MASTER THESIS
INTERNATIONAL BUSINESS & MANAGEMENT
“REVERSE KNOWLEDGE TRANSFER WITHIN A MULTINATIONAL CORPORATION, BETWEEN SUBSIDIARIES FROM CHINA AND INDIA TO THE
DUTCH MULTINATIONAL HEADQUARTER”
Student name: Marlous E.van Berkum Student number: 1452738
Email address: m.e.van.berkum@student.rug.nl
Date: 15 December 2010
Supervisor: Mrs. Jutta C. E. Becker-Ritterspach Referent: Mr. Dr. Gijsbert Willenborg
ABSTRACT
Despite the extensive body of literature on knowledge, there are only a few researches that investigated reverse knowledge transfer. This paper focuses on innovative
subsidiaries that transfer their knowledge to the parent unit. The goal is to determine the extent of transfer and the motives of these subsidiaries and the headquarter, to engage in reverse knowledge transfer.
Moreover, this paper develops an analytical framework with six factors that can
determine the success of the knowledge transfer from the subsidiary to the headquarter.
This framework is tested in a case study, in which a comparison is made between the transfer from an Indian and Chinese subsidiary to a Dutch headquarter. As these Asian countries are in different stages of development, they have different factors that
determine the realization of knowledge transfer. My findings in this research suggest, that subsidiaries transfer their specialized knowledge to the headquarter to create and renew the company‟s competitive advantage.
Keywords: reverse knowledge transfer, multinational corporations, barriers to knowledge transfer.
TABLE OF CONTENTS
1. INTRODUCTION………. 5
2. LITERATURE REVIEW……….. 8
2.1 The growth of China and India………... 8
2.1.1 The growth of China……… 8
2.1.2 The growth of India………. 11
2.2 Knowledge transfer……… 14
2.2.1 Creating a competitive advantage………...…… 14
2.2.2 Determinants of intra-corporate knowledge transfer……….. 15
2.2.3 Tacit versus explicit knowledge………. 17
2.3 Reverse knowledge transfer………... 19
2.3.1 Characteristics of reverse knowledge transfer……… 19
2.3.2 Barriers to reverse knowledge transfer……… 21
2.3.3 Solutions to overcome these barriers……….. 27
3. ANALYTHICAL FRAMEWORK………... 29
4. METHODOLOGY………. 32
4.1 Research design……….. 32
4.2 Data collection……… 34
5. CASE STUDY………. 36
5.1 The Chinese subsidiary………...……… 36
5.2 The Indian subsidiary………. 40
5.3 A comparison of the two subsidiaries………. 44
6. CONCLUSION………... 47
6.1 Conclusion……….. 47
6.2 Limitations………. 49
6.3 Suggestions for future research………. 50
- REFERENCES………. 51
- APPENDIX……… 60
Appendix 1: Questionnaire………... 60
Appendix 2: Transcript of the interview with respondent 1………. 61
Appendix 3: Transcript of the interview with respondent 2………. 62
Appendix 4: World Competitiveness Index India 2010-2011……… 63
Appendix 5. World Competitiveness Index China 2010-2011……… 65
1. INTRODUCTION
As domestic markets saturated over the last few decades, firms have sought growth opportunities in foreign markets. Especially in emerging markets with significant economic growth and market potential, such as India and China (Child and Tse 2001).
Multinational corporations (MNCs) developed that consisted of a network of semi- autonomous entities. These MNCs are able to efficiently transfer knowledge to these foreign units and exploit this knowledge stock. The plants in globally dispersed locations take on various missions and develop heterogeneous stocks of knowledge (Foss and Pedersen, 2002). As a consequence, knowledge became a fundamental resource and the ability of MNCs to transfer this knowledge across their subsidiaries, has become essential for achieving and sustaining a competitive advantage (Grant, 1991).
Today, the traditional view of the headquarter as the main source of knowledge in the MNC is changing. MNCs are differentiated cross-border organizations that manage knowledge flows in different directions. Ambos and Schlegelmilch (2006) argue, that the knowledge transfer from subsidiaries to the company headquarter, contributes extensively to the knowledge resources of the firm. The resources of subsidiaries can increase the value of the entire multinational company. However, if knowledge is an important asset of a subsidiary, why will it share these resources with the headquarter? To gain more insight, the focus in this thesis is on the reverse knowledge transfer between the subsidiary and the headquarter.
It is important for MNCs to understand the unique circumstances involved, in managing reverse knowledge transfer from emerging economies. China and India, two of them, flourished when Western multinational companies started to globalize and outsourced certain non-core activities. Both countries started to develop, each in its own way. China has collected a lot of Western resources through Foreign Direct Investment (FDI), on the other hand India has acquired most of its own resources. In 2006, China announced plans to become an innovation-orientated society by 2010. India proclaimed itself “The world‟s knowledge hub of the future”, in that same year. These two new global powers are
innovative and develop a lot of knowledge. However, do they have the characteristics that make them suitable for reverse knowledge transfer in order to benefit a Dutch multinational company?
Research gap
Despite the extensive body of knowledge literature, past studies mainly have their focus on knowledge transfer from the headquarter to the subsidiary. Previous research has not focused its attention on the possibilities of reverse knowledge transfer. Moreover, the determinants for success or failure of reverse knowledge transfer are still unexplored and have not been empirically analyzed. In this paper, I will empirically examine the reverse knowledge flows between two subsidiaries and their headquarter. Furthermore, this paper attempts to extend the existing theory by analyzing the motives for reverse knowledge transfer, their benefits and barriers.
Research questions
The goal of this paper is to determine the motives of MNCs for their reverse knowledge transfer activities and how they execute these transfers. Moreover, a comparative case study will be developed, to investigate the reverse knowledge transfer activities of two subsidiaries in practice. For this paper I composed the following research question:
How and why does a Dutch MNC realize reverse knowledge transfer?
A comparison of reverse knowledge transfer from an Indian and a Chinese subsidiary to its Dutch multinational headquarter.
The opportunities to realize knowledge transfer from the subsidiary to the headquarter need to be investigated in order to be able to answer the main research question. To define whether there are factors that impede the success of reverse knowledge transfer, I composed the following subquestion:
What are the barriers to reverse knowledge transfer?
Outline of the paper
This introduction (chapter 1), can be seen as the start of this research. The rest of the paper is divided in two sections, in order to answer the research questions: A theoretical and an empirical part. The theoretical section will start with the literature review (chapter 2). In this chapter, theories and papers developed by other researchers will be reviewed, which will start with an examination of the growth of China and India. Then, the
concepts of knowledge transfer and reverse knowledge transfer are reviewed. Ultimately, the last part of the literature review describes the barriers to reverse knowledge transfer.
Then, the methodology section (chapter 3) clarifies the research design, the data
collection and introduces the multinational company that acts in the case study. Finally, an analytical framework will be developed to describe the determinants of reverse knowledge transfer.
