European University Viadrina
Frankfurt (Oder), Germany
Department of International Economic Relations

International Transfer of Knowledge in Multinational Enterprises.
The Role of International Human Resource Management in Transferring Tacit Knowledge Across Borders.

Final Thesis

by

Agnieszka Osiecka

May 26th, 2001

Contents

1. Introduction ... 3

2. The Specific Nature of an MNE ... 5
2.1. Defining an MNE ... 5
2.2. Theories Explaining the Existence of MNEs ... 7
2.2.1. Internalization Theory ... 8
2.2.2. Monopolistic Advantage Theory ... 10
2.2.3. Product Life Cycle Theory ... 12
2.2.4. Dunning′s Eclectic Theory ... 14
2.3. Highlights on the Internationalization Process ... 15
2.4. Perlmutter′s Classification of MNEs ... 20

3. Theory of the International Knowledge Transfer within MNEs ... 23
3.1. Defining Knowledge ... 23
3.2. MNE as a Learning Organization ... 25
3.2.1. The Concept of Organizational Learning ... 25
3.2.2. Creation of Organizational Knowledge ... 28
3.3. A General Model of Intra-Firm Knowledge Transfer ... 29
3.4. Transferring Complementary Knowledge Between MNE′s Units ... 34
3.5. Knowledge Sharing Mechanisms ... 38
3.5.1. The Knowledge Transfer Facilitating N-form Structure ... 39
3.5.2. Expatriation as a Means of Transferring Tacit Knowledge ... 45
3.5.3. The Role of Expatriation in the Internationalization Process ... 47

4. The Role of International Human Resource Management in Transferring Tacit Knowledge Across Borders ... 50
4.1. International Human Resource Management ... 50
4.2. Linking Organizational Growth Stages of an MNE with Human Resource Planning ... 53
4.3. Recruitment and Selection of Expatriates ... 55
4.3.1. Approaches to International Staffing ... 55
4.3.2. Selection Criteria ... 58
4.3.3. The Use of Selection Tests ... 61
4.3.4. Self-Selecting Expatriates ... 63
4.3.5. Female International Managers ... 65
4.4. Cross-Cultural Training of Expatriates ... 68
4.4.1. Defining Culture ... 69
4.4.2. Hofstede′s Value Survey Model and Its Practical Implications ... 70
4.4.3. Improving Cultural Awareness ... 73
4.4.4. Preliminary Visits ... 75
4.4.5. Language Training ... 76
4.4.6. Practical Orientation Program ... 76
4.5. Expatriates′ Compensation ... 78
4.5.1. Key Components of an International Compensation Program ... 78
4.5.2. Approaches to International Compensation ... 82
4.5.3. Taxation ... 85
4.6. Expatriates′ Adjustment to the New Environment ... 86
4.6.1. Individual Coping Strategies during the Adaptation Process ... 87
4.6.2. Spouse Issues ... 88
4.6.3. Cultural Shock ... 90
4.6.4. Expatriate Failure ... 93
4.7. Expatriates′ Performance Management ... 95
4.7.1. Variables Affecting Expatriates′ Performance ... 95
4.7.2. Performance Appraisal ... 98
4.8. Repatriation ... 99
4.8.1. Phases of the Repatriation Process ... 100
4.8.2. Factors Affecting Expatriates′ Readjustment Process ... 101
4.8.3. Practical Repatriate Program ... 104
4.9. Comparison of IHRM Practices in Various Countries ... 108

5. Conclusions ... 109

Appendix ... 111

References ... 121

List of Figures

Figure 1: The World Economic System ... 8
Figure 2: Knowledge Hierarchy ... 24
Figure 3: Processes Describing the Interaction Between Explicit and Tacit Knowledge ... 29
Figure 4: The Five-Stage Model of Knowledge Transfer ... 30
Figure 5: Three Types of Knowledge Pockets ... 32
Figure 6: Knowledge Transfer Situation ... 33
Figure 7: Additive Complementarity ... 35
Figure 8: Sequential Complementarity ... 35
Figure 9: Complex Complementarity ... 36
Figure 10: Three Steps of Learning Form the Internationalization Process ... 48
Figure 11: Dimensions of International Human Resource Management ... 51
Figure 12: The Phases of Cultural Adjustment ... 92
Figure 13: Variables Affecting Expatriate′s Performance ... 95

List of Tables

Table 1: Characteristic Features of the Ethnocentric, Polycentric and Geocentric Orientations: ... 22
Table 2: Policies: What Are We? ... 27
Table 3: Procedures: How Are We Organized? ... 27
Table 4: Knowledge Contextual Dimensions ... 31
Table 5: Comparison of the Matrix Organizational Form and the N-Form ... 42
Table 6: Linking Organizational Growth Stages with Human Resource Planning ... 54
Table 7: Implications of Hofstede′s Cultural Classification for Management Styles ... 72
Table 8: Average Cost of Expatriates ... 82

List of Abbreviations

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1. Introduction
In the world of today, business is no longer limited by national boundaries. The majority of the world’s large corporations perform a significant portion of their activities outside their home countries. The rapidly emerging global economy creates numerous opportunities for businesses to expand their revenues, drive down their costs and boost their profits. At the same time, markets have become fierce battlegrounds where firms have to fight aggressively for market share with domestic and foreign competitors. It is commonly accepted that one of the primary sources for competitive advantage of multinational enterprises (MNEs) in this globalized business environment is their ability to transfer superior knowledge at the international level¹ and to create a “learning organization”². To succeed, or at least survive, in the global market-place, organizations need to adapt quickly to the changing environment and must commit themselves to permanent learning.

