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

Contents

1.  Introduction  3

2.  The Specific Nature of an MNE  5

2.1.  Defining an MNE  5

2.2.  Theories Exp laining 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.  Creatio n 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.  Langua ge 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 Internatio nal 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

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List of Abbreviations

COLA cost-of- living allowance FDI foreign direct investment HCN host country national HR human resource HRM human resource management HRP human resource planning IHRM international human resource management IMF International Monetary Fund MBA Master of Business Administration MNC multinational corporation MNE multinational enterprise NTBs non-tariff barriers OAI Overseas Assignment Inventory ORC Organization Resources Counselors, Inc. PCN parent country national R&D research and development TCN third country national UNECOSOC United Nations Economic and Social Council

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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 level ¹ 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 knowledge ³ 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 mana gement 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

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.

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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.

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.

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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

There are three characteristic features of an MNE: (1) it draws on a common pool of resources, including assets, patents, trademarks, information, and human resources, (2) the sub-units of an MNE are linked by a common strategic vision, and (3) the affiliates must be responsive to a number of important environmental forces, including competitors, customers, suppliers, financial institutions and government, that are not only located in the country where the firm is headquartered, but also in the countries in which it does business. ⁹ An MNE may be privately or publicly owned and managed, and motivated by private or social ob jectives. MNE’s assets may be owned and controlled by citizens or institutions of a single country, nationally controlled but internationally managed and owned, or internationally owned and controlled. It may be a large

⁶ See, for instance, UNECOSOC (1978): ^{„Transnational Corporations in World Development, a Re-examination” and} European Community (1973): „Multinational U ndertakings 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.

⁹ See Rugman, A.M. and Hodgets, R.M. (1995): „International Business. A Strategic Management Approach“, McGraw-Hill, Inc., pp. 36-37.

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diversified global corporation managing activities in many countries or a small single product firm that operates only one foreign marketing venture. 10

As mentioned above, MNEs engage in foreign direct investment (FDI). FDI is defined as “investment that involves a long-term relationship reflecting a lasting interest of a resident entity in one economy (direct investor) in an entity resident in an economy other than that of the investor. The direct investor’s purpose is to exert a significant degree of influence on the management of the enterprise resident in the other economy” ¹¹ . According to the U.S. Department of Commerce, FDI occurs whenever a U.S. citizen, organization or affiliated group takes an interest of 10% or more in a foreign business entity, but there is no international consensus on this minimum equity stake. ¹² For the majority of countries, the required interest ranges from 10% and 25%. ¹³ The most characteristic feature of FDI is that it involves not only an international transfer of capital, but also the transfer of a bundle of factors, such as production and marketing technology, organizational and managerial skills, as well as other intangible assets, such as rights to use brand or trade names of the parent. ¹⁴ It is also important to stress that FDI does not involve any change in ownership: the control over the use of the resources transferred remains in the hands of the investing entity. 15

The term “multinational” is often used interchangeably with “transnational”. The latter one was adopted by the United Nations Center on Transnational Corporations in 1974 at the request of some Latin American countries who wished to distinguish between companies domiciled in one country of Latin America and investing in another, from those, usually developed ones, originating from

¹⁰ See Dunning, J.H. (1993): „Multinational Enterprises and the Global Economy“, Addison-Wesley Publishing Company, pp. 3 -13.

¹¹ IMF (1993): „Balance of Payments Manual“, 5 ^th Ed. in Dunning, J.H. (1993): „Multinational Enterprises and the Global Economy“, Addison-Wesley Publishing Company, p. 5.

¹² See Root, F.R.: „International Trade and Foreign Direct Investment“ in Tung, R.L. (1999) : „The IEBM Handbook of International Business“, International Thomson Business Press, p. 374.

¹³ e.g. 10% in U.S., Canada, and Australia, 20% in Germany and France, 25% in New Zealand (Dunning, J.H. /1993/: „Multinational Enterprises and the Global Economy“, Addison-Wesley Publishing Company, p. 12).

¹⁴ See e.g. Kumar, N.R.: „Multinational corporations“ in Tung, R.L. (1999): „The IEBM Handbook of International Business“, International Thomson Business Press, p. 424; Mallampally, P. and Sauvant, K.P. (1999): „Foreign Direct Investment in Developing Countries“, Finance & Development, March; Dunning, J.H. (1993): „Multinational Enterprises and the Global Economy“, Addison-Wesley Publishing Company, p. 5; Root, F.R. : „International Trade and Foreign Direct I nvestment“ in Tung, R.L. (1999): „The IEBM Handbook of International Business“, International Thomson Business Press, p. 374.

¹⁵ See Dunning, J.H. (1993): „Multinational Enterprises and the Global Economy“, Addison-Wesley Publishing Company, p. 5.

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outside the re gion. Over time, these terminological differences have become increasingly obscure. ¹⁶ Some researchers, however, reserve the term “transnational” only for MNEs that are faced simultaneously with high competitive pressures for cost reductions and high pressures for local responsiveness that require a fully integrated and multidimensional organizational strategy. ¹⁷ To avoid misunderstanding, only the term “multinational” will be used throughout this paper, meaning all the companies that comply with the requirements set by the MNE’s definition chosen above.

A little attention should be paid also to the tail end of the concept. The terms “corporation” and “company” are interchangeable, with the only difference being that historically the word “corporation” tended to be a US term, and the word “company” a British one. The term “enterprise” implies the fact that the precise legal form is of no significance and ensures that the definition includes not only private-owned, but also state-owned, as well as public companies. Some researchers, however, wish to reserve the concept of multinational corporation only for private-owned enterprises and prefer to use the word “corporation”. The term “firm”, in turn, includes additionally partnerships and is broader than “corporation” or “company”. Such distinctions are not very important in practice, and, for the purposes of this paper, the words “enterprise”, “corporation”, “company” and “firm” are seen as interchangeable. 18

2.2. Theories Explaining the Existence of MNEs

There exist numerous theories that explain how it is possible that direct- investing firms compete successfully with local firms in the unfamiliar business environment of the host country, what determines where firms invest abroad, as well as why firms prefer to enter host countries as direct investors rather than as exporters or licensers. This paper takes a closer look at four of them that seem to be most important in discussing the internal transfer of knowledge in multinational corporations.