As no other paper compared the reverse knowledge transfer of two globally dispersed subsidiaries within a multinational company, it is researched in the empirical part (chapter 5). A case study is developed on the transfer from two subsidiaries located in China and India, to their Dutch MNC headquarter. The theoretical and empirical parts are analyzed in the final part of this paper, as the conclusion (chapter 6) will try to answer the research questions of this paper.
2. LITERATURE REVIEW
2.1 The growth of China and India
“Great opportunities come with equally great challenges” (Kumar, 2010).
China and India are two countries that get a lot of public interest. These two countries combined have a population of 2.5 billion, one third of the almost 7 billion persons alive on this planet. Furthermore, at the moment they produce 17.5 percent of the world total GDP (International Monetary Fund (IMF)‟s World Economic Outlook Database),
consequently they are globally important countries. The average output per worker is low, though it can be explained by the large population and the late start in terms of rapid growth (Prime, 2009). Moreover, China and India also inhabit a third of the world‟s poor people, despite the fact that they lifted hundreds of millions of people out of poverty in the past decades (Human Development Index). This chapter will describe the impressive development from two third world countries, to two countries with global power.
2.1.1. Growth of China
China has moved from a planned, autarkic economy to a more liberalized economy (Prime, 2009). These economic reforms started in the year 1978 and are part of a strategy and developed grand vision to transform China into a global power by the year 2020 (Wadhva, 2006). China planned a socialist market economy, in which the coastal areas would open up in order to integrate with the global economy. With help from the ethnic Chinese based in neighboring countries, this strategy proved successful as they
continuously attracted inflows of export-orientated Foreign Direct Investment (FDI) in all priority industries (Wada, 2006). The high FDI level of China reflects the confidence of investors worldwide in China‟s prospects. In recent years the inward flow of FDI
accounted for around 40 billion dollar per year, which helped the Chinese to believe FDI is the fastest route to economic development (Huang and Khanna, 2003).
GDP growth
The World Development Indicators of the World Bank (2005) suggest that in 2004 China has one-sixth of the share of world GDP in dollars compared to the United States (Table 1). However, when we compare the contributions to world growth it is shown that China accounted for 13 percent of the world growth between 1995 and 2004 and this number is rising between 2005 and 2020. On the other hand, the United States accounted for 33 percent in 2004, a declining growth rate number that is offset by its much higher starting share in 1995 (Winters and Yusuf, 2007). The World Bank projects that China will have an average annual real growth rate of 6.6 percent between 2005 and 2020. Slightly modest rates than the 9.1 percent between 1995 and 2004 but still formidable compared with the World average. At the moment, China is recovering from the economic and financial crisis and their GDP growth is expected to rise again in 2010. Their GDP growth rate was around 7.5 percent in 2009, down from 9.4 percent in 2008, but still in line with the 9.4 percent average of annual economic growth rate in the years since 1978 (World Bank).
Table 1. Gross Domestic Product in six large economies (Winters and Yusuf, 2007 p.6)
Share of World GDP (2004
$ and exchange rates)
Average annual real growth rates
Average contribution to world growth
Economy 2004 2020 1995-2004 2005-2020 1995-2004 2005-2020
China 4.7 7.9 9.1 6.6 12.8 15.8
India 1.7 2.4 6.1 5.5 3.2 4.1
U. S. 28.4 28.5 3.3 3.2 33.1 28.6
Japan 11.2 8.8 1.2 1.6 5.3 4.6
Germany 6.6 5.4 1.5 1.9 3.0 3.3
Brazil 1.5 1.5 2.4 3.6 1.5 1.7
World 100.0 100.0 3.0 3.2 100..0 100.0
Global Competitiveness
The Global Competitiveness Report constructed each year by the World Economic forum is seen as a respected assessment of national competitiveness and provides a description
of a nation‟s economic environment and its ability to achieve a sustained level of growth (Table 2). China‟s main strengths are its large and growing market size, both its domestic and foreign market size have a rank in the top 2. Furthermore, the country scores high on macroeconomic stability, mainly due to the high savings rate. According to the Report, China has a high savings rate and ranked 3rd out of the 139 countries. This helped to invest a lot in the economy, however the high savings rate means that the Chinese population spends less money on household consumption. The Chinese people feel they must save extensively for their health care, education and retirement (Rohwer, 1995). For the household consumption and the insecurity of the population, it would benefit if a larger share of the company returns go to private households and less to enterprises.
Table 2 The Global Competitiveness Index in detail (Global Competitiveness Index 2010-2011)
Indicator China (Rank out
of 139)
India (Rank out of 139)
Global competitiveness Index 2010-2011 27 51
Institutions 49 58
Infrastructure 50 86
Macroeconomic environment 4 73
Health and primary education 37 104
Higher education and training 60 85
Goods market efficiency 43 71
Labor market efficiency 38 92
Financial market development 57 17
Technological readiness 78 86
Market size 2 4
Business sophistication 41 44
Innovation 26 39
The two-rank improvement compared with last year for China is attributable to a better financial market development. This has historically been a weak point, however due to easier access to credit and financing and a perceived improvement in the soundness of the banking sector the pillar ranked 24 places higher at the 57th place. Other weak indicators include the quality of higher education and training, although small changes have been made it remains a key factor for the future. Furthermore, China has a higher score on institutions as the average efficiency driven economy, it still suffers from distrust in the government because of a high number on corruption (63rd rank).
Finally, the technological readiness pillar remains weak. Especially the availability of latest technologies (94th rank) and FDI and technology transfer (80th rank) have low scores. This pillar measures the ability to adopt existing technologies to enhance productivity, especially its capacity to fully utilize information and communication technologies (ICT) in its daily business for increased efficiency and competitiveness.
China prevents private domestic manufacturing businesses to challenge their State-owned enterprises (SOE‟s). By protecting these SOE‟s for competition, they damage possible promising businesses. Furthermore, these state-owned domestic companies produce mostly low-value manufactured goods and they lack efficiency, brand names and marketing experience (Bjorkman, Budhwar, Smale and Sumelius, 2008). As the
manufacturing industry accounts for 34 percent of total GDP, inefficiency in this sector declines the rank of the technological readiness pillar. Moreover, the services sector is dominated by the public sector and is not yet technologically ready to be internationally competitive (Prime, 2009).
Table 3. Sectorial value-added as a share (%) of GDP (Global Competitiveness Index report 2010-2011)
Country/Economy Agriculture Manufacturing industry
Non-
Manufacturing industry
Services
China 11 34 14 40
India 17 16 13 54
2.1.2. Growth of India
India started with open market-orientated reforms in 1991. The main driver of economic growth was the impulses generated by Indian entrepreneurs in the knowledge-intensive services and industries. These private initiatives have increased the economic power over the last 20 years, instead of a well-thought out strategy by the government (Wadhva, 2006). In the beginning of the 1990‟s when production costs were rising, western companies were to lower these costs by separating non-core activities to lower-cost countries. As a result of the global trends in outsourcing and the Indian liberalization, India promotes services exports and has a higher sectorial share of services than of manufactured goods as is shown in table 3 (Kowalski, 2008).
