Journal of International Business Studies (2004) 35, 443455

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Managing knowledge transfer in MNCs: the impact of headquarters control mechanisms

Ingmar Bjo rkman1,2 Wilhelm Barner-Rasmussen2 and Li Li2
INSEAD, Fontainebleau Cedex, France; Department of Management and Organisation, Swedish School of Economics, Helsinki, Finland
2 1

Correspondence: rkman, Swedish School of Economics, I Bjo Post Box 479, 00101 Helsinki, Finland. Tel: 358 9 43133273; Fax: 358 9 43133275; E-mail: ingmar.bjorkman@hanken.fi

Abstract In this paper we explore the impact of organisational mechanisms on inter-unit knowledge flows in multinational corporations (MNCs). A comprehensive model, based on agency theory and socialisation theory, is tested on a sample of 134 Finnish and Chinese MNC subsidiaries. Our findings indicate that MNCs can influence inter-unit knowledge transfer by specifying the objectives of the subsidiary and by utilising corporate socialisation mechanisms. However, we found no support for the hypothesised impact of management compensation systems and the use of expatriate managers on the extent of knowledge transfers from foreign subsidiaries to other parts of the MNC. Journal of International Business Studies (2004), 35, 443455. doi:10.1057/palgrave.jibs.8400094
Keywords: agency theory; socialisation theory; control; headquarters; knowledge transfer; multinationals

Received: 16 February 2003 Revised: 31 January 2004 Accepted: 31 March 2004 Online publication date: 1 July 2004

Introduction Strategy and management scholars now widely agree that globally distributed networks of subsidiaries constitute a potentially important source of competitive advantage for multinational corporations (MNCs) (Ghoshal and Bartlett, 1990; Birkinshaw and Hood, 1998; Rugman and Verbeke, 2001). By accessing the knowledge residing in these networks, MNCs can both exploit existing repositories of knowledge and combine these sources of knowledge to explore new issues (Frost, 2001). This argument, highlighting the potential importance of knowledge as a strategic resource, has brought the transfer of competence across units into focus as a central challenge for MNC management. It has also triggered a considerable amount of research on factors influencing inter-unit knowledge transfer patterns within the differentiated MNC (e.g., Zander and Kogut, 1995; Szulanski, 1996; Simonin, 1999; Gupta and Govindarajan, 2000). In view of frequent observations about the challenges involved in successfully transferring knowledge across MNC units (Szulanski, 1996), a crucial design problem for MNC top management is how to choose organisational mechanisms that enhance knowledge flows (Foss and Pedersen, 2002). Yet, with certain notable exceptions (e.g., Gupta and Govindarajan, 2000), few efforts have been made to examine the influence of organisational mechanisms on knowledge sharing within the MNC (Foss and Pedersen, 2002). In particular, although a sizable body of research on MNC control and coordination exists (for reviews, see Martinez and Jarillo, 1989;

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Doz and Prahalad, 1993), there is a lack of research on the strategies that MNC headquarters may use to ensure that the competence of subsidiaries is transferred across different units. The question addressed in this paper is therefore: How do different organisational mechanisms impact on flows of knowledge from a foreign-owned subsidiary to other parts of its parent MNC? Research has indicated that barriers to knowledge transfer include, among others, motivational factors (Szulanski, 1996). For instance, a subsidiary may be reluctant to transfer knowledge to other units for fear of losing a position of superiority, or because it is insufficiently compensated for the efforts and costs involved in the process of knowledge transfer (Szulanski, 1996; Forsgren et al., 2000). Given a situation of information asymmetry between MNC top management and the focal subsidiary, it may therefore be in the subsidiarys self-interest not to transfer knowledge to other MNC units, even though this would enhance overall MNC performance. Agency theory has been used extensively in MNC research during recent years, and in several applications a view of the headquarterssubsidiary relationship as a principal agent relationship has been proposed (Roth and ODonnell, 1996; Chang and Taylor, 1999; ODonnell, 2000). We accordingly hypothesise in this paper that headquarters will use several kinds of mechanism as safeguards against opportunism on the part of the subsidiary. However, it has also been persuasively argued that self-serving behaviour on the part of managers can be mitigated by corporate socialisation (Lubatkin et al., 2001). Research has found knowledge flows in MNCs to be positively related to the use of corporate socialisation mechanisms (Gupta and Govindarajan, 2000), and the existence of close relationships among MNC units (Szulanski, 1996; Tsai and Ghoshal, 1998). Hence, in this paper we use socialisation theory (Van Maanen and Schein, 1979) to hypothesise a contrasting set of factors influencing foreign subsidiary transfers of knowledge. Our contribution to the research on this important question breaks new ground in several respects. First, we explore the impact of a range of mechanisms that has not previously been studied. Second, the operationalisation of some of the constructs we employ is arguably more fine-grained than that used in previous research. Third, by drawing upon agency theory and socialisation theory to develop and test a model of foreign subsidiary knowledge transfer, our discussion of the

topic is well rooted in existing organisational theories. Fourth, and finally, we base our findings on an extensive data set collected through structured interviews with the presidents of 134 Western-owned subsidiaries located in Finland and China.