¹⁶ See Ho ogvelt, A. and Puxty, A.G. (1987): „Multinational Enterprise. An Encyclopedic Dictionary of Concepts and Terms“, Macmillan Reference Books, pp. 155-158.

¹⁷ See Hill, Ch.W.L. (1998): „Global Business Today“, Irwin McGraw-Hill, International Edition, pp. 335-342, based on Bartlett, Ch. A. and Ghoshal, S. (1989): „Managing across Borders“, Boston, Harvard Business School Press. A closer look at the competitive pressures faced by multinationals will be given in Chapter 2.4.

¹⁸ See Hoogvelt, A. and Puxty, A.G. (1987): „Multinational Enterprise. An Encyclopedic Dictionary of Concepts and Terms“, Macmillan Reference Books, pp. 155-158.

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2.2.1. Internalization Theory

Internalization theory postulates that: (1) markets can fail to allocate resources optimally due to risk, uncertainty, oligopoly, government interventions and externalities (the failure of market prices to capture all costs or revenues), (2) markets and firms are alternative ways of organizing exchange of goods and services, (3) exchange is internalized within a firm when its costs are less than the costs of external market transactions, and (4) the internalization of cross-national transactions is conducted by an MNE undertaking foreign direct investment. 19

In a world of perfect markets, international business would be carried out through free trade. In the real world, there exist numerous market imperfections that reduce the potential gains from exporting and importing according to the principles of comparative advantage. One can distinguish between two general types of market imperfections : those imposed by government regulations and natural market imperfections (Fig.1). To the first type belo ng tariffs, taxes, foreign exchange controls, etc. Imperfections of the second kind arise in the circumstances which lead to transaction costs preventing the competitive market from developing, as well as in the pricing of knowledge. 20

Figure 1: The World Economic System

Source: Rugman, A.M., Lecraw, D.J., and Booth, L.D. (1985): „International Business. Firm and Environment“, McGraw-Hill, Inc, p. 99.

¹⁹ See Root, F.R.: „International Trade and Foreign Direct Investment“ in Tung, R.L. (1999): „The IEBM Handbook of International Bu siness“, International Thomson Business Press, pp. 374-381.

²⁰ See Rugman, A.M., Lecraw D.J., and Booth, L.D. (1985): „International Business. Firm and Environment“, McGraw- Hill, Inc, pp. 97 -108.

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Market transaction costs are defined as costs of organizing exchange, i.e. the sum of information, enforcement and bargaining costs. The dominant mode of organization in markets is the price system. If markets were perfect and individuals perfectly honest, the tasks of informing, monitoring and rewarding participants would be costlessly performed by prices. In practice, markets are never fully efficient because the value of goods and services exchanged can never be perfectly measured and because positive measurement costs joined with opportunism make it possib le for agents to cheat. ²¹ To eliminate market transaction costs, MNEs organize exchange through central direction and control of their operations and employees. They replace external markets with internal flows of factors, services, technology and products whenever they can lower transaction costs by doing so. 22

Market failure is most evident in the case of knowledge. The information buyer does not know exactly what he is buying, but if the seller would reveal that information, he would be transferring it free of charge to the buyer. ²³ The newly created knowledge cannot be priced by a market because of its public good character, i.e. because of the fact that new knowledge users can be supplied at no additional costs. The zero price, in turn, creates no incentive for firms to create knowledge. Property rights can partly overcome this problem, but only some of the firm’s knowledge can be protected in such a way. An alternative method to prevent disclosure is the internalization of knowledge by applying it only to production under the control of the firm. ²⁴ In the case of imperfect markets for knowledge, production by subsidiaries is much more preferable than licensing or joint ventures. The latter two arrangements would dissipate the firm’s information monopoly, unless foreign markets were segmented by effective international patent laws or other protective devices. 25

The internalization theory addresses the way in which MNEs involve themselves in foreign operations (foreign direct investment rather than licensing or exporting). However, it does not

²¹ See Hennart, J.F.: „The Transaction Cost Theory of the Multinational Enterprise“ in Pitelis Ch.N. and Sugden, R. (1991): „The Nature of the Transnational Firm“, Routledge, pp. 81-116.

²² See Dicken, P. (1992): „Global Shift. The Internationalization of Economic Activity“, 2 ^nd Ed., The Guilford Press, p.

130.

²³ See Arrow, K. (1962): „Economic Welfare and the Allocation of Resources for Invention” in Hennart, J.F.: „The Transaction Cost Theory of the Multinational Enterprise“ (in Pitelis, Ch.N. and Sugden, R. /1991/ : „The Nature of the Transnational Firm“, Routledge, pp. 81-116).

²⁴ See Hennart, J.F.: „The Transaction Cost Theory of the Multinational Enterprise“ in Pitelis, Ch.N. and Sugden, R. (1991): „The Nature of the Transnational Firm“, Routledge, pp. 81-116.

²⁵ See Rugman, A.M.: „Internalization as a General Theory of Foreign Direct Investment: A Re -Appraisal of the Literature“ in „The Theory of Multinational Enterprises. The Selected Scientific Papers of Alan M. Rugman“ (1996), Volume 1, Edward Elgar Publishing Company, p.14.

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answer neither the fundamental question of why an MNE should have an advantage over domestic firms abroad, nor the questions of what firm is looking for FDI (with what characteristics), and in what countries. It also does not explain the existing structure of MNEs’ FDIs. 26

2.2.2. Monopolistic Advantage Theory

According to the monopolistic advantage theory , firms invest abroad because they possess competitive advantages enabling them to operate subsidiaries more profitably than local competitors in foreign markets. The monopolistic advantages include superior knowledge and oligopoly. Oligopolistic firms are very sensitive to actions of competing firms that threaten their market share. When an oligopolistic firm enters a foreign market, rival firms are forced to respond with counteractions, otherwise they would risk the loss of market position or growth to the advantage of the initiating firm. By investing abroad, oligopolistic firms are interested primarily in vertical integration, mostly to create their own source of supply in order to avoid oligopolistic uncertainty and to erect entry barriers to new rivals. 27

I would like to concentrate on the second type of monopolistic advantages, the possession of superior knowledge, tha t is of crucial importance when talking about knowledge transfer within MNEs. Superior knowledge consists of all intangible skills (technology, management and organization skills, marketing skills, etc.) possessed by the firm that give the firm a competitive advantage wherever it undertakes operations. ²⁸ Such skills, called core competencies, can exist in any of the firm’s value creation activities ²⁹ and are typically expressed in products that are difficult to match or imitate. Core competencies enable a firm to reduce the costs of value creation and/or to create value in such a way that premium pricing is possible (e.g. through superior design, quality or functionality of the firm’s product offering). Firms with unique and valuable skills can often realize

²⁶ See Winiecki, J. (2000): Materials for the lecture “ Economics of Multinational Enterprise and its Cross-Border Activities”, summer term, European University Viadrina in Frankfurt (Oder).

