Proceedings of 29th International Business Research Conference

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Proceedings of 29th International Business Research Conference
24 - 25 November 2014, Novotel Hotel Sydney Central, Sydney, Australia, ISBN: 978-1-922069-64-1
Reverse Knowledge Transfer from Subsidiaries to Multinational
Companies
Myung-Su Chae1, Gap-Yeon Jeong2 and Byung-il Park3
Although examinations of reverse knowledge transfer (RKT) from subsidiaries to
parent firms are increasing, the debate discussing primary determinants
influencing RKT has not reached academic consensus. By incorporating different
facets of the phenomenon, we draw an overall picture for RKT. We advance a
series of hypothesis to achieve the research objective by using a sample of
subsidiaries in South Korea. By doing this we reveal that ‘market knowledge
application by MNCs’ significantly depends on ‘market knowledge absorption by
subsidiaries’, ‘socialization mechanisms’, ‘knowledge relevance between MNCs
and subsidiary’ and ‘absorptive capacity of MNCs’. In addition, ‘knowledge
relevance between MNCs and subsidiaries’ and ‘absorptive capacity of MNCs’
moderate the positive relationship between ‘market knowledge absorption by
subsidiaries’ and ‘market knowledge application by MNCs’.
JEL Codes:
M16, M31 and M39
1. Introduction
There is a common understanding that knowledge is one of the key organizational assets for
multinational corporations (MNCs) to maintain and strengthen competitive advantages. However,
one problem is that no single MNC possesses sufficient knowledge to efficiently compete against
other competitors in the global arena. Thus, MNCs often attempt to develop and improve their
organizational competitiveness by integrating and blending various sources of knowledge
generated internally within MNC networks (Lane, Salk and Lyles, 2001). In this process, MNC
subsidiaries often play a pivotal role by absorbing information that resides in the local
environment and reverse transferring it to their headquarters (Ambos, Ambos and Schlegelmilch,
2006; Subramaniam and Venkatraman, 2001). These subsidiaries help MNCs to tap into, and
revitalize, dispersed knowledge sources, as a crucial ingredient of the group‟s wider creative
program (Pearce and Papanastassiou, 2006). These processes are expected to contribute to the
richness of the core of knowledge available to the MNC (by their interactive operations in globally
dispersed environments).
Given the importance of subsidiaries to the competitiveness of MNCs, researchers increasingly
attempt to identify primary factors influencing reverse knowledge transfer (RKT) and add valuable
contributions to current knowledge. The RKT (i.e., knowledge transfer from foreign subsidiaries to
parent companies) is one important process in the intra-MNCs knowledge transfer phenomenon
that has recently received attention (Eden, 2009). Previous studies on RKT have employed
fragmentary theoretical concepts in conducting similar empirical examinations. That is, some
studies emphasized a learning organization‟s (i.e., MNCs‟) learning capability and absorptive
capacity (e.g., Ambos et al., 2006), whereas others highlighted relational capital between
knowledge transferors and acquirers as a catalyst to enhance a favorable learning environment

Dr. Myung-Su Chae, College of Business Administration, Hankuk University of Foreign Studies, South Korea.
Email : [email protected]

Dr. Gap-Yeon Jeong, College of Business Administration, Hankuk University of Foreign Studies, South Korea.
Email : [email protected]

Dr. Byung-il Park, College of Business Administration, Hankuk University of Foreign Studies, South Korea.
Email : [email protected]
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Proceedings of 29th International Business Research Conference
24 - 25 November 2014, Novotel Hotel Sydney Central, Sydney, Australia, ISBN: 978-1-922069-64-1
(e.g., Noorderhaven and Harzing, 2009). Some other scholars exploring knowledge acquisition
by headquarters suggest that learning is not possible without social embeddedness (i.e. the
subsidiary is deeply embedded in the local social network) (e.g., Schultz, 2001) or knowledge
relatedness (e.g., Foss and Pedersen, 2002), which is a circulative link to a subsidiaries‟
absorptive ability in RKT discussions. In contrast, Gupta and Govindarajan (2000) view the
maximization of knowledge flow within MNC networks as not plausible without the presence of
appropriate knowledge integration mechanisms.
These explanations above clearly indicate that although the number of empirical examinations on
RKT is rising, limitations still linger. To reiterate, previous studies to date have emphasized
fragmentary components by observing partial aspects of the phenomenon. Due to this, a
consensus on key factors influencing RKT has not yet been reached. For example, Ambos and
Ambos (2009) suggest that the development of intra-MNCs trust relationship is a determinant of
RKT, whereas Yang, Mudambi and Meyer (2008) argue that the role taken by subsidiaries
positively affects knowledge flow between MNCs and their subsidiaries, and the list goes on.
Therefore, we will try to fill the gap by drawing an overall picture for RKT research. Secondly, to
the best of our knowledge, determinants influencing RKT have been examined mainly by
exploring their cause-and-effect relationships, despite the complex interactions existing among
those determinants (Najafi-Tavani, Giroud and Sinkovics, 2012). Therefore, we need to figure out
and solve this complexity. Thirdly, previous studies have focused on finding the determinants of
RKT in the perspective of parent companies. However, when examining knowledge transfer, we
need to identify it both in the perspective of parent companies and subsidiaries (Rabbiosi, 2011).
Based on this idea, we will attempt to comprehensively observe the issues related to RKT within
the research framework. In other words, grounded in the resource-based view and relational
capital view of MNCs, we consider a learning process where overseas subsidiaries absorb
knowledge in local markets and then share, transfer, and have it utilized by parent firms.
2. Literature Review: Reverse Knowledge Transfer
Traditionally, knowledge has been transferred from MNCs to subsidiaries in a forward knowledge
transfer pattern (Yang et al., 2008). However, researchers recognize that MNCs also need to fully
exploit knowledge and skills possessed by each subsidiary in order to maintain competitiveness
by combining the capabilities of the whole network (Subramaniam and Venkatraman, 2001).