GDP Growth
The World Bank has described the GDP of six large economies in the world for its World Development Indicators (table 1). According to the data for the year 2004 India has 1.7 percent of world GDP. Nevertheless, India is expected to have an average annual real growth rate of 5.5 between 2005 and 2020, which is reasonable higher than the United States. Since the United States have a higher starting share, they automatically have a higher share of world GDP. On the other hand, their average contribution to world growth is decreasing, while the Indian share is increasing. The average annual real growth rate for India that is predicted for the next years seems cautious. The country is recovering from the slowdown during the global financial crisis, while still achieving a growth rate of 6.7 in 2008. In 2009 the number increased to 7.4 and is expected to grow to 8 or 9 percent over the next years (World Bank).
Global Competitiveness
The Global Competitiveness Report by the World Economic forum describes indicators that are subdivided in 12 pillars. According to the report, India‟s performance remains quite stable, while falling two places to the 51st position. India‟s competitiveness is based on the large market size and good performance in complex areas. One of India‟s main strengths is the financial market development, in which it ranked 17th. The British colonizer has helped the evolution of the Indian capital markets with their traditions and institutions. Loans are accessible through the local equity market and venture capital is available for entrepreneurs. Moreover, technologies are adopted to increase productivity, yet due to the lack of ICT India ranks 86th in the technological readiness pillar.
Furthermore, the country‟s strengths are in the innovation and business sophistication factors. The business sophistication pillar measures the quality of a country‟s overall business networks, which leads to higher efficiency and increased productivity. Within strong business networks, opportunities for innovation are created. Technological innovation is especially important for countries in the innovation stage that need to keep developing themselves to remain competitive. India is still in the factor driven stage of development, but has an innovative environment that is supported by the public and private sector.
On the other hand, the report also indicates India‟s weaknesses. The country fails to improve the basic requirements, which include institutions, infrastructure,
macroeconomic environment, primary education and health. The country ranks 104th in the health and primary education pillar, with high rates for life expectancy, infant mortality and communicable diseases.
Although the quality of the higher educational system ranks 39th compared to the 98th place for the primary education, the enrollment rates for all education types are ranked around 100 out of 139. Moreover, the macroeconomic environment is ranked 73rd and is characterized by persistent budget deficits, high public debt, and high inflation. Finally, the infrastructure in India needs to be improved, especially the quality of the roads, ports and electricity supply as this pillar dropped 10 places this year.
Last, India ranks 83rd for irregular payments and bribes. India has inherited from their British colonizer their rule of law, which has given them an efficient civil system, a modern political institution and a constitutional democracy. Despite all this, the Indian system is still corrupt.
2.2 Knowledge transfer
Knowledge management is defined by Egbu (2004) as: The process by which knowledge is created, acquired, communicated, shared, applied and effectively utilised and managed in order to meet existing and emerging needs, to identify and exploit existing and
acquired knowledge assets.
Knowledge transfer is the extent to which a MNCs headquarters and its subsidiaries transmit knowledge to each other (Lee, Chen, Kim and Johnson, 2008). The primary reason that MNCs exist, instead of smaller locally orientated companies, is because of their ability to transfer and exploit knowledge more efficiently and effectively within the MNC, than is possible in external market mechanisms. Every firm consists of a certain bundle of knowledge. This knowledge base provides the company with a source of differentiation and therefore can achieve a competitive advantage (Gupta and Govindarajan, 2000).
2.2.1. Creating a competitive advantage
A competitive advantage exists when a company is applying a value creating strategy, which is not being implemented by any current or potential competitor at the same time.
This advantage can exist, until a competitor will duplicate the strategy. Consequently, when a firm is searching for a sustained competitive advantage, it must focus on resource heterogeneity and immobility (Barney, 1991). There are several factors that determine if a resource can be a competitive advantage. First, the resource must be valuable; it must be able to exploit opportunities in the companies‟ environment. Second, the resource must be rare among potential and current rivals. Third, the resource must be imperfectly imitable, which means that the company does not understand the link between the resource it controls and the advantages it brings. Otherwise other companies will be able to understand this link and apply it. Finally, the factor substitutability. There must be no other resource that can be used to perform the same strategy. The Resource-based view of the firm according to Barney (1991), suggests that these four factors are the source of a competitive advantage.
According to Grant (1996) knowledge in itself cannot create a competitive advantage. It is the headquarter that must be able to assimilate knowledge through the subsidiaries and then absorb and transfer this acquired knowledge throughout the complete MNC. Foreign subsidiaries possess local market knowledge, which requires headquarters and
subsidiaries to transfer their knowledge back and forth. The headquarter must be able to recognize the valuable information from each host market. Furthermore, they must collaborate with their subsidiaries to learn from each other and most important strive to develop unique, innovative products and services to meet global needs (Cui, Griffith and Cavusgil 2005). The competitive advantage consists of coordination and collaboration in the MNC network and the knowledge on competitors and customers it creates.
Figure 1. Determinants of intra-corporate knowledge transfer: An overarching theoretical framework (Gupta and Govindarajan, 2000 p.477)
2.2.2. Determinants of intra-corporate knowledge transfer
According to Gupta and Govindarajan (2000) knowledge transfer is a function of five factors. I will briefly describe the five factors, and in figure 1 by Gupta and Govindarajan (2000) these factors are presented in a framework.
The value of the source unit‟s stock. The higher the value of the knowledge stock in a subsidiary for the entire MNC, the more important the subsidiary is in the entire MNC. The knowledge stock consists of duplicative and non-duplicative knowledge.
Especially the non-duplicative part of the knowledge stock can increase the value of the subsidiary for the entire MNC, at least when the knowledge is relevant. Therefore, knowledge outflows from these subsidiaries are likely to be high.
Motivational disposition of the source unit. A subsidiary with valuable knowledge for the rest of the MNC is likely to have an “information monopoly” and power within the company (Cyert, 1995). Gupta and Govindarajan argue that factors that enrich the motivational disposition of the source unit to share its knowledge base have a positive effect on the magnitude of knowledge outflows.
Existence and richness of transmission channels. For knowledge to flow within an organization you need transmission channels (Ghoshal and Bartlett, 1988). The links alone are not the only an important factor, but for example also the openness and the intensity of the communication (Gupta and Govindarajan, 1991).
Motivational disposition of the target unit. The “Not-Invented-Here” (NIH) syndrome can be a major barrier to the inflows of knowledge into any part of the organization. There are two well-known drivers of the NIH syndrome. First the ego- defense mechanisms, which can guide managers to block knowledge transferred from other suspected higher skilled managers. Second are power struggles within the MNC, that lead subsidiaries to downgrade the knowledge stock of fellow subsidiaries in order to lower their power (Pfeffer, 1981).