Theoretical framework Previous research has uncovered a number of barriers to intra-MNC competence transfer, associated with the competence itself, with the characteristics of its senders and recipients, and with the relationship between them. For instance, it has been argued that idiosyncratic, specific, tacit, and/ or non-codified knowledge is difficult to transfer from one unit to another, owing to the problem of separating such knowledge from the unit that carries the knowledge and adding it to another actors knowledge base (Zander and Kogut, 1995; Grant, 1996; Spender, 1996; Szulanski, 1996, 2000; Hansen, 1999). Other problems have been related to the recipients ability or willingness to absorb new information (Allen, 1977; Cohen and Levinthal, 1990; Szulanski, 1996), to the relationship between the sender and receiver, and to the willingness of a unit to share information with other units (Szulanski, 1996; Forsgren, 1997). Focusing here on factors associated with the sender subsidiary, we note that several factors may induce the subsidiary not to engage in a transfer of knowledge to other MNC units. First, the complex and idiosyncratic interaction processes between the subsidiary and its external counterparts produce competences that cannot easily be used in other corporate units business contexts. This is because the absorptive capacity required to understand and apply the competence is developed within the unique interaction process. Thus, competence development is to a significant degree context specific, or even relation specific (Lane and Lubatkin, 1998; Forsgren et al., 2000). For instance, extensive long-term cooperation with a specific customer or supplier will enhance the subsidiarys absorptive capacity, its problem-solving capacity, and its ability to create new knowledge within that context. However, the more context specific the solutions are, the more difficult and costly it will be to transfer the knowledge to other corporate units that do not possess the same relational absorptive capacity. Therefore, the sender subsidiary may have to make a significant effort to support the receiving units (Szulanski, 2003).

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Second, competence development at the subsidiary level takes place through both internal development work and the firms interactions with customers, suppliers, research institutions, and other organisations. Regardless of whether the knowledge is largely internally accumulated, or mostly created on the basis of knowledge input from relations with external organisations, the development process engages expensive and scarce human resources. In order to transfer the competences to other units, the same experts and facilities will usually have to be engaged. Taking part simultaneously in both development and dissemination processes may therefore be costly for the subsidiary. Hence, there is a probable trade-off between resources deployed in competence development and resources deployed in transfer of knowledge to other corporate units (Forsgren et al., 2000). Also, efforts to transfer knowledge may interfere with the subsidiarys ability to attend to aspects of its operations that subsidiary managers view as more important for the units own performance (Szulanski, 2003). Third, subsidiaries tend to have different goals and often limited incentives to transfer know-how to other units, particularly if it involves the time of their best people or proprietary technology that might leak out (Porter, 1985; Szulanski, 1996). By diffusing knowledge to other MNC units, the focal subsidiary may also lose some of its uniqueness, thus losing bargaining power within the MNC (Levitt and March, 1988; Forsgren, 1997; though see Foss and Pedersen (2002), for a discussion of possible positive long-term effects of knowledge outflows from the focal subsidiary). The significance of the political aspects of knowledge transfer is further supported by a review of research showing that internal competition between subsidiaries is a critical determinant of subsidiary survival (Birkinshaw and Hood, 1998). To sum up, there are several reasons why subsidiaries may perceive it to be against their own interest to actively engage in knowledge transfers to other MNC units, even though transferring knowledge would enhance corporate performance. In other words, conflicts of interest are likely to emerge between subsidiaries and corporate top management concerning the extent to which the former transfer knowledge to other MNC units. We will now proceed to develop a model, based on agency theory and socialisation theory, of the organisational mechanisms that may positively

INDEPENDENT VARIABLES

DEPENDENT VARIABLE

Agency Theory Performance Evaluation Criteria Subsidiary Management Compensation Number of Expatriate Managers

Socialization Theory Corporate Socialization Mechanisms Outward Knowledge Transfer from Focal Subsidiary

Control Variables - Stock of Subsidiary Knowledge - Subsidiary Scope of Operations -Mode of Establishment -MNC Home Region -Subsidiary Location -Subsidiary Size

Figure 1 Factors hypothesised to influence the outflow transfer of subsidiary knowledge.

influence a subsidiarys propensity to undertake knowledge transfers to other parts of the corporation. The model is presented in Figure 1.

Agency theory and knowledge transfer Agency theory (Jensen and Meckling, 1976; Eisenhardt, 1989) has lately found increasing use in MNC research (e.g., Roth and ODonnell, 1996; Chang and Taylor, 1999; ODonnell, 2000). The relationship between headquarters and a subsidiary can be viewed as a principalagent relationship. It is in the interest of headquarters (the principal) that a subsidiary (the agent) with valuable capabilities contributes to the competence development of other MNC units. However, as outlined above, owing to the potential asymmetry between the goals of the headquarters and those of the subsidiary, the latter may not act according to corporate interests. MNCs use a variety of mechanisms to control and coordinate their foreign subsidiaries, with the different mechanisms being predominantly complementary rather than substitutes (for a review, see Martinez and Jarillo, 1989). Agency theorists generally agree that a combination of outcome (incentive) based and behavioural control mechanisms should be employed (Tosi and Gomez-Meija, 1989; Tosi et al., 1997). Hence, in this paper we hypothesise that several kinds of

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mechanisms will be used successfully to reduce the agency problems of MNC headquarterssubsidiary relationships. In other words, we propose that different organisational mechanisms put in place by MNC headquarters will contribute to increasing the level of knowledge transfer from the focal subsidiary to the rest of the corporation.