Subsidiaries are able to tap local markets for new knowledge which will be diffused and utilized
within the MNC networks (Foss and Pedersen, 2002). This knowledge often functions as a useful
means for MNCs to choose appropriate global strategies. This implies that researchers generally
acknowledge that knowledge can be transferred from subsidiaries to MNCs.
Meanwhile, Gupta and Govindarajan (2000) suggest three potential determinants for RKT. First,
the value of knowledge is held by subsidiaries. Second, various incentive systems are motivating
the acceleration of knowledge transfer. Third, a relational system is between MNCs and
subsidiaries. Although this study is well-known and often cited, its drawback is that it does not
consider the influence stemming from the attributes of concerned entities exchanging knowledge.
Hakanson and Nobel (2001) argue that knowledge absorbing activity of overseas subsidiaries is
a starting point initiating RKT, and also suggest that local market network embeddness as a
factor that can wield huge influence on knowledge absorption. According to Schultz (2001),
overseas subsidiary‟s accessibility toward local market knowledge could affect RKT. In contrast,
Zhou and Frost (2003) shed light on the importance of a subsidiary‟s role in bringing a
competitive edge to MNCs, and they point out that new value can be developed when knowledge
absorbed by overseas subsidiary is transferred to MNCs. This study undertakes an experiment
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Proceedings of 29th International Business Research Conference
24 - 25 November 2014, Novotel Hotel Sydney Central, Sydney, Australia, ISBN: 978-1-922069-64-1
on the innate characteristics of overseas subsidiaries amassing knowledge through close contact
with the local environment, but the discussion resides only in the catalysts promoting the
absorption of local management techniques (Almeida and Phene, 2004). A welcome exception is
Adenfelt and Lagerstrom (2008) and they consider subsidiaries as an organization creating local
market knowledge through contact with customers, providers and other business partners in a
host market. However, elements included in their research framework are limited to MNCs‟ ability
to recognize new external information.
In the same vein, empirical studies on RKT tend to increasingly attempt to identify influential
factors for the topic. Piscitello and Rabbiosi (2006) try to answer the question of whether a
company‟s knowledge transfer mechanism, subsidiary‟s role, subsidiary‟s autonomy and
subsidiary‟s local market embeddedness can affect RKT. They uncover that knowledge of
person-based mechanisms, competence-creating subsidiary and deeply embedded subsidiary‟s
knowledge influence RKT. Similarly, Ambos et al. (2006) examine the components that will ease
knowledge acquisition by MNCs from subsidiaries. Their findings indicate that the subsidiary‟s
competitive advantage in the host market, subsidiary‟s strategic role and parent company‟s
absorptive capacity positively stimulate RKT. Li, Barner-Rasmussen and Bjorkman (2007)
document the significant effect of the relationship between economic status of the host market
where subsidiaries are operating and RKT. In particular, their interesting outcome is that there is a
disparity in the level of RKT between overseas subsidiaries located in developed countries and
those established in developing economies, and that economic status of the host market can
moderate the relationship between social capital and RKT in MNC networks. From the results,
they suggest that subsidiaries doing business in developing economies should endeavor to
develop social capital with parent firms and other subsidiaries within the networks. As shown,
current studies have a propensity to focus on certain aspects of RKT and neglect to incorporate
all processes of the issue by simultaneously considering absorption, sharing, transference, and
the use of new information by MNCs. Our study contributes extant knowledge by filling this
research gap.
In terms of research context, Yang et al. (2008) analyze factors that affect conventional
knowledge flows transferred from MNCs to subsidiaries, and reverse knowledge inflow
transmitted from the latter to the MNC network by surveying subsidiaries in Hungary, Poland, and
Lithuania. Here subsidiaries possessing a capability to absorb new local market knowledge and
efficiently transfer it to parent firms are also good at conventional knowledge acquisition from
parent firms. This is probably because subsidiaries, which function with a creative mandate
(Manea and Pearce, 2006) reverse transfer local market knowledge and eventually strengthen
MNC competitiveness, are strategically important miniatures and, thus, they are logically
plausible to receive collaborative support from MNCs. As indicated, this study takes place in
transitional economies, and to our best knowledge, no one has tried to explore RKT in Korea. We
believe we will be able to extend our understanding on the issue by applying it to such an
economy.
3. Hypotheses
The relationship between market knowledge absorption by subsidiaries and knowledge
integration mechanisms
When overseas subsidiaries and MNCs (i.e., parent firms) have a complementary knowledge
integration mechanism, RKT is perhaps accelerated. Knowledge integration mechanism refers to
structural collaborative connectors which are used for inter-units knowledge and information
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Proceedings of 29th International Business Research Conference
24 - 25 November 2014, Novotel Hotel Sydney Central, Sydney, Australia, ISBN: 978-1-922069-64-1
cooperation (Griffin and Hauser, 1991). According to Zahra and Nielsen (2002), knowledge
integration mechanism functions as a lubricant in the RKT process, because it guides managers
to ways to initially recognize the importance of learning, efficiently understand the attributes of
knowledge, and adequate usage, eventually resulting in the enhancement of MNC
competitiveness (De Luca and Atuahene-Gima, 2009).
Such knowledge integration mechanism is divided into two different types: formalized integration
and socialization (Gupta and Govindarajan, 2000). Formalized integration mechanism consists of
formal organizational functions such as task force team and special committee adjusting relevant
departments‟ business activities (Nadler and Tushman, 1988). These organizational functions
often perform as a catalyst for RKT as (both MNC and subsidiary) employees actively exchange
necessary information within the formal channel. On the other hand, socialization mechanism is a
systematic instrument, which enlarges intimacy and trust among individuals and encourages
interactions among subsidiaries within MNC networks (Gupta and Govindarajan, 2000). Thus it
contributes to build the linkages between MNCs and subsidiaries, motivates sharing of invaluable
market knowledge and logically facilitates RKT from subsidiaries to headquarters (Bartlett and
Ghoshal, 1989).