Absorptive capacity of the target unit. Individuals and unit‟s in the MNC differ in their “absorptive capacity”, which means their ability to recognize the value of new information, assimilate it and apply it to commercial ends (Cohen and Levinthal, 1990).
The extent of prior knowledge on a related topic determines the absorptive capacity of one subsidiary versus another. Furthermore, the degree to which the individuals from the
two subsidiaries that communicate together are alike in personal and social characteristics increases the absorptive capacity.
2.2.3. Tacit versus Explicit knowledge
Knowledge can be broken down into two specific components and each needs to be transferred in its own way. First, tacit knowledge is complex, intuitive and difficult to write down, which makes it difficult to transfer (Polanyi, 1967). The transfer will occur through individuals instead of collectives, as initiatives of tacit knowledge from the collective often fail (Inkpen and Dinur 1998). The firm is a social institution that gathers value from the individuals within it. As people are social, they like to share their
experiences (Birkinshaw, 2001). Tacit knowledge is often transferred in personal networks, between individuals that have prior experiences and familiarity with this knowledge. These interfirm relationships develop relational capital, which according to Kogut (2000) has a positive effect on firm performance. Within the network there is trust, commitment and knowledge sharing, by which the MNC has access to resources that stem from links within their organization. Therefore it is valuable for an MNC to have strong connections in the network, to be able to have access to unique resources.
In the literature, tacit knowledge is described by Barney (1991) and Grant (1996) as the principle for competitive advantage from the resource-based view of the firm. If ways are found to transfer the tacit knowledge, through personal interaction or by recording it explicitly, then the knowledge becomes an asset of the firm, a key source of advantage (Birkinshaw, 2001). The codification of tacit knowledge into explicit knowledge, facilitates the transfer process, however it increases the sensitivity for competitor imitation of the firm-specific, proprietary knowledge (Pedersen, Petersen and Sharma, 2000).
On the other hand, explicit knowledge is codifiable and the knowledge can be broken down in parts and transferred without loss of integrity (Polanyi, 1967). Due to these features, explicit knowledge is thought to be easier to transfer than tacit knowledge. As explicit knowledge is codified it does not need personal connections and is less
dependent on trust. Moreover, the knowledge needs less teaching and effort in communication. These features make it easier to transfer explicit knowledge at long distances, at great speed and as a consequence, explicit knowledge is easy to replicate (Szulanski and Capetta, 2003). Firms are protecting their explicit codified knowledge and see less risk in transferring tacit knowledge via personal connections.
2.3 Reverse knowledge transfer
MNCs have the ability to transfer knowledge throughout their organization in an efficient and effective way. The knowledge sharing offers an opportunity to learn from experience and share this among the global network. In the old days the MNC would transfer
knowledge in a one way direction. MNCs invested in foreign direct investment (FDI) to go abroad and earn rents on their knowledge-based assets that were created at the headquarter (Eden, 2009). Knowledge, produced locally was transferred to the host countries where it could be exploited.
Today, MNCs try to create vertically integrated networks, where knowledge is created in every part of the organization. Knowledge is shared between subsidiaries, but can also flow from the subsidiary to the headquarter. Although for most MNCs the home country technology is dominant, the MNCs are depended on their subsidiaries to construct new developments in technology and identify new market opportunities (Bartlett, Ghoshall and Birkinshaw, 2003). According to Downes and Thomas (2000), general knowledge is transferred from the headquarter to the subsidiary, while the knowledge flow from the host to the home country contains market-specific knowledge.
2.3.1 Characteristics of reverse knowledge transfer
Reverse knowledge transfer has several benefits for the headquarter. The MNC is a network in which it has access to internal and external knowledge, that enables the firm to create and renew its competitive advantage continuously (Nohria and Ghoshal, 1994).
Furthermore, local knowledge can help the headquarter to improve processes in their own site, as well as in other parts of the network. Moreover, it can simply provide the missing link to develop a new product. The transfer from the subsidiary to the headquarter is a step in the direction towards a true learning network with the ability to integrate, combine and create new knowledge (Ambos et al., 2006).
Due to the opportunities that arise from cross-national learning, regardless the balance of global integration and local responsiveness, MNCs are becoming knowledge network
organizations. MNCs are driven by a need to develop knowledge and technology, which can be achieved by being present in foreign locations to generate internationally co- ordinated learning processes (Gooderham and Nordhaug, 2003). From the view of the subsidiary, it is significant to nurture relationships with local customers and customize innovations to their needs, instead of producing standardized products that can be produced by any part of the MNC. The headquarter is interested in co-coordinating the individual innovative projects across subsidiaries in the MNC, to avoid duplications (Ghoshal and Bartlett, 1988).
The role of the subsidiary
The resource-dependency theory describes the evolution of the roles that subsidiaries play in a MNC. Yamin (1998) argues that according to the resource-dependency theory subsidiary roles are not assigned by the headquarter, rather their position in the global MNC is asserted or earned through entrepreneurial activities from the subsidiary itself.
Gupta and Govindarajan (1991) defined subsidiary roles along a two-dimensional space:
the inflow of knowledge from the rest of the MNC and the outflow of knowledge. Two subsidiary roles are identified with a high outflow of knowledge to the rest of the MNC:
The global innovator (high outflow-low inflow) and the integrated player (high outflow- high inflow). The global innovator serves as a knowledge creator for the entire
organization. The integrated player also constructs knowledge for the entire MNC, however these subsidiaries are not self-sufficient in the fulfillment of their own knowledge needs.
Entry mode of the subsidiary
Moreover, Yamin (1998) argues that the innovative capabilities of a subsidiary are
determined by the entry mode. A green-field subsidiary is an organizational replication of the parent company, which includes that the subsidiary is under tight control of the headquarter and are not highly embedded in the local network. An already established enterprise that is acquired, on the other hand will have more autonomy as it is difficult to incorporate the subsidiary in the overall MNC. Andersson and Forsgen (2000) argue that an acquired company is highly embedded in its domestic market and is not depended on
the resources from the headquarter, which makes the subsidiary an autonomous element in the MNC. Due to its adaption to the local environment, an acquired subsidiary is likely to be more innovative and develop market-related innovative capabilities. Nevertheless, the green-field subsidiary is more likely to develop innovations that, due to its
organizational replication, are suitable for the entire MNC and are thus transferred to the parent (Andersson and Pahlberg, 1966).
Millar and Choi (2009) argue in their paper that knowledge transfer is a two-way
interaction. The presumed weaker party, the subsidiary, can provide a value that is much higher than is commonly estimated, at least if the headquarter is open to it and wants to learn. Moreover, the value of the subsidiary itself will increase when it engages in the two-way interaction. MNC subsidiaries can learn from the inflow of knowledge and by combining the internal and external knowledge, they can create new innovations. At least, if they can absorb the external information and keep in mind that there is an inverse U- shaped relationship between the outflow of knowledge and subsidiary performance (Mahnke, Pedersen and Venzin, 2005). Mudambi and Navarra (2004) observed that when knowledge is transferred from the host to the home country, especially when it comes from overseas or a small unit, it tends to be downgraded in value because of the lack of absorptive capacity at the headquarter.