Specification of performance evaluation criterion The criteria used by headquarters to evaluate subsidiary performance are likely to influence what subsidiary managers pay attention to and focus on in their operations (ODonnell, 2000). It is especially important to specify the measures used to appraise performance in control situations where the information asymmetry between the principal (headquarters) and the agent (the subsidiary) is large, making direct supervision by the headquarters difficult to apply. This situation is often found in MNCs. For instance, if headquarters are perceived to emphasise the transfer of knowledge to other MNC units, it is in the interest of subsidiary managers to pay special attention to this issue as they know that they will be explicitly or at least implicitly evaluated based on how well the unit performs on this dimension. In other words, subsidiary managers perception of the importance attached by headquarters to knowledge transfer as a performance evaluation criterion is likely to increase their efforts to share knowledge with other MNC entities. It should be noted that the specification of knowledge transfer as a criterion of subsidiary performance is likely to influence subsidiary decision-making also in situations where there is no conflict of interests between headquarters and the subsidiary. As pointed out by Hendry (2002), an agent may lack knowledge of the objectives that the principal holds. If this is the case, by devoting resources to specifying and communicating the objectives that headquarters have for the subsidiary and the criteria used to evaluate its performance, the principal (MNC headquarters management) may guide the actions of the agent (subsidiary management) in accordance with its goals. Based on this reasoning, the following hypothesis can be formulated:
Hypothesis 1: The higher the perceived importance attached to knowledge transfer by headquarters when evaluating the performance of the subsidiary, the more the knowledge transferred from the subsidiary to other corporate units.

Subsidiary management compensation In addition to defining and clarifying the criteria used to assess foreign subsidiary performance, MNC headquarters may put in place financial compensation systems that encourage knowledge transfer. In agency theory terms, the principal may design an incentive system that encourages the agent to pursue the principals objectives (Eisenhardt, 1988; Stroh et al., 1996). An example of this would be the basing of subsidiary managements bonuses not only on the subsidiarys result, but also on the regional and/or global performance of the MNC (cf. Roth and ODonnell, 1996). As competence transfers to other MNC units are likely to contribute to their performance, it is in the self-interest of subsidiary managers to actively engage other MNC entities in knowledge transfers. Based on similar arguments, Gupta and Govindarajan (2000) hypothesised a positive relationship between knowledge outflows and the extent to which a subsidiary presidents bonus is MNC network based rather than subsidiary focused. Although not supported by their data, this theoretical argument nevertheless seems valid. However, we argue that, in addition to the financial incentive systems for the subsidiary president him- or herself, the way in which other members of the subsidiary top management team are financially compensated is also likely to influence the knowledge-sharing behaviour of the subsidiary. We consequently hypothesise that:
Hypothesis 2: The greater the importance of regional and corporate performance as criteria for determining the financial compensation of subsidiary senior management, the more the knowledge transferred from the subsidiary to other corporate units. However, both the specification of subsidiary performance evaluation criteria and the use of global and/or regional MNC performance as the basis for subsidiary management compensation are at best imperfect mechanisms to reduce the agency problems in headquarterssubsidiary relationships. First, the extent to which the subsidiary has in fact transferred knowledge to other MNCs is difficult for headquarters to measure and thus follow up. Agency theorists argue that, in situations of low outcome measurability, principals should use monitoring as a control strategy (Eisenhardt, 1989). Second, the regional and/or global MNC performance is influenced by a host of factors other than the competences transferred from the focal

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subsidiary. Subsidiary managers may therefore conclude that it is not in their self-interest to spend limited resources on knowledge sharing. Given these limitations, MNC headquarters may use what in the agency theory literature has been labelled monitoring or behavioural control strategies to ensure that the agent behaves in accordance with the principals interests. To staff a foreign subsidiary with expatriate managers can be viewed as a headquarters strategy to monitor the unit.

Govindarajan, 2000). The following hypothesis will therefore be tested: Hypothesis 3: The higher the number of expatriate managers, the more the knowledge transferred from the subsidiary to other corporate units. So far we have relied on agency theory arguments to develop hypotheses on the organisational mechanisms influencing outward flows of subsidiary knowledge. However, several writers have emphasised that the propensity of managers to behave opportunistically may also be affected by socialisation (Ouchi, 1979; Ghoshal and Moran, 1996; Lubatkin et al., 2001). Below, we therefore hypothesise on how subsidiary knowledge transfer may be affected by corporate socialisation.