Meanwhile, Gupta and Govindarajan (2000) point out that the more diverse the paths of
knowledge flow, the more knowledge integration mechanisms are activated and thus knowledge
exchange between MNCs and subsidiaries can be successfully done. Birkinshaw, Nobel and
Ridderstrale (2002) argue that in the case where the tacit level of technical knowledge is high, it
will strengthen the use of the knowledge integration mechanism. Almeida, Dokko and Rosenkopf
(2003) particularly emphasize that various official and unofficial integration mechanisms are
necessary for MNCs to acquire new information. To sum up, the more the overseas subsidiary
actively absorbs local-market-suit knowledge, the higher the possibility of increasing the usage of
the knowledge integration mechanism in MNC networks (De Luca and Atuahene-Gima, 2009).
Accordingly:
Hypothesis 1: Market knowledge absorption of subsidiaries will positively influence the formalized
integration mechanism of MNCs.
Hypothesis 2: Market knowledge absorption of subsidiaries will positively influence the
socialization mechanism of MNCs.
The relationship between absorption of subsidiary market knowledge and its applications by
MNCs (i.e., parent firms)
Some subsidiaries are better able to enhance the value of their own knowledge by absorbing new
local information and blending it with existing knowledge and then using it for business operations
in local markets. These subsidiaries often achieve superior performance and competitiveness
compared to other subsidiaries within MNCs. In that case, MNCs have a propensity to support
such subsidiaries in order to seek an opportunity to learn invaluable local market knowledge
through RKT (Rugman and Verbeke, 2001). In the same vein, Davenport and Prusak (1998)
emphasize that once MNCs view certain subsidiaries as attractive cooperation partners
possessing competitive information, the former usually vigorously attempts to learn and acquire
the subsidiary knowledge. Gupta and Govindarajan (2000) argue that in this circumstance RKT to
MNCs is actively undertaken and MNCs tend to apply the reverse transferred knowledge to
commercial ends. In addition, it becomes particularly vivid when the knowledge owned by
subsidiaries is unique and non-duplicable skills, such as specific market information (Bjorkman,
Barner-Rasmussen and Li, 2004). In this regard:
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Proceedings of 29th International Business Research Conference
24 - 25 November 2014, Novotel Hotel Sydney Central, Sydney, Australia, ISBN: 978-1-922069-64-1
Hypothesis 3: Market knowledge absorption of subsidiaries will positively influence its knowledge
application by MNCs.
The relationship between knowledge integration mechanisms and application of local market
knowledge by MNCs
It may be generally accepted as common wisdom that knowledge integration mechanisms need
to be accurately exercised by MNCs in order to appropriately share external knowledge within
MNC networks. This is because the use of knowledge integration mechanisms decreases the
uncertainties on the breadth and the diffusion of knowledge distribution (Schreiner, Kale and
Corsten, 2009). Similar commentaries can be easily found from previous studies. For instance,
Bresman, Birkinshaw and Novel (1999) point out that richer knowledge integration mechanism
are a precondition for knowledge use and application to take place in the perspective of
knowledge acquirers. Meanwhile, Gupta and Govindarajan (2000) divided knowledge integration
mechanisms between MNCs and subsidiaries into both formalized integration and socialization
mechanisms and present them as antecedent variables in knowledge flow relationship.
According to Szulanski (1996), the existence of formalized integration and socialization
mechanisms facilitate knowledge development by creating trust and mutual exchange of
knowledge. This is mainly because interactions of knowledge integration mechanisms within an
MNC network enhances „depth‟, „breadth‟, and effectiveness of reciprocal knowledge use (Singh,
2005; Tsai, 2001), as well as increases knowledge accessibility and application of MNC units
(Feinberg and Gupta, 2004). In addition, Ambos and Ambos (2009) conclude the discussion by
confirming the positive effect of both formalized integration and socialization mechanisms on RKT
and knowledge application by MNCs. Thus:
Hypothesis 4: Formalized integration mechanism of MNCs will positively influence the application
of local market knowledge by MNCs.
Hypothesis 5: Socialization mechanism of MNCs will positively influence the application of local
market knowledge by MNCs.
The relationship between knowledge relevance between MNCs and subsidiaries and application
of local market knowledge by MNCs
Similar knowledge background is perhaps one of the most important elements for learning to
occur in that when new knowledge has similar characteristics with information residing in an
existing knowledge reservoir, learning organizations may not need to exercise experimental ways
to absorb it and thus knowledge relevance logically plays a pivotal role in acquiring new skills
(Park and Ghauri, 2011). In other words, as Powell, Koput and Smith-Doerr (1996: 120) indicate,
“Knowledge facilitates the use of other knowledge. What can be learned is crucially affected by
what is already known”. Previous studies investigating knowledge acquisition have long
recognized the importance of „knowledge relatedness‟ as a key concept in organizational learning
(Inkpen, 2000). Thus, researchers often highlight that the extent of RKT is enlarged in the case
where both MNCs and subsidiaries share similar cognitive structure. Similarly to this contention,
Park (2010) also indicates that among various components that may affect congruence
knowledge base between two transferring and acquiring firms, knowledge relevance is a
particularly significant element. In addition, Abecassis-Moedas and Mahmoud-Jouini (2008)
propose that in many cases, local market knowledge which is learnt on the basis of local
economy is useful for MNCs because the information through RKT may significantly contribute to
new product development and headquarters‟ knowledge trajectory, which implies that the parent
firms will seek to apply the new knowledge to commercial ends. Thus;
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Proceedings of 29th International Business Research Conference
24 - 25 November 2014, Novotel Hotel Sydney Central, Sydney, Australia, ISBN: 978-1-922069-64-1
Hypothesis 6: Knowledge relevance between MNCs and subsidiaries will positively influence the
application of local market knowledge by MNCs.
