value of source unit���s knowledge stock. Knowledge flows across units are not cost free (Teece, 1981). We also know that different resources have different levels of value (Barney, 1991). Thus, the greater the value of a subsidiary���s knowledge stock for the rest of the MNC, the greater would be its attractiveness for other units. This idea is broadly consistent with the concept of ���relative advantage��� in the literature dealing with diffusion of inno- vations which has argued that the adoption rate of an innovation is positively related to its relative advantage (Rogers, 1995). This idea has not yet been applied to the examination of interunit knowledge trans- fers within multinational corporations. Within such corporations, we visualize the knowledge stock of any subsidiary as com- Copyright ��� 2000 John Wiley & Sons, Ltd. Strat. Mgmt. J., 21: 473���496 (2000) posed of both duplicative as well as non- duplicative knowledge. The presence of non-duplicative knowledge is a necessary, although not sufficient, condition for such knowledge to be of value to other units. Thus, we would anticipate that knowledge outflows from a subsidiary are likely to be high when the subsidiary���s knowledge stock is non-duplicative as well as relevant for the rest of the global network. (b) Motivational disposition of the source unit. As Cyert (1995) has suggested, an organi- zational unit with uniquely valuable know- how is likely to enjoy an ���information monopoly��� within the corporation. This reality coupled with the fact that power struggles are a ubiquitous phenomenon in any organization (Pfeffer, 1981) implies that at least some units will view uniquely valuable know-how as the currency through which they acquire and retain rela- tive power within the corporation. Levitt and March (1988: 331) have observed similarly that ���In many (but not all) situ- ations%diffusion of experience has nega- tive consequences for organizations that are copied.��� Therefore, we anticipate that factors which would enhance the moti- vational disposition of the source unit to share its knowledge with other units within the MNC are likely to counterbalance any ���hoarding��� tendencies and thereby to have a positive impact on the magnitude of knowledge outflows. (c) Existence and richness of transmission channels. As would be expected, and as demonstrated empirically by Ghoshal and Bartlett (1988) in the domain of MNCs, knowledge flows cannot occur without the existence of transmission channels. Beyond mere existence, we would expect other properties of transmission channels to also affect the extent of knowledge flows ��� the most notable such property would be the richness/bandwidth of communication links, as captured in aspects such as infor- mality, openness, and density of communi- cations (Daft and Lengel, 1986 Gupta and Govindarajan, 1991 Jablin, 1979 Tush- man, 1977). (d) Motivational disposition of the target unit. The ���Not-Invented-Here��� (NIH) syndrome
476 A. K. Gupta and V. Govindarajan is well-known and also has been the sub- ject of scholarly inquiry (Katz and Allen, 1982). There are at least two drivers of the NIH syndrome: (i) ego-defense mecha- nisms (Allport, 1937 Sherif and Cantrill, 1947) which can lead some managers to block any information that might suggest that others are more competent than they are, and (ii) power struggles within organi- zations (Pfeffer, 1981) which can lead some managers to try to downgrade the potential power of peer units by pretending that the knowledge stock possessed by these peer units is not unique and valuable. In short, unless counterveiling forces are present, the NIH syndrome can act as a major barrier to the inflows of knowledge into any focal unit. These counterveiling forces can manifest themselves in several forms: the relative paucity of the focal unit���s knowledge stock, incentives that increase subsidiary managers��� eagerness to learn from peer units, or coercive pressures from corporate headquarters. (e) Absorptive capacity of the target unit. Even when exposed to the same environ- ment and even when there are insignificant differences in the desire to acquire new knowledge, individuals and organizations may differ in their ���absorptive capacity��� i.e., in their ���ability to recognize the value of new information, assimilate it, and apply it to commercial ends��� (Cohen and Levinthal, 1990: 128). There are at least two reasons why absorptive capacity may differ across organizations: (i) the extent of prior related knowledge, and (ii) the extent of inter-unit homophily of the receiving unit vis-a-vis ` the sending unit. Prior related knowledge is important because it shapes the filters through which the organization differentiates between more vs. less relevant signals and also because it determines the organization���s ability to internalize and assimilate the more valued signals (Cohen and Levinthal, 1990). On the other hand, homophily ��� i.e., ���the degree to which two or more individuals who interact are similar in cer- tain attributes, such