The use of expatriate subsidiary managers The use of expatriates has been extensively studied m and Galbraith, in the MNC literature (e.g., Edstro 1977; Boyacigiller, 1990), recently often from an agency theory perspective (e.g., ODonnell, 2000; Harvey et al., 2001). From a headquarters control perspective, there are at least two reasons why expatriate subsidiary managers can be expected to be more likely than local managers to act in the principals best interest. First, compared with local managers, expatriates future career prospects are more likely to be significantly influenced by headquarters evaluation of how well the subsidiary contributes to the performance of the whole corporation. Second, as expatriates tend to identify less with the subsidiary than do local managers, being instead more likely to have been socialised into the parent company (cf. Lubatkin et al., 2001), they may be less inclined to take a narrow subsidiary perspective when deciding on subsidiary activities. Furthermore, knowledge transfer is carried out within the context of interpersonal relationships between the sending and the receiving unit, and there are several reasons why expatriates are more likely than locals to be actively involved in the knowledge transfer process. First, expatriates are more likely to have stronger and longer-tenured social ties with managers at headquarters and in other MNC units (Gupta and Govindarajan, 2000). Second, and related to the first point, expatriate managers may be perceived as more trustworthy than local managers. Therefore, managers in receiving units may be more likely to engage in processes of knowledge transfer with subsidiaries headed by expatriates. Third, expatriate managers are likely to be better positioned to understand the added value of the subsidiarys knowledge base for other parts of the MNC. Finally, there may be fewer communication problems between expatriate managers and their colleagues in other MNC units (Gupta and

Corporate socialisation The aim of corporate socialisation is to establish a shared set of values, objectives, and beliefs across MNC units (Nohria and Ghoshal, 1994), providing them with a strong sense of a shared mission and a unitary corporate culture (Hedlund and Kogut, 1993). From a knowledge-sharing perspective, the underlying rationale is that the more different units share long-term visions and goals, the more likely they are to transfer resources and exchange complementary knowledge. Empirical research on the knowledge-based view of the firm indeed suggests that the existence of close interpersonal networks facilitates the diffusion and creation of new knowledge across units within a corporation (Tsai and Ghoshal, 1998; Tsai, 2001). Szulanski (1996) views the absence of pre-existing relationships among units as a factor creating stickiness in knowledge sharing. Similarly, drawing on a social network perspective on organisational learning, Tsai (2001) argues that inter-unit knowledge transfer in MNCs occurs in a shared social context in which different units are linked to one another. In his study addressing the roles of inter-unit ties in sharing knowledge in MNCs, Hansen (1999) notes that efficient knowledge sharing is typically characterised by tight coupling between people from different organisation subunits. Interpersonal ties between MNC units provide channels through which both information and resources flow. Social interactions among different business units blur the boundaries of those units and stimulate the spread of information and knowledge. Corporate socialisation mechanisms refer to those organisational mechanisms that facilitate

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the development of interpersonal ties in the MNC (Van Maanen and Schein, 1979), which in turn can be expected to enhance the communication between the parties, including transfer of knowledge. Gupta and Govindarajan (2000) indeed found that corporate socialisation mechanisms, as well as what they called formal integration mechanisms (including the use of permanent committees), were positively related to knowledge transfer to peer subsidiaries and (partially) to the parent organisation. Therefore we predict the following relationship between the use of corporate socialisation mechanisms and a subsidiarys knowledge transfer to other MNC units: Hypothesis 4: The more extensive the use of corporate socialisation mechanisms, the more the knowledge transferred from the subsidiary to other corporate units.

Measures Dependent variable The outward transfer of subsidiary knowledge as the dependent variable was used to assess the extent to which the subsidiary knowledge had been transferred to other MNC units. The approach is similar to that of Gupta and Govindarajan (2000), Holm and Pedersen (2000), and Schulz (2001). On a seven-point Likert scale, where 1not at all (used by others) and 7very much (used by others), respondents were asked to rate the extent to which the subsidiarys distinctive competences within five business activities had been used by the corporations other units. The activities were: general management, manufacturing, marketing and sales, service, and R&D. Note that the operationalisation does not imply a full replication of the knowledge in the receiving unit. Indeed, transfer of knowledge is typically associated with modification of the knowledge in the receiving organisation. Hence we agree with Argote and Ingram (2000, 154) that knowledge transfer occurs when experience in one unit of an organisation affects another unit. The outward transfer of subsidiary knowledge construct is a multi-item construct calculated as the total sum of scores reported by respondents for all the five business activities mentioned above divided by the number of items (alpha0.81). Independent variables
(1) Subsidiary knowledge transfer as performance evaluation criterion. The variable was measured by asking respondents what importance they attached to the criterion Transfer of knowledge to other units when subsidiary performance was evaluated by the headquarters. The respondents were requested to estimate the perceived importance of this evaluation criterion on a seven-point Likert scale, where 1not at all important, and 7very important. (2) Subsidiary management compensation. The measure used to assess subsidiary management compensation is similar to that of Roth and ODonnell (1996). We asked the respondents to report the percentage weight of the following criteria (total100%) when adjusting, respectively, the general managers and the subsidiary top managements bonuses and base salaries: (a) individual performance; (b) performance of the subsidiary (or parts thereof); (c) performance of the MNC in the region; and (d) performance of the whole of the MNC. The general managers