Hypothesis 7: The higher the knowledge relevance between MNCs and subsidiaries, the higher
the impact of subsidiaries’ knowledge absorption on the application of local market knowledge by
MNCs.
The relationship between absorptive capacity of MNCs and application of local market knowledge
by MNCs
As the most significant determinant of organizational learning, absorptive capacity has attracted
huge attention from the research community. Due to its importance, many researchers have
attempted to define it. For instance, Zahra and George (2002: 186) define it as a set of
organizational routines and processes by which firms acquire, assimilate, transform and exploit
knowledge to produce a dynamic organizational capability. However, the most widely cited is
perhaps the definition given by Cohen and Levinthal (1990) who initially coined the concept: “the
ability to recognize the value of new external information, assimilate it and apply it to commercial
ends” (p.128). That is, if we apply absorptive capacity to RKT, it refers to the ability of MNCs to
recognize the value of new local market knowledge and may involve a sense-making process
whereby parent firms connect the new information to existing skills and an application activity to
create new knowledge from it (Lane et al., 2001). Thus, the greater the absorptive capacity of the
MNCs, the more knowledge it can acquire from subsidiaries. According to Lane et al. (2001)
absorptive capacity is a moderating variable between the knowledge acquirer‟s learning activity
and local market adaptability. They argue that a firm that has a good absorptive capacity can
improve their performance by using knowledge transferred from outside, after combining it with its
existing knowledge and transforming it to explicit information. These discussions lead to the
following hypotheses:
Hypothesis 8: Absorptive capacity of MNCs will positively influence the application of local market
knowledge by MNCs.
Hypothesis 9: The better the absorptive capacity of MNCs, the stronger the influence of
subsidiaries' market knowledge absorption on the application of local market knowledge by
MNCs.
4. Methodology
4.1 Sample Design and Research Method
Viewing the MNC from the parent company and subsidiary perspective, our study identifies key
determinants affecting the absorption, sharing, transmittance and the use of local market
knowledge in RKT. To this end, this study used the dyad of foreign subsidiaries and their
headquarters (i.e., MNCs) as the unit of analysis. The list of all foreign subsidiaries was obtained
from the database of the Ministry of Knowledge Economy. This database is an official and reliable
source of information on inward FDI in Korea, which covers all foreign investment activities
undertaken in the market. Among these foreign subsidiaries we excluded the following samples.
First, foreign subsidiaries which have been in business for less than two years are excluded,
since it is logically difficult for foreign subsidiaries to efficiently absorb new local market
knowledge in cases where they are not accustomed to a local environment due to relatively short
operating experience. Second, small foreign subsidiaries with less than 50 employees are
excluded, as most of them are perhaps personal or family businesses, which may not be actively
involved in RKT to headquarters. Moreover, foreign subsidiaries with headquarters possessing
minority ownerships are also excluded because those subsidiaries may not reflect the
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Proceedings of 29th International Business Research Conference
24 - 25 November 2014, Novotel Hotel Sydney Central, Sydney, Australia, ISBN: 978-1-922069-64-1
phenomenon (i.e., knowledge flow) in the perspective of MNCs and thus they may not transfer
local market knowledge to the parent firms. Through this process, 804 foreign subsidiaries were
finally selected as the sample.
Prior to the main survey, a pilot test was done and the preliminary questionnaire was sent to 10
executives in foreign subsidiaries and their headquarters. In our study, the sample for the pilot
test was randomly chosen from the firms which have been in business for less than two years, as
those companies would not overlap with those in the actual study sample. From this process it
was found that respondents had difficulty in answering several items on the questionnaire,
particularly when it came to understanding the concepts of market knowledge absorption and
market knowledge application. Accordingly, a final draft of the questionnaire was revised to make
it easier for respondents to understand. The researchers made calls to the selected sample firms
to check for appropriate informants (mostly CEOs and executives), ask for cooperation through
direct personal contact, ask the firms whether it would be possible to obtain the cooperation of
headquarters and also identify possible participants at their parent firms (most potential
respondents suggested general managers and directors), and explain the objectives of the
research. From March to August 2012, the questionnaire was conducted of the foreign
subsidiaries by visiting in person, sending e-mails and fax, and mail; and to their parent
companies by e-mail and fax, and mail. A total of 262 responses (i.e., 148 foreign subsidiaries,
114 parent companies) were returned. Among them, 9 were unusable, and thus 253 responses
(i.e., 145 foreign subsidiaries, 108 parent companies) were used in our analysis, representing a
response rate of 32.6%.
We tested the responses for non-response bias by using key parameters (detailed industry
classification, origin of MNCs, as well as early versus late respondents). However, we found no
significant differences in responses between the non-responding subsidiaries and parent
companies with regards to two key parameters, or between the early respondents and the late
respondents as well. Based on the results, we conclude that non-response bias was minimal.
Comprehensive characteristics of the sample are shown in the following <Table 1>.