In reverse knowledge transfer there are two participants active; the home country MNC actors and the host country subsidiary actors. Knowledge-related barriers between these parties exist and the MNC needs ways to overcome them. In effective knowledge transfer, the interaction of the knowledge transfer participants are key factors (Downes and
Thomas, 2000).
2.3.1. Barriers to reverse knowledge transfer
The value of knowledge stock
The higher the value of the subsidiary‟s knowledge stock, the larger the attractiveness of the subsidiary for the rest of the multinational company. The knowledge stock is
composed of duplicative and non-duplicative knowledge. As Barney (1991) argues, these different resources have different levels of value. Non-duplicative knowledge is a
requirement to achieve a competitive advantage and will therefore be of higher value for other units in the MNC than duplicative knowledge. However, the non-duplicative knowledge must be relevant for other units in the global network, in order to increase the value of the subsidiary‟s knowledge stock.
Second, the entry mode of a subsidiary can determine the value of the knowledge stock.
Hennart and Park (1993) describe that according to the literature on FDI, a multinational company will choose to enter the market with the acquisition of a subsidiary, when there is no overlap between the existing corporate know-how and the know-how required to succeed in the host market. Consequently, greenfield subsidiaries will have a higher share of duplicative knowledge compared to the knowledge stock of the multinational company.
On average, acquired subsidiaries are expected to have a higher value of knowledge stock than greenfield subsidiaries.
Furthermore, since large subsidiaries have more resources that can be used for the creation of new knowledge, it is expected (exceptions excluded) that subsidiary size should have a positive impact on the non-duplicative knowledge stock of the subsidiary.
Eventually, not all of the non-duplicative knowledge of the subsidiary will be relevant for the global MNC, still part of the knowledge stock will.
Motivational disposition to share knowledge
Subsidiaries are motivated to transfer knowledge to their parent firm, because it could strengthen their strategic position in the whole organization (Gupta and Govindarajan, 2000; Cyert, 1995). Or the other way around, may be unwilling to devote time and resources to transfer knowledge, due to the fear of losing ownership, a position of privilege, superiority or it may be resentful of not being adequately rewarded for sharing success (Osterloh and Frey, 2000).
An employee‟s contribution in transferring tacit knowledge cannot be measured and paid accordingly (Osterloh and Frey, 2000).At best, managers can observe the result of knowledge transfer in terms of output. The extent of tacit knowledge transfer, is
influenced by intrinsic motivation. Motivation is intrinsic if an activity is undertaken for one's immediate need satisfaction (Calder and Staw, 1975). Morrison and Robinson (1997) emphasize “that intrinsic motivation is an identification with the firm's strategic goals, shared purposes and the fulfillment of norms for its own sake”. Explicit knowledge, on the other hand, is tradable. Managers can observe how an employee performed and can reward him accordingly. Explicit knowledge transfer is influenced by extrinsic motivation. Employees are extrinsically motivated if they are able to satisfy their needs indirectly, especially through monetary compensation.
Crowding effects are the relationships that are between intrinsic and extrinsic motivation and they are divided in a crowding-out effect and a crowding-in effect (Osterloh, Frost, and Frey, 2002). Crowding-out means a negative relationship between intrinsic and extrinsic motivation. An employee reduces his work morale, because he receives monetary incentives that are based upon his performance (`pay for performance‟).
Crowding-out can only take place when there is a significant amount of intrinsic motivation. The crowding-in effect has a positive relationship between intrinsic and extrinsic motivation. External rewards may strengthen intrinsic motivation if it is
perceived to be supportive of the employee‟s intrinsic motivation. This can be a pay rise for example, that reflects appreciation for one‟s work and which increases work morale.
Therefore, managing motivation means balancing the tension between intrinsic and extrinsic motivation.
Existence and richness of transmission channels
Communication is one of the most important factors in knowledge transfer. Employees from the subsidiary and the headquarter have several ways to share knowledge with each other. Explicit knowledge is shared through the records in the company database and email (Birkinshaw, 2001). Tacit knowledge on the other hand is shared through personal
contact, for example by expatriate assignments, company visits, team assignments and conference calls.
Doz and Santos (1997) argue that subsidiaries transfer codified, explicit knowledge easily to other parts of the organization. However, they do not keep into account that the
meaning may change and that the knowledge may not be comprehensible, because it is in a foreign language. This is particularly the case with tacit knowledge, because it is defined by an implicit character. Tacit knowledge is transferred through personal relationships, in which both the sender and receiver have their own background.
In a Dutch multinational company with Chinese and Indian subsidiaries, none of the units has English as their mother tongue, nevertheless it is used as language in their
communication. Two important criteria for effective communication are the content of the message and the way in which the message is delivered (Teagarden et al., 2008). The content of the message may be shared efficient in the English language, however, the nuance is often lost. Moreover, the way in which the message is delivered includes factors such as: Body language, intonation, speaking rate and voice characteristics. All these factors that affect the delivery of a message can form an invisible barrier to the transfer of knowledge. Accents for example can hinder the understanding of the message at the end of the receiver.
Due to the colonization of India by Great Britain, the population is familiar with the English language. India has a high number of university graduates that are taught in English and consequently have a high proficiency in the English language. These skills enable them to have conversations with Western clients, which explains the enormous Indian help desk support industry. Chinese on the other hand, are mostly taught in
Chinese, which gives them a particular accent in the English language. This accent makes it difficult for Western clients and colleagues to understand the content of the message.
Motivational disposition to acquire knowledge
A headquarter may be reluctant to accept knowledge from subsidiaries. Knowledge is subjective and therefore it may be blocked from managers that are perceived higher skilled. Or the receiver may believe it is similar to what he knows already (Szulanski, 1996). The “Not-Invented-Here” (NIH) syndrome guides managers to sabotage
knowledge transferred, because of the superiority of the receiving unit. China and India are global powers, nevertheless they are in a lower stage of development than the Netherlands. The Dutch headquarter may perceive their Eastern subsidiaries as less endowed with knowledge than their own unit. Finally, a motivational barrier to the
transfer of knowledge may result from a lack of perceived reliability of the source (Arrow, 1971). When the source unit‟s trust is questioned, their knowledge will be challenged and resisted.
Absorptive capacity
Individuals and units in the MNC differ in their absorptive capacity (Cohen and Levinthal, 1990). If both the sender and the receiver want to participate in the transfer, the receiver must be familiar with the knowledge, to be able to learn. Managers will find it easier to understand and less problematic to apply the transferred knowledge. Nevertheless, it is essential that the knowledge from the sender is complementary. The transferred
knowledge has to be related to, but also different from the headquarter‟s existing knowledge.