Data and methods Data for this study were collected through structured face-to-face interviews with top managers of Finnish and Chinese subsidiaries of foreign MNCs. Subsidiary top managers were chosen as respondents because, given the broad scope of the research instrument, they were likely to be the individual subsidiary employees best able to provide perceptional data on the full range of questions. Finland and China were chosen so as to test the hypotheses with data from two different contexts one small Western industrial country and one large Asian developing country. In both countries, we began the data collection process by contacting subsidiary presidents by mail. In Finland we targeted the 150 largest foreign-owned subsidiaries, and in China some 300 foreign-owned subsidiaries, whose contact information was available to us. The letter described the project and emphasised the confidentiality of individual responses. The respondents were then contacted by telephone to book interviews. The result was an initial sample of 164 subsidiaries. For the analyses presented here, deleting cases with missing values resulted in a final sample of 134 observations. The interviews, which lasted 45120 min, were conducted in 20002002. During the interviews, the respondents and the researchers went through a pre-tested questionnaire together. The questionnaire language was English; any terms that respondents had difficulty understanding were explained to them in another language they felt comfortable with (Finnish, Swedish or Mandarin).

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and the subsidiary top managements percentage scores were then averaged into mean scores for each criterion. The final subsidiary management compensation construct, based on these mean scores and following Roth and ODonnell (1996), was the aggregate weight as a percentage given to regional and MNC performance. The construct thus covers the compensation of both the subsidiarys top manager and the rest of its top management team, the relatively greater emphasis on the former compared with individual members of the top management group being motivated by corresponding differences in power and influence. (3) Number of expatriate managers. This variable measured the number of foreign employees in the subsidiarys top management team. (4) Corporate socialisation mechanisms. Three different measures of lateral socialisation were included in our operationalisation: (a) interunit trips and visits; (b) international committees, teams, and task forces; and (c) training involving participants from multiple units. For each of the three measures, respondents were asked to provide data on the number of managers interacting with representatives of other units within the scope of that type of interaction. We then divided these data by the total number of subsidiary employees in order to account for variations in subsidiary size. The resulting three scores were then added up and divided by three. Thus, where some previous studies have used scales where the respondents have been asked to estimate the use of a certain type of interaction on a scale from used rarely to used very often (e.g., Roth et al., 1991), or answer yes or no to whether a specific type had been used (e.g., Gupta and Govindarajan, 2000), we use an objective estimate of the number of people involved in corporate socialisation mechanisms. Arguably, this provides a more precise measure (alpha0.76).

Control variables
(1) Stock of subsidiary knowledge. A subsidiary with a stock of knowledge that in some capacity is unique and greater than that of other MNC units is likely to be an attractive collaboration partner (Davenport and Prusak, 1998; Gupta and Govindarajan, 2000). The existence of a capability gap to other MNC affiliates is there-

fore likely to motivate MNC units to seek knowledge from the focal subsidiary, thus increasing the likelihood of knowledge transfer from this subsidiary to other MNC units (Rugman and Verbeke, 2001). Using acquisition as mode of entry, subsidiary size, and relative economic level of the host country as proxies for the value of the subsidiarys knowledge stock, Gupta and Govindarajan (2000) found empirical support for the hypothesised positive relationship between subsidiary knowledge stock level and outward transfers of knowledge from the subsidiary to both peer subsidiaries and the parent corporation. It was therefore essential to control for the subsidiarys stock of knowledge in the empirical tests. This construct of subsidiary knowledge assesses the subsidiarys distinctive competence in five business activities: general management, manufacturing, marketing and sales, service, and R&D. The respondents were asked to indicate, on a sevenpoint Likert-type scale (with 1very much lower, and 7very much higher), the extent to which, during the last 3 years, the subsidiary had developed knowledge that was superior to that of other units in the business area for these five activities. In testing the hypotheses, a single composite measure based on the total sum of all five items divided by the number of items was used. A higher number indicated knowledge superiority compared with other MNC units (alpha0.69). (2) Subsidiary scope of operations. The number of functions performed by a foreign subsidiary influences its propensity to develop and possess knowledge of potential use for other MNC units. Subsidiaries with fully fledged operations in terms of manufacturing, marketing, service and R&D are more likely to transcend limitations in the technological specialisation of the parent company and take advantage of the capabilities residing with their local network partners (Cantwell, 1992). A subsidiary with a wide range of functions in-house may also better integrate and further develop corporate and external knowledge. Furthermore, with a higher number of functions there is a higher likelihood that the subsidiary develops MNCunique knowledge in some functional area. Thus, the scope of operations was controlled for in the tests of the hypotheses. The variable was measured by asking respondents to check all of the following subsidiary functions that