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Proceedings of 29th International Business Research Conference
24 - 25 November 2014, Novotel Hotel Sydney Central, Sydney, Australia, ISBN: 978-1-922069-64-1
<Table 1> Characteristics of Sample
Item
Scale
The number
of
respondents
Responses
Parent Company
Subsidiary
108
145
42.7 Ownership in
52.3 Subsidiaries
Nationality of
our sample
Japan
USA
China
Europe
Others
25
90
23
94
21
9.9
35.6
9.1
37.1
8.3
Customers of
our sample
B2B
B2C
170
83
%
67.2
32.8
Item
Scale
51% share or
above
100% share
Japan
USA
Nationality of
China
CEO of
Europe
Subsidiary
Korea
Others
Below 30 hundred
million
30~100 hundred
Annual
million
Average
100~200 hundred
Sales of
million
Subsidiary 200~500 hundred
million
Over 500 hundred
million
%
91
54
62.7
37.3
10
20
13
29
64
9
6.8
13.7
8.9
20.0
44.1
6.5
11
7.5
40
27.5
39
26.8
41
28.2
14
10.0
Machinery
Electricity
Electron
Semiconductor
Business
Shipbuilding
Characteristics
Aviation
of our sample
Mold
Home Appliance
Vehicle
Clothing
Others
17
60
24
12
20
14
12
16
24
7
47
6.7
23.7
9.5
4.7
7.9
5.5
4.7
6.3
9.5
2.9
18.6
Age of
Subsidiary
2~3 year
3~5 year
5~7 Year
Over 7 year
33
36
35
41
22.7
24.8
24.1
28.4
50~100 people
Size of Parent 100~200 people
Company
200~500 people
Over 500 people
33
25
31
19
30.5
23.1
28.7
17.7
Size of
Subsidiaries
50~100 people
100~200 people
200~500 people
Over 500 people
45
34
42
24
31.0
23.4
28.9
16.7
1.4 Variable Measurements
Market knowledge absorption by subsidiaries was measured by a seven-item scale based on
Likert-type responses (adapted from Simonin, 1999; Yi-Renko et al., 2001; De Luca and
Atuahene-Gima, 2007). In contrast, the knowledge integration mechanism (i.e., formalized
integration and socialization mechanisms) was assessed by a four-item scale based on
Likert-type responses (modified from Gupta and Govindarajan, 2000; Bjorkman et al., 2004;
Noorderhaven and Harzing, 2009). Knowledge relevance between MNCs and subsidiaries was
calculated by a six-item scale based on Likert-type responses (adapted from Yang et al., 2008;
Lee, Chen and Lu, 2009). Absorptive capacity of MNCs was measured by a five-item scale based
on Likert-type responses (modified from Cohen and Levinthal, 1990; Lane et al., 2001). Finally,
market knowledge application by MNCs (i.e., RKT) was assessed by a six-item scale based on
Likert-type responses (revised from Ambos et al., 2006; Rabbiosi, 2011). All responses were: 1 =
very little up to 7 = to a great extent, and the detailed descriptions on the measurement items are
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Proceedings of 29th International Business Research Conference
24 - 25 November 2014, Novotel Hotel Sydney Central, Sydney, Australia, ISBN: 978-1-922069-64-1
explained in <Table 2>.
<Table 2> Exploratory Factor Analysis
Measurement
Factor
MKA1
MKA2
Market
Knowledge
Absorption by
Subsidiaries
MKA3
MKA5
MKA6
MKA7
Formalization
Integration
Mechanism
FIM1
FIM2
FIM3
FIM4
SM1
Measurement Items
The extent of knowledge absorption on
customer information
The extent of knowledge absorption on
information for local competitors
The extent of knowledge absorption on
market environment
The extent of knowledge absorption on
local marketing tools
The extent of knowledge absorption on
local marketing skills
The extent of knowledge absorption on
local government regulation
Interactions through regular meeting
Interactions through regular report
Interactions through the operation of
taskforce
Interactions through the operation of
project team
Provision of training program
SM2 Participation of expatriates in daily routine
Socialization
Mechanism
Knowledge
Relevance
between MNCs
and Subsidiaries
Absorptive
Capacity of
MNCs
SM3
SM4
0.824
0.903
0.814
0.855
0.793
0.807
0.810
KR5
Similarity for distribution channel
0.828
AC1
Understanding extent for new knowledge
0.840
AC2
The possession of prior knowledge on
information system facilitating the sharing
of knowledge within organizations
0.803
RKT4
0.821
2.164
(9.42)
0.851
2.350
(10.83)
0.836
2.145
(9.21)
0.829
0.806
0.873
0.785
0.768
0.772
RKT3
2.388
(10.75)
0.851
Similarity for product
Similarity for markets
Similarity for customers
Similarity for competitors
RKT2
0.807
0.793
KR1
KR2
KR3
KR4
RKT1
2.140
(9.15)
0.843
0.806
0.802
AC4
AC5
0.876
0.829
Frequent communications between MNC
and subsidiary top managements
The possession of prior knowledge on
local market information
The extent of marketing skill retention
Investments in on-board training
The extent of knowledge application on
customers
The extent of knowledge application on
competitors
The extent of knowledge application on
market know-how
The extent of knowledge application on
distribution know-how
2.394
(11.32)
0.810
SM5
AC3
Market
Knowledge
Application by
MNCs
Frequent face-to-face communications
between employees
Frequent Invitation of experts
Factor Eigenvalue Cronbach's
Loading
(%)
α
0.812
0.928
0.787
0.812
0.819
0.810
0.840
RKT5 The extent of knowledge on sales network 0.870
RKT6
The extent of knowledge on brand
management
0.822
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Proceedings of 29th International Business Research Conference
24 - 25 November 2014, Novotel Hotel Sydney Central, Sydney, Australia, ISBN: 978-1-922069-64-1
5. Results
5.1 Reliability and Validity Analysis
Exploratory factor analysis
To check unidimensionality of operationalized measures, we ran an exploratory factor analysis,
as seen in <Table 2>. Each item designed in the main survey was grouped as we intended, and
when we applied eigenvalue greater than one, a total of six dimensional factors were deducted.
Additionally, to verify internal consistency, we also calculated Cronbach's alpha coefficient, and
confirmed that most of them demonstrated over 0.6 coefficients. However, each one of the
measurement items of market knowledge absorption by subsidiaries (MKA4) and knowledge
relevance between MNCs and subsidiaries (KR6) showed relatively low factor loading that affects
the reliability of variables and, thus, they were deleted(See <Table 2>).
