Conventional and Reverse Knowledge Flows

in Multinational Corporations†
Qin Yang
School of Business, Robert Morris University, Moon Township, PA 15108
Ram Mudambi*
Department of Strategic Management, Fox School of Business, Temple University, Philadelphia, PA 19122
Klaus E. Meyer
School of Management, University of Bath, Claverton Down, Bath BA2 7AY, UK

Leveraging knowledge from geographically disparate subsidiaries is a crucial source of competi-

tive advantage for multinational corporations (MNCs). This study investigates the determinants of
knowledge transfers to and from newly acquired subsidiaries in three transition economies in
Central and Eastern Europe. It is hypothesized that the determinants of conventional knowledge
transfers from MNC parents to subsidiaries and reverse knowledge transfers from subsidiaries to
MNC parents are based on different transfer logics. A sample of 105 acquired subsidiaries
revealed that organizational characteristics are important in conventional knowledge flows from
headquarters, so that subsidiaries acquired with competence-creating objectives receive signifi-
cantly larger inflows. Knowledge characteristics are important in reverse flows to headquarters so
that subsidiaries whose knowledge is more relevant are able to transmit significantly larger out-
flows. Host country locations have significant moderating effects. The significance of the direc-
tional context in knowledge transfers is an important new finding.

Keywords: knowledge management; knowledge relevance; acquisitions; multinational sub-

sidiaries; transition economies

Knowledge is a fundamental resource for firms to develop and retain competitive advan-
tages (Grant, 1996; March, 1991). The ability of multinational corporations (MNCs) to lever-
age their knowledge across dispersed foreign subsidiaries has become essential for achieving
and sustaining competitive performance (Gupta & Govindarajan, 1991; Mudambi, 2002,

Journal of Management, Vol. 34 No. 5, October 2008 882-902

DOI: 10.1177/0149206308321546
© 2008 Southern Management Association. All rights reserved.

882
 Yang et al. / Knowledge Flows in Multinational Corporations 883

2007; Piscitello, 2004). MNCs are complex and differentiated cross-border organizations that
manage knowledge flows in multiple directions, including exchanges within local clusters,
transfers between parent and subsidiary, and transfers between subsidiaries (Andersson,
Forsgren, & Holm, 2002; Ghoshal & Bartlett, 1990; Mudambi & Navarra, 2004).
Headquarters is an important source of new knowledge for subsidiaries (Johanson &
Vahlne, 1977; Sölvell & Zander, 1995). The parent MNC possesses valuable intangible
assets and capabilities (Buckley & Casson, 1976; Piscitello, 2004) that subsidiaries can
exploit to prosper in local markets (Kuemmerle, 1999). Subsidiaries also contribute to the
resource base of the global operations through local research and development (R&D)
efforts and access to external resources in the local environment (Birkinshaw & Hood, 1998;
Frost, Birkinshaw, & Ensign, 2002). Since the early 1980s, MNCs have increasingly under-
taken R&D in multiple subsidiaries (Cantwell & Piscitello, 2000; Håkanson, 1995).
Empirical research on knowledge transfer has primarily been conducted in developed
economies, with a few exceptions (e.g., Cui, Griffith, Cavusgil, & Dabic, 2006; Lyles & Salk
1996). Yet the nature of knowledge flows is likely to be substantially different for sub-
sidiaries in transition economies, because the knowledge endowment of headquarters is typ-
ically substantially larger than that of the local units (Cui et al., 2006; Lyles & Baird, 1994;
Lyles & Salk 1996). Therefore, it is particularly important for MNCs to understand the
unique issues involved in managing knowledge transfers to and from units in transition
economies (Brouthers & Bamossy, 2006).
In this article, we focus on knowledge flows between MNCs and their recently acquired
subsidiaries in three Central and Eastern European (CEE) countries: Hungary, Poland, and
Lithuania. Mergers and acquisitions provide a good opportunity for firms to complement
and renew their knowledge bases (Bresman, Birkinshaw, & Nobel, 1999). The knowledge
base of acquisition targets has been shown to be particularly valuable in CEE transition
economies (Uhlenbruck, 2004). Hierarchical knowledge flows within MNCs are made up of
two constituent flows: the conventional flow from parent to subsidiary and the reverse flow
from subsidiary to parent (Mudambi & Navarra, 2004). We examine the role of acquired sub-
sidiaries in both these constituent flows, as receivers of knowledge from the parent and as
knowledge providers to the parent. In other words, we study the directional context of
knowledge flows between MNC parents and their acquired subsidiaries. We demonstrate
that the determinants of conventional knowledge transfers from MNC parents to subsidiaries
and reverse knowledge transfers from subsidiaries to MNC parents are based on different
transfer logics.