The prior knowledge on the topic determines the absorptive capacity of the receiver (Zahra and George, 2002). However, when the individuals from the headquarter and subsidiary that communicate together are similar in personal and social characteristics, it increases the absorptive capacity. Finally, the higher the absorptive capacity of the headquarter, the higher the potential benefit of the reverse knowledge transfer.
Distance
Despite having one corporate culture, subsidiaries have their own local context due to their geographic location. The institutional and cultural factors can clarify for example,
why some subsidiaries are more innovative than others. The explanation can be, that the environment provides strong incentives to learn and be creative. Global communication is making the world small and relatively homogeneous, is assumed. In business that is an incorrect assumption, as distance still matters.
First, the cultural distance between the headquarter and the subsidiary. Gould and Grein (2005) believe that IB scholars need to move from a focus on national culture, to a more globalized, flatter concept of culture. When the attention is only on national culture, the researchers will ignore networks and communities within the MNC. Moreover,
Teagarden, Meyer and Jones (2008) argue that multinational companies want people without a particular cultural background. The employees need to be internationalists instead of nationalists. Personal and national interests need to be ignored and all attention and decisions should be in order to achieve the business goal. Easier said than done, as Teagarden et al. (2008) describe that employees in a MNC will accentuate the home culture when they work with employees from other cultures. As they sketch: “it is hard to take a Chinese out of a purely Chinese context and get them to think of anything but a China-first mentality”. The local values, beliefs and norms that are taught since childhood raise cultural barriers to knowledge transfer at the individual level.
Differences in religious beliefs, race and social norms are all capable of creating distance between two countries, as culture and shared norms define what is acceptable and what not (O‟Reilly and Chatman, 1996). These shared norms are able to provide understanding between the two parties, as well as a common approach of the transfer process (Bhagat, Kedia, Harveston and Triandis, 2002). When the interactions between the source and recipient are in disagreements, it can indicate that the new knowledge is not being accepted or internalized (Hackman, 1969)
Max von Zedtwitz, professor of strategy and innovation at Tsinghua University, defined the Chinese corporate culture as conflicting with knowledge sharing, as they were dependent on the rules of the Chinese government for a long time. On the contrary, multinational companies in the Netherlands have a corporate culture that is built around
knowledge sharing in teams and individual networks. Moreover, Teagarden et al., (2008) report about the Chinese and Indian professional culture, that Indian employees are articulate and very outspoken. Indians do not hesitate to vocalize their opinions. On the other hand the Chinese employees act more patiently according to their culture, which can end up in exclusion from the communication process.
Second, the MNC is active in multiple institutional environments. Institutional distance between two countries is the extent of similarity or dissimilarity between the regulatory, cognitive, and normative institutions of two countries (Kostova, 1996). When
institutional distance is large, it is difficult for the subsidiary to transfer strategic routines to the foreign headquarter (Kostova, 1999). Institutional differences can create a barrier to accept and implement transferred practices. For example, differences in the cognitive institutional environment can create a difficulty for the recipient, in understanding the nature and purpose of the transferred practice (Jensen and Szulanski, 2004).
Cognitive and normative legitimacy is related to institutional distance, as this distance reduces the legitimacy of a transferred resource (Kostova and Zaheer, 1999). According to Kostova (1999), the institutional perspective suggests that legitimation is the main purpose of adaptation. Adaptation is argued to increase cognitive and normative legitimacy, which will increase the recipient motivation to accept and utilize the transferred knowledge.
2.3.2. Solutions to overcome the barriers
One solution to overcome these barriers is to develop an organizational culture that encourages innovation and learning. A favorable atmosphere is needed between the headquarter and its subsidiaries, that is based on common goals and objectives.
Training with members from all parts of the world can fade away the local interests and focus all members on the international corporation with one goal and one culture.
Furthermore, when there is ease of communication between the local and international staff, individuals will be encouraged to share and create knowledge (Von Krogh, 1998).
Miller and Choi (2009) argue that MNCs need to pay attention to informal mechanisms for knowledge transfer. Informal sub networks consisting of employees from different countries, regions, professional backgrounds and value systems that compose a diverse heterogeneous mix. The MNC headquarter can access the knowledge in the subgroup by tapping into the network with informal systems, values and ties.
These subgroups provide resource sharing among the members in the network. Tacit knowledge is shared between individual members in the organization and is therefore more difficult to transfer than codified explicit knowledge. Efficient communication is essential in the transfer of tacit knowledge (Nobel and Birkinshaw, 1998). The content can be misunderstood and the way of delivery can harm the message transferred.
Furthermore, there is an issue of trust when transferring tacit knowledge. When there are strong links in the MNC, individuals are more willing and motivated to transfer their ideas to others, with whom they can communicate properly and with individuals who share a certain level of trust (Nobel and Birkinshaw, 1998).
Eventually a higher degree of interaction between units leads to more knowledge sharing, but also familiarity and subsequently to a better understanding of the knowledge
transferred (Subramaniam & Venkatraman, 2001).
3. ANALYTICAL FRAMEWORK
This paper analyzes the reverse knowledge transfer activities within a multinational company,with reference to dimensions drawn from an article by Gupta and Govindarajan (2000). This analytical framework describes the relationship between the different
concepts and variables that I want to research in my case study. Furthermore, the framework is developed, based on the theories from the literature review.
1. Value of the source unit‟s knowledge stock.
2. Motivational disposition of the source unit.
3. Existence and richness of transmission channels.
4. Motivational disposition of the target unit.
5. Absorptive capacity of the target unit.
6. Distance
These six factors determine the success or failure of the reverse knowledge transfer activities within a multinational company. Barriers that disturbe the knowledge transfer process can exist in any of these factors, though facilitators can also exist.
Figure 2. Determinants of reverse knowledge transfer within a multinational : An analytical framework
Factor 1 and 2 are present at the subsidiary and influence the level of success of reverse knowledge transfer in this part of the MNC. Factor 3 defines the use and existence of communication and transfer channels and describes how these affect the success of reverse knowledge transfer. Factor 4 and 5 are present at the headquarter and describe whether the transferred knowledge from the subsidiary is adopted and utilized by the headquarter, or whether the knowledge is blocked due to barriers in these factors. Finally, 6 describes the distance factor, which helps to determine if the success of reverse
knowledge transfer depends on institutional or cultural differences, between the two countries relevant.
Figure 2 is an analytical framework of these 6 factors that determine the reverse knowledge transfer activities. This analytical framework can be transcribed into the following 6 propositions:
“Different resources, have different levels of value” (Barney, 1991). The subsidiary‟s attractiveness for the headquarter will increase, when the value of its knowledge stock for the rest of the multinational company increases.
Proposition 1. The value of the subsidiary„s knowledge stock, is positively associated with the intensity of reverse knowledge transfer.
A subsidiary may strengthen its strategic position with the transfer of valuable knowledge (Cyert, 1995), or may be reluctant to share knowledge as it fears to lose superiority.
Proposition 2: When a subsidiary is motivated to share knowledge with the headquarter, it will have a positive effect on the knowledge outflow from that subsidiary.