as beliefs, education, social status, and the like��� (Rogers, 1995: 18���19) ��� is important because when the Copyright ��� 2000 John Wiley & Sons, Ltd. Strat. Mgmt. J., 21: 473���496 (2000) interacting individuals ���share common meanings, a mutual subcultural language, and are alike in personal and social charac- teristics, the communication of new ideas is likely to have greater effects in terms of knowledge gain, attitude formation, and overt behavior change��� (Rogers, 1995: 19 see also Lazarsfeld and Merton, 1964). Figure 1 presents a schematic diagram of the overarching framework developed in this section. From the perspective of the ���nodal��� level of analysis being pursued in this study, this frame- work can be translated into the following six propositions: Proposition 1: Ceteris paribus, the value of a subsidiary���s knowledge stock will be positively associated with outflows of knowledge from that subsidiary. Proposition 2: Ceteris paribus, the moti- vational disposition of a subsidiary to share its knowledge with other units will be positively associated with outflows of knowledge from that subsidiary. Proposition 3: Ceteris paribus, the existence and richness of transmission channels linking a subsidiary to other units within the MNC will be positively associated with outflows of knowledge from that subsidiary. Proposition 4: Ceteris paribus, the existence and richness of transmission channels linking a subsidiary to other units within the MNC will be positively associated with inflows of knowledge into that subsidiary. Proposition 5: Ceteris paribus, the moti- vational disposition of a subsidiary to seek/accept knowledge from other units will be positively associated with inflows of knowl- edge into that subsidiary. Proposition 6: Ceteris paribus, the capacity of a subsidiary to absorb incoming knowledge from other units will be positively associated with inflows of knowledge into that subsidiary. In the rest of this section, we operationalize the constructs underlying these propositions and
Knowledge Flows within Multinational Corporations 477 Figure 1. Determinants of intra-corporate knowledge outflows from and inflows to foreign subsidiaries: An overarching theoretical framework develop more concrete and empirically testable hypotheses. Value of source unit���s knowledge stock We argued earlier that, in order for a source unit���s knowledge to be of value to other units, the source unit must (i) create non-duplicative knowledge on its own, and (ii) this non- duplicative knowledge must be of relevance for the rest of the global network. Based on this reasoning, we operationalize the construct of value of knowledge stock in terms of the follow- ing three variables: mode of entry, subsidiary size, and the economic level of the host country relative to that of the home country. Mode of entry. As Caves (1982), Root (1987) and others have pointed out, an MNC may enter a foreign country through one of several modes ��� greenfield operations, strategic alliances, or acquisitions. Since our study focuses only on fully- or majority-owned subsidiaries, we examine here the impact of greenfield vs. acquisition modes only. At a general level, we can visualize every subsidiary to consist of three bundles of knowledge: duplicative knowledge, non- duplicative knowledge that is relevant only in the local environment, and non-duplicative knowledge that is relevant also for other units within the global network. As the literature on foreign direct investment Copyright ��� 2000 John Wiley & Sons, Ltd. Strat. Mgmt. J., 21: 473���496 (2000) has argued and demonstrated (Hennart and Park, 1993), the less the overlap between existing corporate know-how and the know-how required to succeed in a host market, the greater the probability of acquisition as the mode of entry. Thus, relative to greenfield subsidiaries, acquired subsidiaries on average can be expected to have a knowledge stock that is less duplicative vis-a-` vis the knowledge stock of the rest of the corpo- ration. It is true that only a subset of the non- duplicative knowledge would be of relevance for the global network. However, since the pool of non-duplicative knowledge would be higher for acquired subsidiaries as compared to greenfield subsidiaries, it is likely that acquired subsidiaries should have a larger pool of relevant knowledge to offer to the global network than greenfield subsidiaries. Based on these arguments, Proposi- tion 1 can be operationalized in the form of the following two empirically testable hypotheses: ceteris paribus, relative to greenfield operations, acquired subsidiaries will engage in greater knowledge outflows to peer subsidiaries (H1a) and to the parent corporation (H1a���). Subsidiary size. We anticipate that the typical MNC would discourage investment of a subsidi- ary���s resources in the reinvention of knowledge that exists elsewhere in the global network. Thus, we would expect that a subsidiary���s own resources would generally be directed at the cre- ation of non-duplicative knowledge. Since larger