Research on the Reverse Knowledge Transfer Mechanism through the
Overseas M&A of China’s Companies
----based on the BSC Ideology
Yuan Wang1, Xiao Zhao2
1
School of Management and Economy, Tianjin University, Tianjin, China
2
School of Management and Economy, Tianjin University, Tianjin, China
(yuanw@vip.sina.com)
Abstract - Increasingly, the geographically dispersed
subsidiaries begin to transfer knowledge to their
headquarters. Meanwhile, more and more China’s
companies go abroad and also face the problems of reverse
knowledge transfer (RKT). Therefore, this paper explores
the mechanism of RKT from the subsidiaries abroad to the
parent companies at home. Based on the balanced scorecard
(BSC), this paper presents the objects and variables in the
perspective of financial, customer, internal business and
innovation and learning in order to make the RKT process
more successfully.
Keywords - reverse knowledge transfer, overseas M&A,
BSC, PDCA cycle
I. INTRODUCTION
According to a survey, the number of M&A
activities all over the world was 22.9% higher in 2010
than in 2009. To date, the emerging economies have
completed one third of M&A events globally. M&A can
provide the parent companies with R&D technologies,
management experience and brand recognition quickly.
However, the success of these goals is not very easy
because the process of the knowledge transfer would be
affected by some factors such as the M&A bodies, culture
differences, organizational context and so on. At present,
the literature of knowledge transfer almost focus on the
key factors and model (mechanism) of knowledge transfer
from the parent companies to their subsidiaries, across the
strategic alliance or during the university-industry
collaboration. For example, Yanqing Duan, Wanyan Nie
and Elayne Coakes(2010) empirically explored and
verified ten key factors affecting knowledge transfer
success, including relationship, culture awareness,
language, motivation, knowledge distance, objectives and
focus, transfer channel, selection of appreciate partners,
trust and openness[1]. In addition, Pien Wang, Tony W.
Tong, Chun Peng Koh(2004) developed a two-stage
model describing knowledge transfer from MNCs to their
China subsidiaries[2].
However, the direction of knowledge transfer is
changing.
Increasingly,
geographically
dispersed
subsidiaries begin to function as neural networks, reverse
transferring knowledge to headquarters. We find that there
is little work that attempts to examine the reverse
knowledge transfer (RKT), especially the RKT through
the overseas M&A of China’s companies.
II.
LITERATURE REVIEW
Hakanson and Nobel (2001) focused their study on
the effect of local embeddedness and integration on
reverse technology transfer, and then concluded that both
of the factors increase the propensity of reverse
technology transfer [3]. Schlegelmilch and Chini(2003)
offered a dynamic view of the conceptual model of RKT
including strategic mandate of the subsidiary, value of
knowledge stock, cultural distance, knowledge transfer
capabilities and organizational distance[4]. After exploring
the impact of R&D projects on reverse knowledge
integration, Frost, T. S., Zhou, C.(2005) found the
positive association between them [5]. As for the variables
affecting the benefits from the RKT, Ambos, T. C.,
Ambos, B., & Sclegelmilch, B. B. (2006) examined the
competitive strength of the host country, subsidiary
strategic mandate and absorptive capacity of the
headquarters [6]. Piscitello and Rabbiosi (2006)
investigated how the impact of RKT on parent’s
innovativeness would be greater, and their significant
findings included that person-based mechanisms are
employed, subsidiaries are competence-creating and
knowledge creation benefits from local external linkages
[7]
. Persson (2006) reckoned that operational structure,
knowledge sharing incentives and subsidiary socialization,
liaison mechanisms and temporary teams have a positive
influence on outbound knowledge transfer [8]. Larissa
Rabbiosi(2011) found two distinctive configurations that
positively affect the extent of RKT [9].
In a word, the literature abroad usually shed light on
the factors, models, the impacts of RKT and so on. At
home, there are also some people paying attention to
these aspects. For example, He Jinsheng, Chen Guoxu
(2006) came up with five key factors through modeling
the RKT process, including the value of knowledge stock
of the subsidiaries, the transfer willingness and capacity
of the subsidiaries, the control mechanism and the
absorptive capacity of the headquarters [10]. In addition,
some domestic scholars also noted the RKT of the
China’s companies that took over foreign ones. Kong
Qunxi, Xuan Ye and Yuan Tiantian(2012) applied the SCP
theory to explain some key variables and their
relationship with the effect of RKT [11].
With more and more overseas M&A activities,
China’s companies need some researches about the RKT.
Therefore, this paper explores the mechanism of RKT
based on the BSC ideology.
III BALANCED SCORECARD (BSC)
The scorecard can be used to assess activity
performance of an organization based on four
perspectives, namely (i) financial; (ii) customer; (iii)
internal business; and (iv) innovation and learning
(Kaplan and Norton, 1992) [12]. Managers should know
more about the company’s needs and ensure the
alignment of the management processes and the long-term
strategies (Kaplan and Norton, 1992, 1996)[12][13].The
balanced scorecard put emphasis on the concept of
“balance”, including balancing the financial and nonfinancial aspects, process and outcome, the internal and
external business, and the long-term and short-term goals.