†Data for this paper were generated by the project Merger and Acquisition Strategies in Eastern Europe. We thank
Kristina Toth, Zoltan-Antal Mokos, and colleagues at Copenhagen Business School for their contribution to the
project. We received helpful comments from three anonymous referees as well as from participants at the 2007
Academy of Management meetings in Philadelphia. We are particularly grateful to the associate editor, Keith
Brouthers, whose extensive comments helped us shape the paper. We acknowledge financial support from the
Danish Social Science Foundation under grant 24-01-0152.

*Corresponding author: Tel.: 215-204-2099; fax: 215-204-8029

E-mail address: ram.mudambi@temple.edu

884 Journal of Management / October 2008

Internal Knowledge Transfer and Knowledge Relevance Theory

Knowledge transfer is a process in which an organization re-creates a complex, causally

ambiguous set of routines in new settings and keeps the routines functioning. These routines
appear in the form of know-how, R&D capabilities, managerial techniques, and so on. But
knowledge, especially when it is tacit, does not necessarily flow easily within the MNC
(Cantwell & Santangelo, 1999). Stickiness connotes the difficulty experienced in the transfer
process (Szulanski, 1996). Recent studies suggest that such factors as knowledge character-
istics, source and target units’ characteristics, the organizational contexts of transfer, and
environmental factors are likely to affect knowledge transfer (Cui et al., 2006; Foss &
Pedersen, 2002; Gupta & Govindarajan, 2000; McCann & Mudambi, 2005; Szulanski,
1996). In sum, knowledge-related barriers and the interaction of knowledge transfer partici-
pants are key factors in effective knowledge transfer.
Relevance is a term used to describe how pertinent, connected, or applicable some infor-
mation is to a given matter. According to relevance theory, a piece of information is charac-
terized as relevant to an individual when processing it yields cognitive effects, that is, when
it permits new inferences or the revision of previously held assumptions (Sperber & Wilson,
1986). The greater these cognitive effects, the greater the relevance; the greater the process-
ing effort used to achieve these effects, the lesser the relevance.
Knowledge relevance is defined as “the degree to which external knowledge has the
potential to connect to local knowledge” (Schulz, 2003: 442). Following relevance theory,
the more the provider’s knowledge has implications for the receiver and the easier it is for the
knowledge receiver to derive these implications, the more the knowledge is relevant. As
the overlap between provider knowledge and extra-unit receiver knowledge increases, the
likelihood of connections or relatedness also increases. Knowledge relevance provides an
approach to link the transferring and receiving ends of knowledge flows and is consistent
with the notion of relative absorptive capacity (Lane & Lubatkin, 1998). For a given level of
provider willingness to undertake the transfer and a given level of knowledge tacitness, the
more the knowledge is connected, the more effective the transfer. A number of arguments
can be made to support this line of reasoning.
First, researchers in social psychology have found that similarity and attraction are posi-
tively associated (Sabini, 1992). Firms manage international business units more efficiently
with a high degree of relatedness (Palich & Gomez-Mejia, 1999). Thus, decision makers
consider relevant knowledge to be of high value (Feldman & March, 1981). Second, if the
knowledge to be learned is related to the firm’s current knowledge, the firm can quickly rec-
ognize the potential benefits of the new knowledge and thus be motivated to take measures
to assimilate and use it (Mudambi & Navarra, 2004). Third, knowledge evolves through the
continuous incorporation of new knowledge into the existing knowledge base. Schulz noted
that “knowledge can change other knowledge the more it is related to it or can be related to
it” (Schulz, 2003: 442). The more new knowledge is connected with current knowledge, the
higher the capacity to absorb it, apply it, and integrate it into the organization. Units’ absorp-
tive capacity is “largely a function of their preexisting stock of knowledge” (Szulanski, 1996:
31). Knowledge relevance therefore improves a firm’s willingness and capacity for learning,
 Yang et al. / Knowledge Flows in Multinational Corporations 885

two critical factors that affect the extent and success of knowledge transfer (e.g., Gupta &
Govindarajan, 2000; Mudambi, Mudambi, & Navarra, 2007).
Finally, although knowledge relevance is positively related to absorptive capacity, the two
concepts are theoretically distinct (Mahnke, Pedersen, & Venzin, 2005). For example, if
knowledge relevance is low but the transfer is considered a strategic priority, the firm may
invest resources to create sufficient absorptive capacity.