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(3)

(4)

(5)

(6)

applied to the subsidiary: manufacturing, sales, service, and R&D. Hence each subsidiary received a score of 14. Mode of establishment. The literature on foreign direct investment (e.g., Hennart and Park, 1993) has argued theoretically and shown empirically that, compared with a greenfield subsidiary, an acquired subsidiarys knowledge base is less likely to overlap with the knowledge base of the rest of the MNC. In fact, an important motive for an MNC to acquire a local firm can be to access its knowledge base. Compared with greenfield subsidiaries, acquired units may therefore possess knowledge that is more unique within the context of the MNC. Gupta and Govindarajan (2000) found that acquired units indeed transferred more knowledge to peer subsidiaries than did greenfield units. The mode of establishment was therefore included as a control variable in our analysis. The variable was measured by asking survey respondents whether the subsidiary was acquired. It was coded as 0 and 1, with 0No and 1Yes. MNC home region. A large body of literature suggests that the country of origin of the MNC may influence the way in which it operates. Accordingly, following Gupta and Govindarajan (2000), we controlled for the home region of the MNC when testing our hypotheses. All MNCs in the sample were headquartered in the United States, the Nordic countries, or the rest of Europe. Nordic parentage was treated as the base case, and dummy variables were created for the two other regions. Subsidiary location. In this paper, we study knowledge transfer from Western-owned MNC subsidiaries located in China and Finland. The propensity of MNC units to engage in knowledge transfer may vary, depending on the location of the sender unit, and therefore the location of the subsidiary was controlled for in our analysis. The country dummy variable indicated the location of the subsidiary (coded as 0Finland, 1China). Subsidiary size. It has been shown in several studies (e.g., Foss and Pedersen, 2002) that subsidiary size may influence knowledge transfer. We therefore controlled for subsidiary size, which was measured as the log of the number of subsidiary employees.

The variables were standardised prior to the analyses.

Results Descriptive statistics and correlation for all of the variables analysed in this study are provided in Table 1. To assess the effects of the hypothesised variables and the control variables on subsidiary knowledge transfer, we ran OLS regression analyses. Table 2 presents the results of the regressions used to test the hypotheses. When testing the hypotheses, we first entered the control variables into the equation. The resulting regression model (Model 1 in Table 2) was statistically significant, with the subsidiarys knowledge stock and its value chain scope being particularly strongly related to the level of knowledge transfer. Hence, the more extensive the subsidiarys knowledge stock and the broader the scope of its operations in terms of production, R&D, marketing, and service, the more the knowledge flowed from the subsidiary to the rest of the MNC. Knowledge outflows were also higher (Po0.05, two-tailed t-test) when the subsidiary had been established through an acquisition. Subsequently, we entered the independent variables hypothesised as the determinants of subsidiary knowledge transfer. As the results in Table 2 show, the regression model (Model 2) was highly significant, suggesting support for our theoretical framework. The R2 increased from 0.348 in the model only containing control variables to 0.427 in the full model. Of the control variables, subsidiary stock of knowledge and scope of operations were significantly related to knowledge transfer. There was strong support for Hypothesis 1 (at Po0.001, single-tailed t-test) predicting a positive relationship between knowledge transfer and the perceived importance headquarters attach to knowledge transfer when evaluating subsidiary performance. Hypothesis 2 examined the relationship between knowledge transfer and top management being compensated based on the regional or global performance of the MNC. Although the relationship was in the expected direction, no significant effect was found; Therefore, Hypothesis 2 was not supported. Similarly, the number of expatriates in management was hypothesised to impact positively on the extent of knowledge transfer, but the number of expatriate managers was not found to be related to knowledge transfer, implying the rejection of Hypothesis 3. Hypothesis 4 investigated the relationship between knowledge transfer and the extent of lateral socialisation practices. This hypothesis was

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0.46** 0.25**

0.02

supported (at Po0.05, single-tailed t-test). Thus, consistent with socialisation theory, the more the subsidiary managers interact with managers from other MNC units through visits, during joint training programmes, and in cross-unit committees and task forces, the more the knowledge transferred to other parts of the corporation.

0.22**

0.06

10

0.27**

11

Discussion This study builds on and contributes to the expanding body of previous research on the determinants of knowledge flows within MNCs, and in particular the work of Gupta and Govindarajan (2000). Our overarching aim was to address the lack of research on the strategies used by MNC headquarters to control the inter-unit transfer of subsidiary competences. Building on agency theory and socialisation theory, we have explored the way in which different organisational mechanisms available to MNC headquarters impact on knowledge outflow from a foreign-owned subsidiary to other parts of the parent corporation. The model was tested on a data set consisting of 134 Western subsidiaries located in Finland and China. The results reported here indicate that MNC headquarters can indeed successfully use certain organisational mechanisms to enhance knowledge transfer, and that both agency theory and socialisation theory appear relevant for predicting intraMNC knowledge flows. More specifically, our findings suggest that MNC headquarters can influence the flow of knowledge transfers within the corporation by tailoring the criteria used to evaluate subsidiary performance. This harmonises well with an agency theory perspective. In line with results obtained in previous research (Gupta and Govindarajan, 2000), outward subsidiary knowledge transfer was also positively and significantly related with the employment of corporate socialisation practices. Corporations may thus increase the likelihood for knowledge sharing by organising international training programmmes, by establishing international task forces and committees, and by encouraging visits across MNC units. Theoretically, our findings can be interpreted as supporting Lubatkin et al.s (2001) suggestion that the original agency theory proposed by Jensen and Meckling (1976) should be integrated with other theoretical perspectives, including socialisation theory. Although the findings of this study suggest that the specification of knowledge transfer as a subsidiary evaluation criterion may in itself have an impact on subsidiary behaviour, the results failed to