Confirmatory factor analysis
After we ran an exploratory factor analysis and reliability verification of the sample data, we
statistically re-examined based on discriminant validity and convergent validity and conducted a
confirmatory factor analysis to examine whether there were contradictions between hypotheses
developed from the basis of previous studies and our data (Anderson and Gerbing, 1998). There
was no item deleted, because the level of significance of the measured variables‟ factor score
appeared under 0.001 (See <Table 3>).
<Table 3> Confirmatory Factor Analysis
Standardized
Construct Factor
estimate
MKA1
0.824
MKA2
0.903
Market
0.814
Knowledge MKA3
Absorption by MKA5
0.855
Subsidiaries MKA6
0.810
MKA7
0.829
FIM1
0.843
Formalized
FIM2
0.806
integration
FIM3
0.793
Mechanism
FIM4
0.793
SM1
0.851
SM2
0.806
Socialization
SM3
0.807
Mechanism
SM4
0.810
SM5
0.782
KR1
0.891
Knowledge
KR2
0.785
Relevance
0.799
between MNCs KR3
and
KR4
0.846
Subsidiaries
KR5
0.803
AC1
0.840
Absorptive
AC2
0.803
Capacity of
AC3
0.812
MNCs
AC4
0.928
t value
p value
10.243
11.828
10.053
10.745
10.004
10.481
10.410
10.253
9.743
9.743
10.989
10.585
10.680
10.778
10.184
10.754
10.681
10.699
10.737
10.708
12.683
12.033
12.214
13.296
***
0.000
***
0.000
***
0.000
***
0.000
***
0.000
***
0.000
***
0.000
***
0.000
***
0.000
***
0.000
***
0.000
***
0.000
***
0.000
***
0.000
***
0.000
***
0.000
***
0.000
***
0.000
***
0.000
***
0.000
***
0.000
***
0.000
***
0.000
***
0.000
Cronbach's
α
r
2
r
AVE
0.876
0.477 0.227 0.702
0.807
0.394 0.155 0.537
0.821
0.521 0.271 0.608
0.851
0.439 0.193 0.621
0.836
0.447 0.199 0.611
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AC5
RKT1
RKT2
Market
Knowledge RKT3
Application by RKT4
MNCs
RKT5
RKT6
2
0.787
0.812
0.819
0.810
0.840
0.870
0.822
10.536
11.404
11.522
11.329
11.861
12.163
11.712
***
0.000
***
0.000
***
0.000
***
0.000
***
0.000
***
0.000
***
0.000
0.829
0.543 0.295 0.736
χ (df)
GFI
AGFI
RMR
NFI
RMSEA
p>0.05
≧0.90
≧0.80
≦0.08
≧0.90
≦0.08
239.427(51),
p=0.000
0.916
0.876
0.034
0.947
0.058
In order for us to check adequacy to deduct each scales‟ optimal composition of items, it is
necessary to look into χ2, GFI, AGFI, RMR, CFI, and RMSEA. We found that the value of χ2 does
not meet the standard, but most of the other model fit indexes demonstrate satisfactory model fit;
0.916, 0.876, 0.034, 0.947, and 0.058, respectively. To verify internal consistency of each
construct, we used Cronbach‟s alpha coefficient and every factor used for measurement showed
over 0.7, which is the standard of internal consistency (Nunnally and Berstein, 1994). Also, we
tested CR (convergent validity) and AVE (average variance extracted). The result was that
constructs exceeded the standard value (CR>0.5, AVE>0.7) and every measured item was
confirmed to have convergent validity (Hair, Anderson, Tahtam and Black, 2005). When the value
of average variance extracted for each factor is bigger than square value of two factors‟
coefficient, it is right to say there is discriminant validity. As we can see from <Table 3>, every
factor‟s average variance extracted values exceeded square value of correlation coefficient,
which confirms the discriminant validity of our data.
5.2 Hypothesis Test
The result of the model fit is illustrated as the following: χ2=232.857 (d/f=51, p=0.000), GFI=0.917,
AGFI=0.886, CFI=0.931, RMR=0.048, RMSEA=0.067. χ2 is slightly below the standard but it is
still possible to analyze the model (Hair et al., 2005). The structural equation model was based on
the path coefficient from „market knowledge absorption by subsidiaries‟, „formalized integration
and socialization mechanisms‟, „knowledge relevance between MNCs and subsidiaries‟,
„absorptive capacity of MNCs‟ and „market knowledge application by MNCs‟ (See <Table 4>).
<Table 4> Hypothesis Test Results
Hypothesis
Path
coefficient
Standardized
Path
coefficient
t value
p value
Result
Market Knowledge Absorption
by Subsidiaries-Formalized
integration Mechanism
0.364
0.396
6.823
0.000
Accept
Market Knowledge Absorption
H2 by Subsidiaries- Socialization
Mechanism
0.457
0.413
7.180
0.000
Accept
Market Knowledge Absorption
by Subsidiaries–Market
H3
Knowledge Application by
MNCs
0.209
0.231
2.473
0.032
Accept
H1
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Proceedings of 29th International Business Research Conference
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Formalized integration
H4 Mechanism–Market Knowledge
Application by MNCs
Socialization MechanismH5 Market Knowledge Application
by MNCs
Knowledge Relevance between
MNCs and Subsidiaries
H6
–Market Knowledge Application
by MNCs
Absorptive Capacity of MNCs –
H8 Market Knowledge Application
by MNCs
0.102
0.115
1.679
0.140
Reject
0.407
0.438
7.381
0.000
Accept
0.328
0.439
7.736
0.000
Accept
0.394
0.371
6.169
0.000
Accept
Hypothesis 7 and 9 are associated with moderating effect of the knowledge relevance between
MNCs and subsidiaries and absorptive capacity of MNCs with respect to the relationship between
„market knowledge absorption by subsidiaries‟ and „market knowledge application by MNCs‟. To
observe a moderating effect in a structural equation, it can be examined through a comparison of
χ2 values of the free model and the limited one. The free model is to differently assign the
coefficient sizes of the „relationship of the knowledge relevance between MNCs and subsidiaries‟
and „absorptive capacity of MNCs‟. In contrast, the limited model is to create those coefficient
sizes as the same figure. At this point, if the χ2 value in free model is bigger than that of limited
one, it can be concluded that moderating effect exists (Hair et al., 2005). First, the following is the
result on the moderating effect of knowledge relevance between MNCs and subsidiaries: In
accordance with free model, χ2 value=126.518, d.f=54, path coefficient=0.267, t=4.176, p=0.000.