According to Daft and Lengel (1986) “The greater the extent to which a subsidiary is linked to the rest of the global network through integrative mechanisms, the greater would be the density of communication between the subsidiary and other units”.
Proposition 3: The existence and richness of transmission channels between the subsidiary and the headquarter have a positive influence on knowledge transfer activities from the subsidiary.
The Not-Invented-Here syndrome prevents managers from the headquarter to adopt knowledge that is transferred, because they feel superior to the subsidiary (Szulanski, 1996). The success of the transfer depends on the incentives of the manager at the headquarter to learn.
Proposition 4: If the headquarter is motivated to acquire and adopt the knowledge that is available from the subsidiary, it will have a positive impact on the knowledge inflows into the headquarter.
An organization‟s ability to search and find new knowledge is depending on its capacity to effectively integrate and absorb newly acquired knowledge (Cohen and Levinthal, 1990). The receiving part of the organization needs to recognize the value of new information that can be transferred.
Proposition 5: The higher the absorptive capacity of the headquarter, the higher the knowledge inflows into this unit will be.
Significant differences between the environments involved in the transfer process, are likely to propose difficulties in the cross-border transfer of knowledge (Bhagat et al., 2002). For example, the legitimacy of the resources transferred will decline, due to the distance between the receiving country and the transferring country.
Proposition 6: When the cultural and institutional distance between the countries of the relevant units decreases, it will have a positive effect on the reverse knowledge transfer activities of the multinational company.
4. METHODOLOGY
4.1 Research design
This research is designed as an exploratory study, as it will give an insight in the reverse knowledge transfer practices within a multinational company (Thomas, 2004). The knowledge transfer from subsidiaries to the headquarter will be researched in practice, to describe the factors that determine the realization of the transfer.
A distinction is made in research between a quantitative and a qualitative research. In quantitative research all elements are treated as variables, even those that are considered as qualitative. The gathered variables can be used for statistical analysis, still this
research method cannot be used for the review of human behavior. Qualitative variables are elements that can be measured, however they cannot be fully scaled (Thomas, 2006).
Qualitative research is based on human behavior and the reasons that govern such behavior. A disadvantage of the research method is that it may be case specific and cannot give general conclusions. Since this research is based on the meanings of human actions, instead of data that can be measured statistically, this will be a qualitative research.
After identifying a problem, formulating a research question and reviewing the previous literature on the topic, the empirical research starts. This paper will investigate the theory by analyzing a comparative case study. A case study can be defined as the detailed examination of a single example of a class of phenomena (Abercrombie, Hill and Turner, 2000). Besides, Yin (2003) argues that the application of a case study is to gain deeper insights concerning a certain situation. In this paper I will give an in-depth analysis of a Dutch MNC. A comparison will be made between the subsidiaries in China and India, and their reverse knowledge transfer activities to its headquarter in the Netherlands.
Furthermore, the case study research is used in this paper, because there is little known about the reverse knowledge transfer activities of subsidiaries from China and India. Yin
(1994) proposes that a rationale for the single case study is, that it can serve a revelatory purpose and open up an unsearched area. In short, the goal of the case study is to
compare the reverse knowledge transfer activities from two subsidiaries in a Dutch multinational company, which will have an exploratory and descriptive nature.
Case study
The unit of interest in this case is a multinational company. Due to privacy motives, it will not be mentioned with its official name, consequently it will be called Company X.
Company X. is an Anglo-Dutch multinational corporation, with their headquarters located in the Netherlands and in the United Kingdom. The MNC employs 163.000 persons worldwide and in the group of senior managers there are 20 nationalities present.
The MNC is active in 170 countries and on any given day, two billion people use their products. The 400 brands in their portfolio span 14 categories of home, personal care and foods products which make them one of the market leaders in their industry. The
international activities of Company X. are subdivided in three regions: North- and South America, Asia Africa and Central & Eastern Europe and Western Europe. Each region is responsible for: Realizing turnover and profit, the marketing of a certain mix of brands and to built and sustain customer relationships. Besides these regions, there are two more categories: food, home and personal care. These two divisions are responsible for the complete development of the brands, including innovation and strategy of the product categories. Lately, social and environmental considerations have been integrated into the development and innovation plans of the major brands.
Company X. is appropriate for the comparative case study, because it is the only large multinational company with a headquarter in the Netherlands, and subsidiaries in China as well as in India. The Dutch headquarter was a must, as it was easier to reach the right people through a personal network. Moreover, Company X. believes innovation is the engine of its growth (company website). In order to stay market leader and be
competitive, the products need to be innovative and suit the consumer‟s needs better than the competitor‟s products. With their 31 major development centers and 6 worldwide Research & Development (R&D) laboratories, the company has innovative centers
worldwide and transfers its knowledge globally. Therefore, Company X. is a
multinational company that develops new and alters existing products continuously to meet the demands of consumers worldwide.
4.2 Data collection
To conduct this research, I gathered secondary as well as primary data. From the university library I collected the necessary books and articles. The literature collected from other authors, was to compare concepts and theory (Eisenhardt, 1989). On the internet I gathered a dataset on the global competitiveness of China and India from the World Economic Forum. Only a part of the dataset is relative for this research,
nevertheless it gives a thorough overview of the global competitiveness in different fields of the two countries (Eisenhardt, 1989). To gather secondary information on Company X.
about their global reach, activities and company structure I visited their company website and checked their annual reports.
Interview design
The primary data is collected from two employees of Company X. who are responsible for collaboration with an Indian and a Chinese subsidiary. After an extensive search within Company X. these two were seen most capable to give information on reverse knowledge transfer from the two countries‟ subsidiaries. The two employees are both working at the headquarter of Company X. and both have the Dutch nationality, which will exclude cultural bias from the respondents. Both employees were asked to answer the same set of open questions in a structured interview. The questions were in the Dutch language, as both respondents and the researcher have the Dutch nationality. Further, the structured interview is chosen, because the interviews could not be constructed in the same way. By standardizing the questions and the order of the questions, bias in the respondents‟ answers is avoided and it facilitates the categorization and comparison of the answers (Eisenhardt, 1989). Nevertheless, the negative side of standardized questions is that it may weaken validity.
Participants
Employee 1 of Company X. is the vice president of a discovery unit that collaborates with the R&D laboratory in China. Due to the fact that the respondent was on a business trip, while carrying out the research, I mailed a self-completion questionnaire. As the respondent is answering the questionnaire on its own, there is no assistance from the interviewer to clarify the questions. Therefore the interview schedule of both
respondents‟ is structured, to avoid bias in the respondents‟ answers. Furthermore, the questions were straightforward and divided into three categories of questions. If problems would have occurred, I was able to telephone after the business trip for more information.
The self-completion questionnaire was helpful in this case, to reach a geographically dispersed person.