²⁷ See Root, F.R.: „International Trade and Foreign Direct Investment“ in Tung, R.L. (1999) : „The IEBM Handbook of International Business“, International Thomson Business Press, pp. 374-381.

²⁸ See Root, F.R.: „International Trade and Foreign Direct Investment“ in Tung, R.L. (1999) : „The IEBM Handbook of International Business“, International Thomson Business Press, pp. 374-381.

²⁹ Based on the conception of firm as a value chain ^{that is composed of a series of distinct value creation activities.} Primary activities include manufacturing, marketing and service, and sales, whereas support activities provide the inputs that allow the primary activities to occur (infrastructure, human resources, research and development, and material management). See Hill, Ch.W.L. (1998): „Global Business Today“, Irwin McGraw-Hill, International Edition, pp. 324-325.

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enormous returns by applying those skills and product offerings to foreign markets where indigenous competitors lack similar skills and products. 30

In order to depict the concept of core competencies more graphically, Prahalad and Hamel (1990) compared the diversified corporation to a large tree, of which the trunk and major limbs are core products, the smaller branches are business units, and the leaves, flowers and fruits are end products. Core competence is the root system that provides nourishment, stability, and sustenance. “You can miss the strength of competitors by looking only at their end products, in the same way you miss the strength of a tree if you look only at its leaves” ³¹ .

Core competencies do not diminish with use. Unlike physical assets, they do not deteriorate over time and grow as they are applied and shared. ³² The foreign firm incurs all the disadvantages of being foreign, so it needs to possess or develop some more-than-compensating advantages in order to operate successfully in the target country. It can gain advantage only if it is able to transfer some advantages (e.g. superior knowledge) that are not available to indigenous players from outside the target country. ³³ The marginal cost of exploiting knowledge assets in a foreign country i s very low for the investing firm, whereas local firms would need to invest the full cost to acquire similar assets. ³⁴ Kogut and Zander (1993) referred to the ability to transfer superior knowledge at the international level as a primary source for competitive advantage as well as further development and growth of the MNC. ³⁵ Also other authors see the company’s ability to transfer innovations from one part of the organization to another as the main competitive advantage of a geographically spread organization that comprises a variety of assets held together under one structure. ³⁶ Thus, we

³⁰ See Hill, Ch.W.L. (1998): „Global Business Today“, Irwin McGraw-Hill, International Edition, pp. 324-327.

³¹ Prahalad, C.K. and Hamel, G. (1990): „The Core Copetence of the Corporation“, Harvard Business Review, May-June.

³² See Prahalad, C.K. and Hamel, G. (1990): „The Core Copetence of the Corporation“, Harvard Business Review, May-June.

³³ See Hu, Yao-Su (1995): „The International Transferability of the Firm’s Advantages“, California Management Review, Summer.

³⁴ See Root, F.R.: „International Trade and Foreign Direct Investment“ in Tung, R.L. (1999): „The IEBM Handbook of International Business“, International Thomson Business Press, p. 374.

³⁵ See 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.

³⁶ See Björkman, I. and Forsgren, M. (1997): „The Nature of the International Firm. Nordic Contributions to International Business Research“, Handelshojskolens Forlag, p. 71.

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can say that today the competition of MNCs increasingly becomes a matter of use and transfer of company-specific information and knowledge. 37

The monopolistic advantage theory addresses the fundamental question of why an MNE should have an advantage over domestic firms abroad, as well as the question of what firm is undertaking foreign direct investment. However, it does not explain, where the firm does it (in the case of the oligopolistic firms it is not clear why the first firm begins to operate in a certain country) and why the firm should involve in foreign operations through FDI rather than through exporting or licensing.

2.2.3. Product Life Cycle Theory

The three original stages in Vernon’s product life cycle (new product stage, maturing product and standardized product) are extended to six stages in this paper that allows better presentation of all the relevant sub-processes taking place during the cycle.

Innovation of new products is far more likely to be realized in highly developed and industrialized nations ³⁸ that have a large market, high level of per capita income and are relatively abundant in capital ³⁹ . During the first stage, a product is developed, eventually redesigned or re-engineered and its domestic sales grow. The second stage involves a further growth of domestic sales, but the growth rate may begin to decrease. All production remains in the innovating country, but exports to other developed, and sometimes even less developed countries, may take place. ⁴⁰ As time passes and the technology of production stabilizes, it becomes easily imitable, both at home and abroad. Foreign competition grows and the innovating firm has to defend the overseas market already built up through export. Thus, in the third stage , FDI is undertaken in more developed countries with the hope that it will allow the firm to average overhead and R&D costs over larger production runs. In

³⁷ See Eliasson, G. (1991): "The International Firm: A Vehicle for Overcoming Barriers to Trade and a Global Intelligence Organization Diffusing the Notion of a Nation" in Torbiorn, I. (1994): „Operative and Strategic Use of Expatriates in New Organizations and Market Structures”, International Studies of Management & Organization, Vol.

24, Issue 3, Fall, pp. 5-17.

³⁸ See Chen, M.: „International Technology Transfer“ in Tung, R.L. (1999): „The IEBM Handbook of International Business“, International Thomson Business Press, pp. 347-365.

³⁹ See Yamin, M. (1991): „A Reassessment of Hymer’s Contribution to the Theory of the Transnational Corporation“ in Pitelis, Ch.M. and Sugden, R. (1991): „The Nature of the Transnational Firm“, Routledge, pp. 64-80.