In terms of limited model, χ2 value=128.729, d.f=56, path coefficient=0.235, t=3.972, p=0.000.
The following is the results on the moderating effect of MNCs‟ absorptive capacity: With respect
to free model, χ2 value =126.327, d.f=54, path coefficient=0.291, t=3.544, p=0.000. In terms of
limited model, χ2 value =128.518, d.f=56, path coefficient=0.274, t=3.162, p=0.000.
<Table 5> demonstrates the overall results. The result shows, the „knowledge relevance between
MNCs and subsidiaries and absorptive capacity of MNCs are to strengthen the positive
relationship between „market knowledge absorption of subsidiaries‟ and „application of local
market knowledge by MNCs.‟ The results are summarized in <Table 5>.
<Table 5> Moderating Effect of Knowledge Relevance and Absorptive Capacity
Free Model
Limited Model
2
126.518
54
0.267
4.176
128.729
56
0.235
3.972
2
126.327
54
0.291
3.544
128.518
56
0.274
3.162
H7
Moderating
Effect of
Knowledge
Relevance
χ
d.f
path coefficient
t value
H9
Moderating
Effect Of
Absorptive
Capacity
χ
d.f
path coefficient
t value
6. Findings and Implications
First, hypothesis 1 and 2 are associated with the relationship between „market knowledge
absorption of subsidiaries‟ and „formalized integration and socialization mechanisms‟. We find
that local market knowledge absorbed by subsidiaries significantly influences both formalized
integration and socialization mechanisms. This result is meaningful in that we confirm market
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Proceedings of 29th International Business Research Conference
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knowledge absorption of subsidiaries is somehow related to the knowledge integration
mechanism as its precedent factor. In other words, local market knowledge absorbed by
subsidiaries often considered as an element that merely has the potential to become a
competitive advantage for parent firms, and it itself is not usually viewed as a valuable resource
for the latter to use immediately (e.g., Andersson, Forsgren and Holm, 2002). Unlikely
conventional wisdom, our result indicates that local market knowledge absorbed by subsidiaries
can function as a vehicle to enhance the competitiveness of parent firms, and thus MNCs attempt
to balance the „transference of foreign knowledge and technology to subsidiaries‟ and „acquisition
of local market information from their overseas miniatures‟ through knowledge integration and
socialization mechanisms.
Hypothesis 3 is a discussion on the relationship between „market knowledge absorption of
subsidiaries‟ and „market knowledge application by MNCs‟. Our result reveals that market
knowledge absorption of subsidiaries is verified as a factor to be influential to market knowledge
application by MNCs. It means that active knowledge absorption of subsidiaries increases the
chance for parent firms to apply it to commercial ends and eventually improves organizational
performance. We also find that that there is a virtuous circle structure between the two elements.
This finding is parallel with Krogh, Ichijo and Nonaka (2000). They argue that knowledge
management is an instrumental tool for innovation in any organization as a means of change
management. Therefore, MNCs should upgrade the level of market knowledge absorption of
subsidiaries for their sustainable development, so that MNCs will also be able to practically use
the knowledge by incorporating it into their knowledge reservoir. Thus, parent firms need to grant
authority to overseas subsidiaries to absorb new local information in their own way to help them
to fulfill their role as a knowledge messenger within MNC networks.
Hypothesis 4 and 5 are related to the relationship between „formalized integration and
socialization mechanisms‟ and „market knowledge application by MNCs‟. The result shows that
the formalized integration mechanism does not have an impact on market knowledge application
by parent firms. However, socialization mechanism is proven to be influential. This implies that
the application of market knowledge absorbed by subsidiaries can be increased through a
non-formalized socialization mechanism. This outcome is counter to the explanations suggested
by the previous studies shedding light on the role of formalized integration mechanism (e.g.,
Bartlett and Ghoshal, 1989). However, we can understand the result if we change our way of
thinking. That is, the relationship between MNCs and subsidiaries is highly hierarchical. In this
situation, coercive formalized mechanisms exercised by MNCs may induce subsidiaries‟
antagonisms and subsequently generated detrimental effect on knowledge flow with subsidiaries,
whereas socialization mechanisms represented by collaborative parent support may yield better
result on knowledge exchange by building trust between them (Park and Ghauri, 2011). Thus, we
infer that MNCs are required to invest more on operating socialization mechanisms rather than
formalized integration mechanisms.
Hypothesis 6 is about the relationship between „knowledge relevance between MNCs and
subsidiaries‟ and „market knowledge application by MNCs‟. The result shows their close
association, and it corresponds with the findings by previous studies, which argue that when
there is a high relevance between transferred information and the existing knowledge of learning
organizations, the potential of new knowledge can be quickly noticed, thereby using the
knowledge efficiently (Mudambi and Navarra, 2004). Therefore, when deciding whether to use
local market knowledge transferred from subsidiaries for commercial purposes, MNCs should
widen the range of its understanding toward the information, and for this, the knowledge
relevance between inflowing and existing knowledge plays an important role.