Employee 2 of Company X. is R&D director and is accountable for the collaboration with the R&D subsidiary in India. After the first contact he responded by mail that he wished for an interview by telephone. A telephone interview is more difficult than a face- to-face interview, due to the absence of visual feedback. However, the interview schedule was standardized, so face-to-face interaction was not needed. As questionnaires may take a while before they got returned, a telephone interview is the fastest way of conducting a survey (Thomas, 2004).
Finally, the information gathered with both interviews is described in the case study part of this paper. Afterwards in the conclusion, the information on reverse knowledge transfer in both countries and the theory from the literature review are taken together and analyzed. All data gathered will be utilized to answer the main research question and sub question.
5. CASE STUDY
This case study is on an Anglo-Dutch multinational corporation, with major research and development laboratories located in: The UK, the Netherlands, the US, China and India.
By bringing together employees from diverse locations, they can leverage the power of collective minds to maximum effect. Company X. has as a R&D mission to 'differentiate, deliver, sustain and grow', which means creating distinctive new products with proven benefits that address real consumer needs (company website). With every inch of success in that direction, they built on the growth of the company. However, the main mission must be to create products that consumers are willing to buy in order to stay profitable and market leader. In this comparative case study, I will first analyze the reverse
knowledge transfer capabilities of the Chinese subsidiary, according to the determinants in the analytical framework. Second will be the analyze of the Indian subsidiary and finally compare the two sites‟ reverse knowledge transfer capabilities based on the determinants from the analytical framework.
5.1 The Chinese subsidiary
Employee 1 has close contact with the R&D laboratory in Shanghai, China. This subsidiary has approximately 430 employees and provides expertise in synthetic and mechanistic chemistry and traditional Chinese herbal medicine resources. They focus on global research and development of several brands of hair and skin products.
1. Value of the source unit‟s knowledge stock.
Employee 1 describes that this site and all other smaller development laboratories in China, are a source of talent and knowledge for Company X. The R&D plant in Shanghai is one of the six large R&D centers of Company X. in the world and partly due to its large size, it has a high value of knowledge stock.
Moreover, entry mode theory tries to explain the innovative capabilities and the value of the unit‟s knowledge stock. Company X. has initially taken over a number of people from
a university group in Shanghai and on this core, the new greenfield R&D organization was built. In this subsidiary, products are developed for the Global Discover organization, which means that the products and innovations from this part of the organization are focused on the global market. Reforms from this site serve products of Company X.
worldwide. This corresponds with the paper of Andersson and Pahlberg (1966), who argue that a greenfield subsidiary is likely to develop innovations that are suitable for the entire MNC. However, in order to be of value for the rest of the multinational company, the knowledge must be non-duplicative and relevant. Especially the use of Chinese herbal medicine resources in the R&D process, create non-duplicative knowledge that is
beneficial in other parts of the MNC. Innovations from this site are transferred to the parent, because the R&D site in Shanghai has knowledge that is of value for the entire multinational company.
2. Motivational disposition of the source unit.
The R&D center in Shanghai has valuable knowledge for the headquarter in the
Netherlands. Furthermore, the subsidiary is motivated to share their valuable knowledge, according to employee 1. The power of China, within the multinational company, is more because of its large population. The market on its own is very important to the MNC as a sales area. Still, what kind of information is transferred between the two units. The respondent explained that explicit as well as implicit information is shared between the two. Furthermore, not only market- and client information is shared, but also information on new technologies and Chinese medicine theories to provide research directions for new global products. Actually, every piece of information that is beneficial for the overall organization is shared with the multinational headquarter.
3. Existence and richness of transmission channels.
To distinguish the role of the subsidiary within the multinational company, employee 1 was asked to describe how active the transfer of knowledge from and to the headquarter is. The answer was that both types of transfer are executed, the two have a high level of interaction, in order to develop knowledge for Company X. that can be used around the globe. The subsidiary in Shanghai can be classified as an “integrated player”, as
knowledge is transferred from the subsidiary, but it is not self-sufficient to satisfy its own knowledge needs.
Some of the questions in the interview are about the personal network of employee 1 and the use of communication tools within Company X.. First of all, there are trusty
relationships between the Chinese and Dutch employees. The two of them share tacit information within their personal networks. Moreover, the company makes use of the following communication tools: Short-term expatriate assignments, visits at both sites, a lot of conference calls, telepresence and teamwork assignments with members from different plants. Still, according to the respondent there is a difference in the proficiency of the English language in the communication process. English is not the mother tongue of the employees and the difference in the mastery of the language, depends on the resemblance between the native languages. The Chinese language is very different from the English language, which makes it as hard to learn proper English for them, as it is for us to learn Chinese.
4. Motivational disposition of the target unit.
One of the barriers to knowledge transfer is the acceptation of the knowledge at the headquarter, due to the NIH syndrome. Employee 1 unfolds that according to him, there is no sign of the NIH syndrome at the headquarter. The company headquarter
acknowledges that the Chinese R&D plant has its own specialty and is motivated and happy to make use of it.
5. Absorptive capacity of the target unit.
An important factor for the success of the reverse knowledge transfer, is the absorptive capacity at the headquarter. The Dutch headquarter possesses a high absorptive capacity, according to employee 1. Knowledge on new concepts are transferred from Shanghai to the Design department at the headquarter. Due to frequent communication between the two units are the Dutch employees up to date and capable of using these concepts that are transferred and transform them into new products. Finally, the Deploy centers are
responsible for the eventual evolution and development of the products.
6. Distance
In order to gain more insight in the barriers to knowledge transfer, questions are asked about the different environments in which the two plants are active and what it means for their collaboration. According to the respondent there are differences in the cultural background of the Chinese and Dutch employees. These cultural differences are higher between the low-skilled workers, and seem to depend on the education level of the Chinese employees. As the higher placed Chinese workers have more contact with other units of the multinational company, they are more familiarized with the global
organization culture. They adapt to the shared organizational local values, beliefs and norms, which is harder for workers at the shop floor.
Eventually cultural differences exist that hamper the knowledge transfer between the two and employee 1 gave an example. A Chinese employee will say yes to an assignment given to him, even though he is not sure whether he is capable of finishing it with a positive result. Due to the values, beliefs and norms learned in China since childhood, an employee will not quickly open up about him not being able to perform a task, or not understanding certain information.
Finally, the institutional differences between China and the Netherlands. The formal rights in China are poor as there is a lack of legal infrastructure, although things are gradually improving. Furthermore, excessive regulation by the government, leads to higher levels of corruption. Besides, the local government discriminates foreign firms as they have favorable regulations for local firms.
The higher the institutional distance between China and the Netherlands, the more difficult it becomes for the recipient to understand and correctly interpret the regulatory, normative and cognitive characteristics of the host institutional environment. The legitimacy of the Chinese resources that are transferred is reduced, due to these institutional differences. Consequently, the transferred knowledge from the Chinese subsidiary in Shanghai is adapted to the Dutch environment to increase the cognitive and normative legitimacy.