⁴⁰ See Chen, M.: „International Technology Transfer“ in Tung, R.L. (1999): „The IEBM Handbook of International Business“, International Thomson Business Press, pp. 347-365.

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this way the firm would gain a competitive strength over local competitors who have local knowhow, no transportation costs, and who can lobby for domestic protective tariffs. ⁴¹ During the fourth stage, with growing overseas markets, product manufacturers in more developed countries begin to

enjoy economies of scale ⁴² and may take away some markets in less developed countries. In the fifth stage, economies of scale are so large that developed countries are able to penetrate the home market of the product. The last stage involves production in less developed countries that enjoy lower labor costs and already improved skills, and become exporters to more developed countries and the home country. 43

The product- life-cycle theory integrates both export-based and FDI-based activities and points to technology as a firm-specific advantage that enables an MNE to compete successfully with local companies abroad. It explains also when a firm switches from exporting to FDI. Unfortunately, it fails to explain why it is profitable for a firm to undertake FDI in other developed countries rather than continuing to export from the home base or licensing a foreign firm to produce the product. It may still be profitable to produce at home and export the product by realizing the economies of scale that arise from serving the global market from one location, or, alternatively, to license a

foreign firm to produce that product for sale in its own country. ⁴⁴ Vernon’s theory does also not explain the identical pattern of industrial structure of American FDIs in Europe and European FDIs in the U.S., and, since it is based on the survey of the U.S. market, it is said to be too Americanocentric. Moreover, in recent periods the distinct time lags between stages have been strongly compressed, since many products are produced almost simultaneously across a number of

markets. 45

⁴¹ See Hoogvelt, A. and Puxty, A.G. (1987): „Multinational Enterprise. An Encyclopedic Dictionary of Concepts and Terms“, Macmillan Reference Books, p. 179.

⁴² For definition of economies of scale see p. 18.

⁴³ See Chen, M.: „International Technology Transfer“ in Tung, R.L. (1999): „The IEBM Handbook of International Business“, International Thomson Business Press, pp. 347-365.

⁴⁴ See Hill, Ch.W.L. (1998): „Global Business Today“, Irwin McGraw-Hill, International Edition, pp. 206-207.

⁴⁵ See Winiecki, J. (2000): Materials for the lecture “ Economics of Multinational Enterprise and its Cross-Border Activities”, summer term, European University Viadrina in Frankfurt (Oder).

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2.2.4. Dunning’s Eclectic Theory

Dunning’s eclectic paradigm synthesizes the essential and common characteristics of the main explanations of international production. According to this theory, the pattern of international production is determined by the configuration of three sets of forces: 46

1) Ownership-specific advantages: Ownership -specific advantages are competitive advantages internal to particular enterprises that arise from the possession of tangible and intangible resources. These resources are, at least for a period of time, exclusive or specific to the firm possessing them. One type of such benefits may lie in the access to markets of raw materials not available to competitors, in exclusive possession of intangible assets (e.g. patents, trademarks, management skills), or in size that may generate scale economies and inhabit effective competition. A second type of ownership-specific advantages may arise from the benefits of the many endowments of the parent company, such as access to cheaper inputs, knowledge of markets, centralized accounting procedures, and R&D at zero or low marginal cost. An extension of the two types of advantages mentioned above are benefits arising from the multinationality of a company: a firm that operates in different economic environments can take advantage of different factor endowments and market situations. 47

2) Internalization advantages: Due to the existence of market imperfections, it may be less costly, or more profitable, for firms to undertake certain activities and transactions within their organizations instead of using external markets (as explained in Chapter 2.2.1.).

3) Location-specific advantages: Location-specific advantages are advantages a country enjoys due to its specific location, such as possession of certain natural resources, market size, availability of cheap labor or proximity to large potential markets. Such factors make the particular country attractive to international direct investment. More precisely, location-specific advantages may be defined as “those that are available, on the same terms, to all firms, whatever their size and nationality, but which are specific in origin to particular locations and have to be used in those locations” ⁴⁸ .

⁴⁶ See Hoogvelt, A. and Puxty, A.G. (1987): „Multinational Enterprise. An Encyclopedic Dictionary of Concepts and Terms“, Macmillan Reference Books, pp. 77, 122, 144, 170.

⁴⁷ See Dunning, J.H. (1977): „Trade, Location of Economic Activity and the Multinational Enterprise: A Search for an Eclectic Approach“ in Buckley, P.J. and Ghauri, P.N. (1999): „The Internationalization of the Firm. A Reader“, 2 ^nd Ed., International Thomson Business Press, p. 66.

⁴⁸ Dunning J.H. (1980): “Towards an Eclectic Theory of International Production: Some Emirical Test”, p. 9 in Dicken, P. (1992) : „Global Shift. The Internationalization of Economic Activity“, 2 ^nd Ed., The Guilford Press, p. 131.

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A detailed description of the three types of advantages can be found in Appendix, Table 1. It is also important to point out that ownership -specific advantages and location-specific advantages are not necessarily independent of each other, as showed in Appendix, Table 2.

Dunning’s theory predicts that a firm will engage in foreign value-adding activities if and when three conditions are satisfied: (1) it must possess ownership-specific advantages, (2) assuming condition (1) is satisfied, it must be more beneficial to the organization to use them internally rather than to sell or lease them to foreign firms, and (3) assuming conditions (1) and (2) are satisfied, it must be in the interests of the firm to utilize these advantages in conjunction with at least some factor inputs outside its home country. According to Dunning (1977), all forms of international production by all countries can be explained by reference to the above conditions. 49

Some researchers claim that there are too many variables identified by the eclectic paradigm and that this fact diminishes their explanatory value. Moreover, the variables are not independent, and the paradigm takes no account of differences in the strategic response of firms to any given configuration of them. ⁵⁰ The eclectic theory does not add much new. It addresses, however, the fundamental question of MNE’s ability to more than offset the costs resulting from operating abroad in comparison to local firms. It answers also the questions about what firm is undertaking foreignoperations, where it does it and in which way (by undertaking FDI rather than licensing).