This paper presents a general overview of the process of international knowledge transfer within multinational enterprises. It deals with the problems of organizational knowledge creation and sharing. A particular emphasis is placed on the implications for international human resource management practices in managing the international transfer of employees, since global assignments are recognized hierin as the most important mechanism of transferring tacit knowledge³ across borders. As the sharing of easily codifiable knowledge is relatively easy to manage, the means of transferring it are not focused on in this study.

Although considered a business necessity, many firms lack an organized human resource management to ensure success of international assignments. Finding the right people, preparing them for life and work within a new culture and making them stay there for the duration of their assignments, are challenging tasks. This is because expatriates working in a foreign environment, with very different political, cultural and economic conditions, face both job-related and personal problems. They must be provided with ongoing support while overseas and the organization must smooth the repatriated employee’s return to the firm in order not to lose the valuable experiential knowledge he gained during the assignment. In light of the high rates of expatriate failure and the increasing demand for managers who can successfully transfer their expertise abroad, the need for sound international human resource management practices presents itself with urgency.

This paper consists of three main parts. The first part builds upon the theories explaining the existence of MNEs, the Uppsala Model of the internationalization process, and the Perlmutter’s distinction between ethnocentric, polycentric and geocentric orientations of the firm. The aim of this part is to provide the reader with an understanding of the specific nature of MNEs and to point out the importance of kno wledge sharing for their existence and performance. The second part is based on the theory of knowledge transfer and of the learning organization. Its aim is to provide understanding of the international knowledge transfer within organizations, by describing the sequence of this process, its constraints and means. The aim of the third part is to identify suitable practices of an international human resource department in managing expatriates. The higher the level of expatriates’ adjustment to the new environment the better their performance ⁴, i.e. their effectiveness in transferring knowledge. This part pays much attention to cross-cultural issues, building primarily on the Hofstede Value Survey Model.

Although there exist several forms in which an MNE may engage in international business, this paper deals with the “internal” transfer of knowledge, i.e. its content is applicable to the two main forms of cooperation that involve equity holding: wholly-owned foreign subsidiaries and joint ventures.⁵ However, issues important to knowledge transfer that result from the very nature of these two forms (e.g. the “unlearning” process in the case of acquisitions or the problems with two or more headquarters, power distribution, control, and knowledge dissipation in the case of joint ventures) lie outside the focus of this paper.

2. The Specific Nature of an MNE

2.1. Defining an MNE

There exists no standard definition of a multinational enterprise. Various definitions have been proposed using different criteria. One way to define MNEs is to see them as corporations owning and controlling production or other value-adding facilities in at least one foreign country. ⁶ Some researchers require, however, a higher degree of geographical spread. According to a definition centered on managerial attitudes, the firm’s degree of multinationality is measured by the extent to which its top executives think geocentrically (world-oriented rather than home- or host- country oriented).⁷ There exist also quantitative definitions setting the minimum threshold for foreign activities, such as the number and size of foreign subsidiaries or the proportion of the firm’s global assets, revenue, income or employment accounted for by its foreign affiliates. For the purposes of this paper, an MNE is defined as a firm that engages in foreign direct investment and owns or controls value -adding activities in more than one country. ⁸

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1 See, for instance, Kogut, B. and Zander, U. (1992): „Knowledge of the Firm, Combinative Capabilities, and the Replication of Technology“, Organizational Science, Vol. 3, No. 3, pp. 383-397; Kogut, B. and Zander, U. (1993): „Knowledge of the Firm and the Evolutionary Theory of the Multinational Corporation“, Journal of International Business Studies, Vol. 24, pp. 625-645; Björkman, I. and Forsgren, M. (1997): „The Nature of the International Firm. Nordic Contributions to International Business Research“, Handelshojskolens Forlag, p. 71.

2 See, for instance, Garvin, D.A. (1993): „Building a Learning Organization“, Harvard Business Review, July/August, pp. 78-91. For definition of the learning organization see p. 23.

3 For definition of the tacit knowledge see p. 22.

4 See, for instance, Guzzo, R.A., Noonan, K.A. and Elron, E. (1994): „“Expatriate Managers and the Psychological Contract“, Journal of Applied Psychology, Vol. 79, No. 4, August, pp. 617-626; Dowling P.J., Welch, D.E. and Schuler, R.S. (1999): „International Human Resource Management“, South-Western College Publishing, pp. 118-153.

5 See Buckley, P.J. and Brooke, M.Z. (1992): „International Business Studies. An Overview“, Blackwell Publishers, p. 37.

6 See, for instance, UNECOSOC (1978): „Transnational Corporations in World Development, a Re-examination” and European Community (1973): „Multinational Undertakings and Community Regulations“, Luxembourg: Com (73) 1930/1973 in Hoogvelt, A. and Puxty A.G. (1987): „Multinational Enterprise. An Encyclopedic Dictionary of Concepts and Terms“, Macmillan Reference Books, pp. 155-158; Rugman, A.M. and Hodgets, R.M. (1995): „International Business. A Strategic Management Approach“, McGraw-Hill, Inc., pp. 36-37.

7 See Perlmutter, H.V. (1969): „The Tortuous Evolution of the Multinational Corporation“, Columbia Journal of World Business, Vol. 40, No. 4, pp. 9-18. Home country is the country in which the multinational firm is headquartered, host countries are foreign countries in which the MNE does business (See Dowling P.J., Welch D.E. and Schuler R.S. /1999/: „International Human Resource Management“, South-Western College Publishing, p. 3). The three possible orientations will be described in more detail in Chapter 2.4.

8 Definition according to Dunning, J.H. (1993): „Multinational Enterprises and the Global Economy“, Addison-Wesley Publishing Company, p. 3.