Kaplan and Norton (1996) summarized that the scorecard
is used for (i) clarifying and updating strategies; (ii)
communicating strategies throughout the company; (iii)
aligning unit and individual goals with strategies;
(iv)identifying and aligning strategic initiatives; and (v)
conducting periodic performance reviews to learn about
the upsides and downsides for improving strategies[13].
Based on the company’s strategies, the balanced
scorecard not only evaluates the financial outcomes in the
past but also pays close attention to the intangible assets
that can promote the company’s development and get the
potential to grow up. For the balanced scorecard’s
strategic guidance, this paper applies its ideology to steer
the company’s RKT and boost success of the process.
IV THE MECHANISM OF RKT THROUGH THE
OVERSEAS M&A OF CHINA’S COMPANIES BESED
ON BSC
The BSC system is a dynamic process that needs set
goals, take action, find problems and then solve them, so
PDCA cycle is the proper tool to explain the whole
procedure. PDCA cycle, which stands for P (plan), D (do),
C (check) and A (action), is an iterative management
method used in business for the control and continuous
improvement of processes and products. Its fundamental
principle is iteration----once a hypothesis is confirmed,
executing the cycle again will extend the knowledge
further. Repeating the PDCA cycle can bring us closer to
the goal, usually a perfect operation and output. Therefore,
PDCA should be repeatedly implemented in spirals of
increasing knowledge of the system that converge on the
ultimate objects, each cycle closer than the previous.
According to the analysis above, the PDCA cycle is
proper to be utilized for helping complete the RKT
process and all the variables should be guidance to make
the RKT more efficient and improve the process
constantly. The PDCA cycle is presented in Fig. 1, and the
four steps and their indexes in RKT are mapped out as
follows:
Fig. 1 The PDCA cycle used in RKT
A. Plan
The first thing we should pay attention to is make
the RKT strategy and select the indexes to measure the
implementation of the strategy. In accordance with the
BSC system, the whole strategy should include four
aspects: financial, customer, internal business and
innovation and learning.
The financial index can reflect the previous
performance intuitively, simultaneously, we can make
financial subjects and goals to adjust the company’s
strategy. At present, most companies abroad and at home
make efforts to maximize the shareholder value. From
this perspective, the first variable we choose is net profit
of the next years after the M&A. Secondly, owing to the
economy crisis in 2008 and the euro-area sovereign debt
crisis, some great companies abroad can’t make ends
meet, which is a good opportunity for China’s
corporations to get the advanced technology and
management experience. Under these conditions, the
parent companies should try their best to make the
subsidiaries turn loss into gain or achieve durable growth.
The sales revenue is the proper variable to measure this
object. Both of the two indexes reflect the subsidiary’s
growth strategy, however, another key subject which
should not be omitted is the asset integration strategy.
After signing the agreement of M&A, the most important
thing is integration. The assets in headquarters and
subsidiaries need to be integrated to maximum the use of
them, including real and intangible assets. Thus, the total
assets turnover cannot be more appropriate as the
measuring tool.
As for the company’s customers, our research
divides them into external customers and internal ones.
Most companies at home engaged in getting more
excellent external performance through the overseas
M&A, so that two main objects in this aspect are to
improve customer satisfaction degree and increase their
market share with a more famous brand. Obviously, the
indicators we would measure are the external customers’
satisfaction degree and the market share. Nowadays, the
internal customers in an organization are getting more and
more crucial, especially in cross-border organizations. It
is empirically proved that multinational corporations
(MNCs) with greater collaboration experience would
capture higher levels of collaborative know-how
compared to firms without it. Such know-how and
experience are firm-specific internal resources which may
improve an organization’s ability to transfer knowledge
and technology to another firm [14]. In view of this, to
enhance the teamwork skills should be involved in the
objectives, including the teamwork between individuals,
groups and so on. This object can be measured by the
effects of every teamwork activity. In addition, owing to
the contradiction psychology, the subsidiary which was
more competent than China’s headquarters and now is
taken over would not be willing to transfer their
technology and management experience, so this paper
examines it and takes it as an object to guide the
organization to improve the subsidiary’s satisfaction.