2.3. Highlights on the Internationalization Process

With the term internationalization we describe the process of increasing involvement in international operations. ⁵¹ Commitment to a foreign market is composed of two factors: the amount of resources located in a particular market area and the degree of commitment, i.e. the difficulty of finding an alternative use for the resources and transferring them to it. The degree of commitment

⁴⁹ See Dunning, J.H. (1977): „Trade, Location of Economic Activity and the Multinational Enterprise: A Search for an Eclectic Approach“ in Dunning J.H. (1993): „The Theory of Transnational Corporations“, Routledge, pp. 183-218.

⁵⁰ See Dunning, J.H. : „The Eclectic Paradigm of International Production: A Personal Perspective“ in Pitelis, Ch.N. and Sugden, R. (1991): „The Nature of the Transnational Firm“, Routledge, pp. 117-136.

⁵¹ See Welch, L.S. and Luostarinen, R. (1988): „Internationalization: Evolution of a Concept“ in Buckley, P.J. and Ghauri, P.N. (1999): „The Internationalization of the Firm. A Reader“, 2 ^nd Ed., International Thomson Business Press, p. 28.

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depends on how much the resources committed to a foreign market are integrated with other parts of the firm and to what extent their value is derived from these integrated activities. 52

There are two possible directions of internationalization: increasing involvement of the firm in the individual foreign country and successive establishment of operations in new countries. ⁵³ The main reasons for going international or expanding international presence (that can be seen as a synthesis and an extension of theories explaining the existence of MNEs described above) may be grouped as reactive and proactive. The reactive reasons assume that the company is responding to something happening in its environment. Generally, this is something beyond its control and its external environment, such as tariffs, quotas, regulations, or competitors becoming international. The proactive reasons assume that the company is seeking advantages and benefits available internationally, such as natural resources, low labor costs, new markets, or power and prestige. ⁵⁴ A full list of the reactive and proactive reasons for international business may be found in Appendix, Tables 3 and 4.

By entering a foreign market, an internationalizing firm has a number of entry modes to chose from: 55

• Exporting : A firm supplies foreign demand from home production;

• Turnkey Projects: In the turnkey project the contractor agrees to handle every detail of the project for a foreign client (such as constructing a facility, starting operations and training local personnel) ⁵⁶ . At completion of the contract the foreign client is handed the “key” to a plant that is ready for full operation;

• Licensing : A licensing agreement is an arrangement whereby a firm (the licensor) grants the rights to intangible property to another entity (the licensee) for a specified time period. In return,

⁵² See Johanson, J. and Vahlne, J.E. (1977) : „The Intarnationalization Process of the Firm: A Model of Knowledge Development and Increasing Foreign Market Commitments“, Journal of International Business Studies, Vol. 8, Spring/Summer, pp. 22-32.

⁵³ See Johanson, J. and Vahlne, J.E. (1977) : „The Intarnationalization Process of the Firm: A Model of Knowledge Development and Increasing Foreign Market Commitments“, Journal of International Business Studies, Vol. 8, Spring/Summer, pp. 22-32.

⁵⁴ See Punnett, B.J. and Ricks, D.A. (1997): „International Business“, 2 ^nd Ed., Blackwell Publishers, p. 240.

⁵⁵ See Hill, Ch.W.L. (1998): „Global Business Today“, Irwin McGraw-Hill, International Edition, p. 359-370.

⁵⁶ See Punnett, B.J. and Ricks, D.A. (1997): „International Business“, 2 ^nd Ed., Blackwell Publishers, p. 253.

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the licensor receives a royalty fee from the licensee. Intangible property includes patents, inventions, processes, designs, formulas, copyrights, and trademarks;

• Franchising : Franchising can be described as a specialized form of licensing in which the franchiser not only sells intangible property to the franchisee, but also insists that the franchisee agrees to abide by strict rules as to how it does business. Typically, the franchiser assists the franchisee by running the business on an ongoing basis and receives royalty payment as a percentage of the franchisee’s revenues;

• Contracts : A firm provides general and specialized services in a foreign location for a specified time period for a fee; 57

• Strategic Alliances: Arrangements among firms to cooperate for strategic purposes; 58

• Joint-Ventures: Establishment of a firm that is jointly owned by two or more otherwise independent firms;

• Wholly Owned Subsidiaries: A company owns 100% of its subsidiary in the foreign market.

When an organization expands overseas, it undergoes a learning process on a worldwide scale. Companies sequentially approach foreign markets with learning gained from past entry experience. This learning enables them to develop organizational capabilities to operate overseas and to launch further entries into areas where they have less strong competitive advantages. ⁵⁹ When an MNC establishes further foreign operations in the future, the process should be completed more smoothly. It takes time for the company to absorb, digest and institutionalize the lessons gained from the experience in a foreign market. Thus, if a company is planning to establish several operations in a foreign country, it is important that these operations be set up seque ntially so that the new ones can

benefit from the lessons learned in the old ones. 60

Some researchers describe internationalization as a process of transferring a firm’s knowledge by

replicating its physical and organizational technologies. ⁶¹ Physical technologies refer to machinery,

⁵⁷ See Punnett, B.J. and Ricks, D.A. (1997): „International Business“, 2 ^nd Ed., Blackwell Publishers, p. 252.

⁵⁸ See Punnett, B.J. and Ricks, D.A. (1997): „International Business“, 2 ^nd Ed., Blackwell Publishers, p. 255.

⁵⁹ See Chang, S. (1995): „International Expansion Strategy of Japanese Firms: Capability Building Through Sequential Entry”, Academy of Management Journal, Vol. 38, No. 2, pp. 383-407.

⁶⁰ See Tsang, E.W.K. (1999): „Internationalization as a Learning Process: Singapore MNCs in China“, The Academy of Management Executive, February.

⁶¹ See Morgan, B. (1991): „Transferring Soft Technology“ in Tsang, E.W.K. (1999): „Internationalization as a Learning Process: Singapore MNCs in China“, The Academy of Management Executive, February.