0.00 0.05 0.47** 0.03 0.06 0.18* 0.05 0.10 0.07 0.12 0.07 0.14 0.03 0.08 0.07 0.23** 0.09 0.18* 0.41** 0.11 0.10 0.08 0.05 0.11 0.08 0.22** 0.12 0.10 0.06 0.15 0.07 0.16* 0.00 0.09 0.22** 0.04 0.03 0.40** 0.32** 0.25** 0.05 0.02 0.16* 2.90 0.77 0.93 1.04 0.50 0.43 0.50 0.50 0.03 0.26** 1.28 1.65 0.05 19.1 0.01 0.15 0.17* 0.12 0.01 0.29**

s.d.

1.35
*Correlation is significant at the 0.05 level (two-tailed). **Correlation is significant at the 0.01 level (two-tailed).

1.48 0.37 4.40 2.84 0.44 0.24 0.40 0.46

2.88 3.82

Mean

Descriptive statistics and correlations

(1) Knowledge transfer outflow (2) Knowledge transfer as performance evaluation criterion (3) MNC Global and/or regional focus in top management compensation (4) Number of expatriate managers (5) Corporate socialisation mechanisms (6) Subsidiary stock of knowledge (7) Subsidiary value chain scope (8) The subsidiary was acquired (9) US MNC (10) European (but not Nordic) MNC (11) Subsidiary home country (0Finland, 1China) (12) Number of employees (log.)

Table 1

22.6

4.96

0.16*

0.00

0.11

0.25**

0.54**

0.05

0.24**

0.22**

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Table 2

Regression analyses for subsidiary knowledge outflow

Independent variables

Standardised beta coefficients (t-statistics) Model 1 Model 2 0.35 (4.83)** 0.33 (4.48) ** 0.15 (1.84)* 0.03 (0.34) 0.00 (0.01) 0.05 (0.49) 0.10 (1.00) 0.23 (3.12)*** 0.04 (0.59) 0.02 (0.22) 0.18 (2.03)* 0.653 0.427 0.375 8.32***

Subsidiary stock of knowledge Subsidiary value chain scope The subsidiary was acquired US MNC European MNC Subsidiary home country (0Finland, 1China) Number of employees (log.) Knowledge transfer as performance evaluation criterion MNC Global and/or regional focus in top mgt. compensation Number of expatriate managers Corporate socialisation mechanisms R R2 Adj. R2 F
*One-tail Po0.05. **One-tail Po0.01. ***One-tail Po0.001.

0.38 (5.12)*** 0.34 (4.31)*** 0.17 (2.10)* 0.00 (0.05) 0.01 (0.07) 0.06 (0.64) 0.02 (0.20)

0.590 0.348 0.312 9.66***

establish any positive effect of management compensation on knowledge flows. We found no support for the hypothesised impact of a compensation system for top management based on the regional or global performance of the MNC, which theoretically could be expected to be enhanced through successful knowledge transfers. Notably, Gupta and Govindarajan (2000) also failed to find support for a similar hypothesis in their study. It is conceivable that the link between knowledge transfer and MNC performance is perceived as too elusive by self-interested subsidiary managers for it to influence their conduct. On the one hand, a compensation system that is based more directly on the subsidiarys contribution to the competence development of other MNC units may be needed to impact upon the pattern of knowledge flows. On the other hand, to construct and implement a system that allows headquarters management to measure subsidiary knowledge transfer is likely to be a significant challenge. More research is clearly needed on the impact of financial compensation systems on MNC-internal knowledge transfer. Contrary to expectations, our data indicate that the use of expatriate managers is not significantly related to outward knowledge transfer from subsidiaries to other parts of the MNC. We can only speculate on the reasons for this, and encourage

scholars to investigate the issue further in future research. First, it may be that monitoring subsidiary knowledge transfer is such a small part of expatriate managers activities that no effect can be seen in the regression analyses. Second, it is possible that extensive use of expatriate managers on relatively short-term assignments in the subsidiary has a negative impact on the development of the longterm, trustful relationships between MNC subsidiaries that are important for extensive competence transfers to take place (Tsai and Ghoshal, 1998). Third, an expatriate-dominated management group may focus the attention of the subsidiarys activities more on MNC-internal processes than on developing relationships with organisations in the local environment, and the subsidiary may consequently fail to take advantage of the resources residing in its environment to develop competences that are unique within the MNC. The strong positive relationship between subsidiary stock of knowledge and knowledge transfer in this study indeed suggests that corporations aiming at increasing knowledge sharing need to manage their foreign subsidiaries so as to stimulate the creation of capabilities that can then be disseminated to other parts of the MNC (see Frost et al., 2002). Research by Andersson et al. (2002) has shown that subsidiaries that are deeply embedded in their environment are