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Proceedings of 29th International Business Research Conference
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Hypothesis 7 is to examine the role of „knowledge relevance between MNCs and subsidiaries‟
and „the impact of knowledge absorption by subsidiaries on knowledge application by MNCs‟.
Our result reveals that the higher the knowledge relevance between knowledge acquiring and
transferring organizations, the stronger the influence of market knowledge absorption of
subsidiaries on market knowledge application by MNCs. Such a result is parallel with comments
from current empirics indicating that knowledge relevance can moderate the relationship between
knowledge providers and recipients (Abecassis-Moedas and Mahmoud-Jouini, 2008). The
implication derived from the result is that knowledge relevance, knowledge absorption and
knowledge application has sequential effects.
Hypothesis 8 is to test the relationship between „absorptive capacity of MNCs‟ and „their market
knowledge application‟. Hypothesis 9 is to examine the role of „absorptive capacity of MNCs‟ and
„the impact of knowledge absorption by subsidiaries on knowledge application by MNCs‟. Our
results demonstrate support for the hypotheses by showing their close association. Such results
are also in accordance with the findings by previous studies shedding light on the importance of
absorptive capacity to apply new information into commercial ends (Gupta and Govindarajan,
2000). In other words, absorptive capacity and performance enhancement are not separate
issues and thus MNCs should seek to escalate their learning capabilities, so that they will
eventually be able to improve organizational competitiveness.
7. Summary and Conclusions
The study aims to identify key determinants affecting the absorption, sharing, transmittance and
use of local market knowledge in the Korean context. In the process, the knowledge-based view
of MNCs was used to achieve these objectives. Our results show that the market knowledge
absorption by subsidiaries is a critical component to influence the knowledge integration
mechanisms of MNCs (i.e. formalized integration mechanism and socialization mechanism) and
the application of market knowledge by MNCs. Furthermore, socialization mechanisms,
knowledge relevance between MNCs and subsidiaries, and the absorptive capacity of MNCs are
keys for MNCs in applying local market knowledge transferred from subsidiaries. In addition, the
knowledge relevance between MNCs and subsidiaries and the absorptive capacity of MNCs
moderate the positive relationship between market knowledge absorption by subsidiaries and
market knowledge application by MNCs. This research additionally includes the comparison
between direct impact of market knowledge absorption by subsidiaries on the market knowledge
application by MNCs and the indirect impact through knowledge integration mechanisms of
MNCs. We discover that in the context of RKT, local market knowledge absorbed by subsidiaries
is not likely to be directly utilized by MNCs and suggest that knowledge sharing through
integration mechanisms is critical for MNCs and subsidiaries to exchange their knowledge
reservoirs and eventually for learning to occur between them.
This research has sought to make a contribution to the understanding of the unclear relationship
of market knowledge absorption by subsidiaries on market knowledge application by MNCs in the
context of RKT. In particular, the primary contribution to strategic management literature was to
identify and examine the implications of the effects of market knowledge absorption by
subsidiaries and knowledge integration mechanism of MNCs as an important feature of market
knowledge application by MNCs. While both market knowledge absorption by subsidiaries and
knowledge integration mechanisms of MNCs in RKT have been acknowledged before, they have
typically been treated as independent dimensions. This has led to conflicting results of the impact
of market knowledge absorption by subsidiaries and knowledge integration mechanisms of
MNCs on market knowledge application by MNCs. In this research, we have argued and
empirically substantiated that to resolve the ambiguity in the literature regarding the effect of
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Proceedings of 29th International Business Research Conference
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market knowledge absorption by subsidiaries on market knowledge application by MNCs, it is
crucial to consider which knowledge integration mechanisms to emphasize.
In addition, this study extends and advances understanding of knowledge-based view of MNCs.
According to this view, knowledge management is a main success factor for MNCs that need to
compete against local firms in alien environments, and thus the subsequent process of
knowledge management is also important. Although scholars in knowledge management may
have different opinions, most of them (e.g., Rugman and Verbeke, 2001) perceive that its process
is consisted of knowledge absorption, sharing and application. That is, as at the initial stage,
learning organizations absorb knowledge through mechanisms which help them to understand
and assimilate new information, and it is referred to as knowledge absorption (Krogh et al., 2000).
In contrast, knowledge sharing facilitates the distribution of the new information within the
organizations (Alavi and Leidner, 2001), and knowledge application is a completion of learning by
commercially using the acquired new information (Gold, Malhotra and Segars, 2001). Based on
these explanations, this study attempts to confirm that RKT is also a part of the knowledge
management process and various factors in the process of mutual interaction. In the context of
RKT, subsidiaries aim to absorb useful knowledge through its knowledge mechanisms from local
market. During the process, experience and knowledge are shared not only between MNCs and
subsidiaries but also between overseas subsidiaries through knowledge integration mechanisms.
Then, the knowledge shared through knowledge integration mechanisms can be eventually
applied for MNCs to enhance their performance and elevate organizational competitiveness. Our
results suggest that RKT is significantly influenced by knowledge management process of MNCs
and extends the knowledge-based view by empirically illuminate the relationship among factors in
the RKT process and identify key components in each process.
Although this study significantly contributes to current knowledge on RKT and provides invaluable
implications to MNCs, we acknowledge that there are some limitations. First, our research
context is geographically restricted, and thus it is hard to say if our findings are fully generalizable.
Thus, we would like to suggest that future studies use our research framework and test it in other
contexts, such as the BRICs. Second, although there are different types and facets of knowledge,
we tackle only one, which is local market knowledge. In this vein, we propose that examination of
other knowledge forms can be another avenue for future research. Third, since we asked
respondents to measure variables we confess to the possible presence of common method bias.
In order to avoid such a problem we agree that it is better to incorporate objective data and
information into future analysis.
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