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production processes, engineering, and other technical matters, whereas organizational technologies are associated with the knowledge of organizational structures and processes. There is no clear division between the two and they often have to be transferred together. 62

There are several models to describe the internationalization process, but I would like to focus on two of them: product life cycle model and the Uppsala Model. Both models describe the internationalization as a gradual development taking place in distinct stages and over a relatively long period of time. ⁶³ The product life cycle model has already been explained above (see Chapter 2.2.3.) According to the Uppsala Model, a firm increases its international economic involvement incrementally, as it gains experience from current activities. The model distinguishes four stages in the internationalization process: (1) no permanent exports, (2) exports via an agent, (3) exports via sales’ subsidiary, and (4) production abroad in own subsidiary. 64

During the internationalization process, firms accumulate two important kinds of knowledge: market-specific and general knowledge. Market specific knowledge refers to the characteristics of the national market, its business climate, structure of the market system, cultural patterns and individual customers and suppliers. General knowledge is cumulative in the nature. Over time firms learn from previous globalization efforts and reduce the barriers that prevent them from freely tapping cheap labor, foreign product markets and new technology. While market-specific knowledge is gained mainly through experience in the market, it is possible to transfer general knowledge from one country to another. ⁶⁵ The diffusion of general knowledge facilitates lateral growth of the firm, that is, the establishment of technically similar activities in dissimilar business environments. 66

⁶² See Westney, O.E. (1991): „International Transfer of Organizational Technology“ in Tsang, E.W.K. (1999): „Internationalization as a Learning Process: Singapore MNCs in China“, The Academy of Management Executive, February.

⁶³ See Vernon-Wortzel, H. and Wortzel, H. (1997): „Strategic Management in a Global Economy“, 3 ^rd Ed., J. Wiley&Sous, Inc., pp. 71-93.

⁶⁴ See Johansson, J. and Wiedersheim-Paul, F. (1975): „The Internationalization of the Firm: Four Swedish Cases“ in Buckley, P.J. and Ghauri, P.N. (1999): „The Internationalization of the Firm. A Reader“, 2 ^nd Ed., International Thomson Business Press, p. 28.

⁶⁵ See Downes, M. Thomas, A.S., and McLarney, C. (2000): „The Cyclical Effect of Expatriate Satisfaction on Organizational Performance: the Role of Firm International Orientation“, The Learning Organization, Vol. 7, Issue 3.

⁶⁶ See Johanson, J. and Vahlne, J.E. (1977): „The Intarnationalization Process of the Firm: A Model of Knowledge Development and Increasing Foreign Market Commitments“, Journal of International Business Studies, Vol. 8, Spring/Summer, pp. 22-32.

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Market specific knowledge is necessary to overcome the psychic distance to the foreign market. Psychic distance is defined as factors preventing or disturbing the flows of information between firms and market, such as differences in terms of language, culture, political systems, education level, level of industrial development, etc. ⁶⁷ Firms usually enter new markets with successively greater psychic distance, starting their internationalization process on markets with the lowest perceived market uncertainty. Such markets are rather easily understood and are often neighboring countries. 68

One of the most important shortcomings of the Uppsala Model is that it is limited to the early stages of internationalization, as its most empirical support comes from studies of companies that were not very experienced in international activities. With the world becoming more homogenous, also the explanatory value of psychic distance tends to decrease. ⁶⁹ Moreover, the increased liberalization, together with decreasing transportation and communication costs, make at least a part of experiential knowledge to formal knowledge available. ⁷⁰ The Uppsala Model is also too deterministic: it excludes other strategic choices, such as to initiate local production in a foreign country without having established sales subsidiaries in the foreign market. ⁷¹ Such leapfrogging of some stages is quite common in practice. 72

⁶⁷ See Johansson, J. and Wiedersheim-Paul, F. (1975): „The Internationalization of the Firm: Four Swedish Cases“ in Buckley, P.J. and Ghauri, P.N. (1999): „The Internationalization of the Firm. A Reader“, 2 ^nd Ed., International Thomson Business Press, p. 29.

⁶⁸ See Johanson, J. and Vahlne, J.E. (1990): „The Mechanism of Internationalization“ in Vernon-Wortzel, H. and Wortzel, L.H. (1997): „Strategic Management in a Global Economy“, 3 ^rd Ed., J. Wiley&Sous, Inc., pp. 71-93. An empirical study of 32 Canadian retail companies showed, however, that only 22% of them were functioning successfully in the U.S. The psychic distance paradox is that operations on psychically close countries are not necessarily easy to manage, because assumptions of similarity can prevent the organiza tions from learning about critical differences (See Grady, S.O. and Lane, H.W. /1996/: „The Psychic Distance Paradox“, Journal of International Business Studies, 2 ^nd Quarter).

⁶⁹ See Vernon-Wortzel, H. and Wortzel, L.H. (1997): „Strategic Management in a G lobal Economy“, 3 ^rd Ed., J. Wiley&Sous, Inc., p. 78.

⁷⁰ See Winiecki, J. (2000): Materials for the lecture “ Economics of Multinational Enterprise and its Cross-Border Activities”, summer term, European University Viadrina in Frankfurt (Oder).

⁷¹ See Vernon-Wortzel, H. and Wortzel, L.H. (1997): „Strategic Management in a Global Economy“, 3 ^rd Ed., J. Wiley&Sous, Inc., p. 78.

⁷² See Hedlund, G. and Kverneland, A. (1984): „Investing in Japan - Experience of Swedish Firms“ in Vernon-Wortzel, H. and Wortzel, L.H. (1997): „Strategic Management in a Global Economy“, 3 ^rd Ed., J. Wiley&Sous, Inc., p. 78.