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more likely to contribute to the competence development of other MNC subsidiaries. Extensive use of expatriate managers might thus over time have a negative impact on outward subsidiary knowledge transfer. How does this study inform us concerning the applicability of agency theory to control issues in the context of MNCs? Two of the three hypotheses based on agency theory were not supported by the data. Some possible explanations for this lack of support have been discussed above. However, there was strong empirical support for the hypothesis that [T]he higher the perceived importance attached to knowledge transfer by headquarters when evaluating the performance of the subsidiary, the more the knowledge transferred from the subsidiary to other corporate units. This finding can be explained as being an outcome of rational subsidiary top managers acting purely in selfinterest, as they believe that their results will be evaluated and that they will personally be rewarded for example, through improved career prospects for how well the subsidiary succeeds in transferring knowledge to other MNC units. On the other hand, the findings may also be an outcome of the performance evaluation criteria playing an important role in informing boundedly rational but not necessarily opportunistically behaving subsidiary managers of the subsidiarys key objectives. In other words, an assumption of agent opportunism may not be necessary to explain why the specification of knowledge transfer as a performance criterion appears to influence subsidiary management behaviour. Further research on the mechanisms involved in specifying, communicating and following up subsidiary goals would help shed further light on subsidiary knowledge transfers in MNCs. Such work would also contribute to our understanding of the usefulness of agency theory for the study of MNC management and control (see also ODonnell, 2000). The hypotheses developed in this paper have been tested with a unique data set created through personal interviews with the presidents of 134 Western-owned subsidiaries located in Finland and China. Despite the differences between these two countries, subsidiary nationality did not seem to influence the patterns of knowledge flows, suggesting that certain organisational mechanisms influence subsidiary knowledge transfers across national contexts. Our choice to collect data through personal interviews has certainly contrib-

uted to our high response rate and helped us ascertain that the subsidiary presidents did their best to provide us with high-quality information. Still, the study remains subject to certain limitations, the addressing of which will provide fruitful avenues for future research. First, there is a potential risk for common method bias due to our use of self-reported, partly perceptual measures. We reduced this risk by asking the questions included in the study at different points of time during the interviews; still, future research where data from one MNC unit are corroborated by data from other units belonging to the same parent corporation would be desirable. Second, the cross-sectional nature of our data collection limits our ability to examine the dynamic interplay between the constructs studied, highlighting the demand for time series data on the topic. Third, similar to Gupta and Govindarajan (2000), this study analysed knowledge flows at the nodal level of analysis that is, with a focus on the behaviour of individual MNC units. Future work on other levels of analysis for example, the dyadic (examining knowledge flows between pairs of units) and the systemic (analysing the entire network of MNC units) is thus called for. Finally, although our data clearly indicate that the subsidiarys stock of knowledge is positively related to outward subsidiary knowledge transfer, we did not examine the impact of the type of knowledge on knowledge flows (see, for example, Simonin, 1999). Scrutiny of how knowledge characteristics interact with the use of headquarters control mechanisms would be one way to further augment our understanding of how organisational mechanisms can be used to increase knowledge sharing in the differentiated MNC. We thus conclude with the hope that this exploration into the mechanisms used by MNCs to enhance knowledge transfer will provide a base for extensive future research into this important area.

Acknowledgements This research was carried out within the Academy of Finland-financed project Managing knowledge creation and transfer in multinational corporations: a Finnish perspective. We thank Anette Bjo rkman and Patrick Furu for their contributions to the data collection. We would also like to thank the editors of the focused issue Nicolai Foss and Torben Pedersen, as well as the three JIBS reviewers for valuable comments and suggestions on an earlier version of the paper.

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About the authors rkman is a professor at the Swedish Ingmar Bjo School of Economics, Helsinki, Finland. His work appears in, among others, Journal of International Business Studies, International Journal of Human Resource Management and Organization Studies. rkmans research interests focus on internaBjo tional HRM, M & A integration, and knowledge management in multinational corporations.
Wilhelm Barner-Rasmussen is a research associate at the Department of Management and Organization, Swedish School of Economics, Helsinki, Finland. His research is concerned with knowledge sharing in multinational corporations, with a special focus on issues related to language and communication. Li Li is currently a doctoral candidate at the Swedish School of Economics, Helsinki, Finland. His main research interests are knowledge transfer in multinational corporations, cross-cultural management, and Western-Chinese business operations.

Accepted by Nicolai Juul Foss and Torben Pedersen, Departmental Editors, 31 March 2004. This paper has been with the author for one revision.

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