The third perspective we should pay attention to is
internal business, which is a crucial factor including the
strategy about the organizational structure, the cultural
differences and the coordination mechanism. Firstly, Luo
Xuan(2006) summarized that M&A is an evolving
process from adaption to collaboration for both subsidiary
and the parent company[15]. With the economy developing,
more and more MNCs turned into network structure
oriented by globalization because this kind of structure is
convenient for the expatriates and the collaboration
between individuals and groups. Therefore, the
determinant measuring this object should be a dummy
variable, that is to say, if the structure is good for RKT,
we can regard it as 1, and if not 0. Secondly, the merger
and acquisition across the country border would be
affected by the cultural distance inevitably. Armed with a
large database of cultural statistics, Hofstede analyzed the
results and found clear patterns of similarity and
difference amid the responses along four dimensions,
namely power distance, individualism, uncertainty
avoidance and masculinity. China’s companies should
engage in bridging the cultural gap with their subsidiaries
by figuring out the four dimensions above. Otherwise, the
cultural differences would be a barrier of the success of
RKT. In this aspect, the culture distance can be regarded
as the variable. Last but not least, the headquarters should
improve the collaboration mechanism in order to narrow
the relationship distance with their subsidiaries. A
harmonious relationship can overcome the practical
differences, bridge the communication differences and
enable all the people to openly discuss differences in
knowledge approaches [14]. If the companies take it as an
important object for the RKT, they will achieve the
competitive edge over their rivals. For this reason, this
paper chooses the difficulty of collaboration as the
measurable factor.
On the basis of BSC, the dimension of innovation
and learning should also be put emphasis on. After the
subsidiary was taken over, the most pressing thing is
building shared vision with the headquarters. The parent
company and the subsidiary are often separated by time,
space, culture, language and so on. Thus, their visions are
not necessarily the same, which may block the RKT
process. The common visions should base on existing
needs, requirements and problems of the two parties
involved. Another dummy variable should be used to
judge whether the visions between them are the same. In
addition, the capacity of the subsidiary’s knowledge
transfer and the absorptive capacity of the headquarters
should also be taken into consideration. To the company,
instead of owing the knowledge stock, the significant
thing is the dynamic ability to create, share and use
knowledge. All these are connected with the capacities
above. In view of this, we can regard the proportion of the
knowledge that be transferred and be absorbed as the
variable. Another object we should shed light on is the
knowledge transfer channels, such as networking events,
seminars, case studies, partnership building activities,
business support and exchange of personnel. It is proved
that when the RKT process is completed by the individual
connection, especially by the teamwork and managers, the
performance of RKT would be more excellent. When
people are well acquainted with each other, they set up
working arrangements more easily [14]. The parent
companies should focus on these kinds of transfer
channels and measure their performances to decide proper
channels for themselves.
B. Do
The next step faced with us is to disintegrate the
whole strategy and its measurable variables in order to
implement the strategy better. The way of disintegration is
dependent on the actual situations in the company. For
example, they can divide the variables by the dimensions
of region, internal business or causality.
C. Check
During the process of implementation, we should
monitor the performance of each object and figure out
which aspects are done well and which need instant
improvements. This function should be completed by a
special department, such as HR department or a branch
newly and specially built for the step.
D. Action
PDCA’s destination is to make this process more
excellent than the previous, so if we check out some
problems, all the relevant people should take action to
make progress and perfect the RKT process.
V. CONCLUSION
As the reverse knowledge transfer plays a critical
role in the overseas M&A, especially in China’s company
taking over foreign subsidiaries, this paper highlights the
mechanism of RKT based on the balanced scorecard
ideology. We emphasizes some objects and variables that
need to be noticed, such as the growth and asset
integration strategy, increasing the customers’ satisfaction
degree, improving the collaboration mechanism, and so
on. Table Ⅰ below identifies all the RKT objects and
variables based on BSC. According to the PDCA cycle,
this paper suggests that the RKT process should obey
with the principle and make constant improvements.
However, this paper is just a theoretical
demonstration, and the next step we should do is do an
empirical research, including data collection, the
credibility and validity test of the variables and
explorative factor analysis.
perspective
Financial
Customer
Table ⅠThe objects and variables of RKT
strategy
strategy
variables
subjects
objects
the growth
maximize the
net profit
strategy
shareholder
value;
turn loss to
gain or make
growth of the
new
subsidiary
the sales
revenue of the
new subsidiary
the asset
integration
strategy
integrate the
assets of the
parent
company and
its subsidiary
total assets
turnover
external customer
increase the
external
customers’
satisfaction
degree;
increase the
market share
external
customers’
satisfaction
degree
enhance the
teamwork
skills;
the effects of
the teamwork
increase the
subsidiary’s
satisfaction
degree
the subsidiary’s
satisfaction
degree
the organizational
structure
optimize the
organizational
structure
dummy variable
the cultural
differences
narrow the
cultural
distance
the cultural
distance
the collaboration
mechanism
improve the
collaboration
mechanism
build shared
vision
the difficulty of
collaboration
strengthen the
subsidiary’s
knowledge
transfer
ability and the
parent
company’s
absorptive
ability
the proportion
of the
knowledge that
be transferred
and be absorbed
internal customer
Internal
business
Innovation
and learning
shared vision
the capacity of
knowledge
transfer both
parties involved
the market share
dummy variable
the knowledge
transfer channels
choose
efficient
knowledge
transfer
channels
the performance
of all kinds of
channels
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