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2.4. Perlmutter’s Classification of MNEs

Before presenting the different orientations a multinational can adopt towards its foreign affiliates, it is worth mentioning that firms competing in the global marketplace might face two general types of competitive pressures: pressures for cost reductions and pressures to be locally responsive. Responding to pressures for cost reductions requires the firm to try to minimize its unit costs by mass producing a standardized product at the optimal location in the world, wherever it might be, in order to realize location and experience curve economies. Locating a value creating activity in such an optimal location can lower the costs of this process (e.g. by taking advantage of low labor costs) or enable the firm to differentiate its product offering (e.g. by profiting from the existence of highskilled workers). ⁷³ The experience curve refers, in turn, to the systematic reductions in production costs that occur over the life of a product. ⁷⁴ It may be explained through learning effects and economies of scale. Learning effects refer to cost savings from learning by doing, i.e. from the increasing labor productivity and management efficiency that arise from the fact that over time individuals learn the most efficie nt ways to perform particular tasks. Economies of scale, in turn, refer to the reduction in unit cost achieved by producing a large volume of a product. They may have a number of sources, but the most important seems to be the ability to spread fix costs over a large volume. 75

The sources of pressures for local responsiveness may be seen in differences in consumer tastes and preferences, differences in infrastructure and traditional practices, differences in distribution channels, as well as in host government demands. These pressures for customization imply that it may not always be possible for a firm to serve the global market-place with a standardized product from a single low-cost location. 76

The kind of pressures faced by a particular multinational often determines the orientation it has towards its sub-units spread all over the world. Perlmutter (1969) distinguishes between three general kinds of managerial attitudes that specify the multinational’s orientation towards its foreign

⁷³ See Hill, Ch.W.L. (1998): „Global Business Today“, Irwin McGraw-Hill, International Edition, pp. 328-335.

⁷⁴ See Hall, G. and Howell, S. (1985): „The Experience C urve from an Economist’s Perspective“, Strategic Management Journal, No. 6, pp. 197-212 in Hill, Ch.W.L. (1998): „Global Business Today“, Irwin McGraw-Hill, International Edition, p. 329.

⁷⁵ See Hill, Ch.W.L. (1998): „Global Business Today“, Irwin McGraw-Hill, International Edition, p. 330.

⁷⁶ See Hill, Ch.W.L. (1998): „Global Business Today“, Irwin McGraw-Hill, International Edition, pp. 333-335.

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affiliates: an ethnocentric, a polycentric and a geocentric one. ⁷⁷ In the case of a firm with an ethnocentric orientation, the established values of a parent company are considered to be the appropriate values for its overseas operations. ⁷⁸ The firm’s structure is highly centralized and foreign subsidiaries serve as little more than foreign points of entry for the outputs that emanate from the home-based parent. Affiliates are highly dependent on the parent that takes full responsibility for decision making and strategic activities, such as research and development. ⁷⁹ The ethnocentric orientation is often adopted by firms that face high pressures for cost reductions. 80

Polycentric firms emphasize the local culture, values and processes, and usually favor empowerment through decentralization. ⁸¹ This means that international affiliates are managed under a single umbrella, but are allowed to become somewhat independent of the parent in order to conform to the needs of their individual markets. The parent makes the overall resource allocation decisions, but some decisions, such as marketing strategies, may be decentralized to the subsidiaries level. This orientation is usually adopted by firms that face high pressures for local responsiveness. 82

If the firm has to respond to both the pressures for cost reductions and the pressures for local responsiveness, a geocentric orientation seems to be most suitable. ⁸³ A geocentric firm refers to a culture-free context, where no one best way exists, but home-country and host-country cultures are appropriately balanced. ⁸⁴ It is highly decentralized, with responsibilities delegated according to

⁷⁷ See Perlmutter, H.V. (1969): „The Tortous Evolution of the Multinational Enterprise“, Columbia Journal of World Business, Vol. 4 No. 1, pp. 9-18. For the fourth attitude - regiocentric - that was added later (See Heenan, D.A. and Perlmutter, H.V. /1979/: „Multinational Organization Development“, Reading, MA: Addison-Wesley) see Chapter

4.2.1., p. 55.

⁷⁸ See Davidson, P. (2000): „Human Resource Management in an International Environment“, Reims School of Management, p. 4.

⁷⁹ See Perlmutter, H.V. (1969): „The Tortous Evolution of the Multinational Enterprise“, Columbia Journal of World Business, Vol. 4 No. 1, pp. 9-18.

⁸⁰ Adapted from Käthe Harzing, A.W. (1999): „Managing the Multinationals. An International Study of Control Mechanisms“, Edward Elgar Publishing, Inc., pp. 34-35.

⁸¹ See Davidson, P (2000): „Human Resource Management in an International Environment“, Reims School of Management, p. 4.

⁸² Adopted from Käthe Harzing, A.W. (1999): „Managing the Multinationals. An International Study of Control Mechanisms“, Edward Elgar Publishing, Inc., pp. 34-35.

⁸³ Adopted from Käthe Harzing, A.W. (1999): „Managing the Multinationals. An International Study of Control Mechanisms“, Edward Elgar Publishing, Inc., pp. 34-35.

⁸⁴ See Davidson, P. (2000): „Human Resource Management in an International Environment“, Reims School of Management, p. 4.

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functional requirements rather than by home and host country distinctions. It is recognized that each

part of the organization makes a unique contribution with i ts unique competence. ⁸⁵ Table 1

summarizes and presents in more detail the characteristic features of all three orientations.

Table 1: Characteristic Features of the Ethnocentric, Polycentric and Geocentric Orientations

Source: Perlmutter, H.V. (1969): „The Tortuous Evolution of the Multinational Corporation“ in C.A. Bartlett and S. Ghoshal: „Transnational Management. Text, Cases, and Readings in Cross-Border Management“, Richard D. Irwin, Inc., pp. 93-103.

⁸⁵ See Dowling P.J., Welch, D.E. and Schuler, R.S. (1999): „International Human Resource Management“, South-

Western College Publishing, p. 32.

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3. Theory of the International Knowledge Transfer within MNEs

3.1. Defining Knowledge

Knowledge and expertise can be organized into a hierarchy (Fig.2), in which data are built up to information, then to knowledge and finally to expertise. ⁸⁶ Data are objective facts describing an event without any judgement, perspective and context. ⁸⁷ They become information by adding meaning and understanding, so that information has shape and i s organized to some purpose. ⁸⁸ Knowledge is what the individual transforms information into by incorporating personal experience, values and beliefs ⁸⁹ as well as contextual information and expert insight ⁹⁰ . Knowledge originates in the head of an individual and is shaped by one’s initial stock of knowledge and the inflow of new information. Thus, the knowledge formed by an individual will differ from another person receiving the same information. ⁹¹ Expertise is, then, specialized, deep knowledge and understanding in a certain field. It is far above average, has been gained through experience, training and education, is built up from scratch over a long period of time, and remains with the individual. Moreover, individuals with expertise are able to create uniquely new knowledge and solutions in their field of expertise. 92

⁸⁶ See Bender, S. and Fish, A. (2000): „The Transfer of Knowledge and the Retention of Expertise: The Continuing Need for Global Assignments“, Journal of Knowledge Management, Vol. 04, Issue 2.

⁸⁷ See Hausemann, R.C. and Goodman, J.P. (1999): „Leading with Knowledge: The Nature of Competition in the 21 ^st Century“, Sage, California, p. 105.

⁸⁸ See Davenport, T.H. and Prusak, L. (1998): „Working Knowledge: How Organizations Manage What They Know“, Harvard Business School Press, Boston, MA, p. 5; Wiig, K.M. (1993): „Knowledge Management Foundations Thinking about Thinking - How People and Organizations Create, Represent and Use Knowledge“, Arlington, TX, p. 73.

⁸⁹ See Wiig, K.M. (1993) : „Knowledge Management Foundations Thinking about Thinking - How People and Organizations Create, Represent and Use Knowledge“, Arlington, TX, p. 73.

⁹⁰ See Davenport, T.H. and Prusak, L. (1998): „Working Knowledge: How Organizations Manage What They Know“, Harvard Business School Press, Boston, MA, p. 5

⁹¹ See Fahey, L. and Prusak, L. (1998): „The Eleven Deadliest Sins of Knowledge Management“, California Management Review, Vol. 40, No. 3, pp. 265 -276.

⁹² See Sveiby, K.E. (1997): „The New Organizational Wealth: Managing and Measuring Knowledge-Based Assets“, Berrett-Koehler Publishers, San Francisco, CA.

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Figure 2: Knowledge Hierarchy

Source: Bender, S. and Fish, A. (2000): “The Transfer of Knowledge and the Retention of Expertise: The Continuing

Need for Global Assignments”, Journal of Knowledge Management, Vol. 04, Issue 2.

One can distinguish between explicit and tacit knowledge. Explicit knowledge is knowledge that can be expressed in symbols and in this way communicated to other people, whereas tacit knowledge is very difficult to articulate and transfer between individuals. ⁹³ It is likely to develop in complex tasks, is largely context-dependent and automatic, often unconscious. ⁹⁴ Tacit knowledge includes cognitive and technical elements. ⁹⁵ The cognitive elements center on “mental models”, such as schemata, paradigms, perspectives, beliefs and viewpoints. They help individuals to perceive and define the world by making and manipulating analogies. ⁹⁶ Mental models refer to an individual’s images of reality and visions for the future. Their articulation is perceived as a key factor in creating new knowledge. The technical element of tacit knowledge, in turn, includes concrete know-how, crafts and skills. 97

⁹³ See Schulz, M. (2000): „Pathways of Relevance: Exploring Inflows of Knowledge into Subunits of MNCs“, research funded by the Carnegie Bosch Institute and the Center for International Business and Research, Seattle, p. 9.

⁹⁴ See Personnel Management (1992): „Knowing and Doing: Tacit Skill at Work“, February.

⁹⁵ See Nonaka, I. and Takeuchi, H. (1995): „The Knowledge-Creating Company. How Japanese Companies Create the Dynamics of Innovation“, Oxford University Press, p. 60.

⁹⁶ See Johnson-Laird, P.N. (1983): „Mental Models“, Cambridge University Press in Nonaka, I. and Takeuchi, H. (1995): „The Knowledge-Creating Company. How Japanese Companies Create the Dynamics of Innovation“, Oxford University Press, p. 60.

⁹⁷ See Nonaka, I. and Takeuchi, H. (1995): „The Knowledge-Creating Company. How Japanese Companies Create the Dynamics of Innovation“, Oxford University Press, p. 60.

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Tacit knowledge is “wholly embodied in individuals, rooted in practice and experience, expressed through skillful execution, and transmitted by apprenticeship and training, through ‘watching and doing’ forms of learning” ⁹⁸ . An important fact is that individuals cannot share tacit knowledge effectively, unless they share a common social and cultural context, or, at least, are aware of and understand the existing differences. Even if this condition is fulfilled, one has to keep in mind that the newly created tacit knowledge of the receiver will not be completely the same as that of the sender. The most that can be achieved is actually only a high degree of overlap between the tacit knowledge held by individuals involved in the process of transferring knowledge. 99

3.2. MNE as a Learning Organization

A learning organization is a company that continuously tries to become more adaptive and proactive in its environment by intentionally developing and using structures, processes, disciplines and strategies in order to maximize what it learns as a whole. It is important to distinguish this concept from the concept of organizational learning that is the action of using these structures, processes, disciplines, and strategies. To put it more simply: a learning organization is what a firm wants to become, and organizational learning is how it achieves this goal. 100

3.2.1. The Concept of Organizational Learning

Learning encompasses the acquisition of know-how, which implies the physical ability to produce some action, and the acquisition of know-why, i.e. the ability to articulate conceptual understanding of an experience. ¹⁰¹ Organizational learning occurs as individual learning is shared and transformed to new individuals, whether across boundaries of space, time, or hierarchy. ¹⁰² The resulting organizational knowledge can be defined as knowledge held by an organization, which is shared

⁹⁸ Fleck, J. (1997): „Contingent Knowledge and Technology Development“, Technology Analysis & Strategic Management, December.

⁹⁹ See Roberts, J. (2000): „From Know-How to Show-How? Questioning the Role of Information and Communication Technologies in Knowledge Transfer“, Technology Analysis & Strategic Management, December.

¹⁰⁰ See Lahti, R.K. (2000): “Knowledge Transfer and Management Consulting: A Look at ", Business Horizons, January.

¹⁰¹ See Kim, D.H. (1993): „The Link Between Individual and Organizational Learning“, Sloan Management Review, Fall, pp. 37-50.

¹⁰² See Downes, M., Thomas A.S., and McLarney, C. (2000): „The Cyclical Effect of Expatriate Satisfaction on Organizational Performance: the Role of Firm International Orientation“, The Learning Organization, Vol. 7, Issue 3.