Hypothesis Development

Knowledge Characteristics

Our core argument is that knowledge relevance has different influences on conventional
and reverse knowledge transfers, attributable to the principal–agent relationships within
MNCs. In conventional knowledge transfer, the parent firm can require the subsidiary to
adopt knowledge developed at home through the use of control mechanisms. Such vertical
top-down knowledge transfers appear to be effective in resolving concerns about the rele-
vance of new knowledge (Schulz, 2001).
Conventional transfer is likely to be “transplantation” or “supplantation” (Mudambi,
2002). It is likely that when an MNC acquires a local firm as a subsidiary, especially when
the MNC’s objective is to exploit local markets, it will infuse knowledge from home to
supplant the subsidiary’s existing knowledge. This was particularly important in transition
economies in the 1990s where local firms typically had weak management and marketing
capabilities (Meyer & Estrin, 2001) and thus were eager to learn from their new foreign own-
ers. The subsidiary typically replicates knowledge from the parent. Therefore, knowledge
relevance between parent and subsidiary will not play a key role in knowledge transfer
because of the parent firm’s authority.
Reverse knowledge transfers from a subsidiary to its parent firm are much more difficult
than conventional transfer. Subsidiaries may be motivated to transfer knowledge to their
parent firm because it could strengthen their strategic position in the whole organization
(Gupta & Govindarajan, 2000; Mudambi & Navarra, 2004). Yet a parent firm would only be
interested in transfers that it deems to be beneficial from its point of view (Gupta &
Govindarajan, 2000; Kogut & Zander, 1993; McDonald, Tüselmann, Voronkova, & Dimitratos,
2005). Reverse knowledge transfer can be beneficial to the parent firm in terms of accessing
local knowledge, coordinating a global strategy, improving processes in the MNCs network,
and providing new products (Ambos, Ambos, & Schlegelmilch, 2006).
However, not every knowledge transfer will equally benefit the receiver (Ambos et al.,
2006). Some knowledge transfers may benefit the parent firm a great deal, some might only be
used for information and coordination, and others may be too costly to integrate into opera-
tions. Moreover, parent firms may not recognize potential benefits and thus not take appropri-
ate initiatives to adopt knowledge available from subsidiaries. Because of the principal–agent
relationship, the parent firms’ commitment to learning from subsidiaries is less than the sub-
sidiaries’ commitment to learning from their MNC parents. In other words, conventional trans-
fer is a teaching process whereas reverse transfer is a persuading process. The subsidiary has
to persuade the parent firm that its knowledge can fit the parent’s needs.
886 Journal of Management / October 2008

Knowledge relevance can help parent firms pay attention to the new knowledge of sub-
sidiaries and recognize the potential benefits. The more their knowledge overlaps, the more
likely it is that the parent takes interest in the subsidiary’s knowledge and understands its
benefits. Therefore, we expect reverse knowledge transfer to be sensitive to knowledge
relevance. Conversely, we do not expect conventional knowledge transfer to be affected
by knowledge relevance, although such a null hypothesis cannot be tested using standard
statistical hypothesis tests.

Hypothesis 1: Knowledge relevance between parent and subsidiary is significant in explaining the
extent of reverse knowledge transfer from subsidiary to parent.

The impact of knowledge relevance varies not only across internal contexts (i.e., conven-
tional vs. reverse) but also across external contexts (Meyer, 2007). These external contexts may
be analyzed on the basis of strategic fit, defined as “aligning strategy with (the organization’s)
external environmental conditions” (Venkataraman and Camillus, 1984: 516). Acquisitions
in markets with high levels of strategic fit have been associated with better value creation
(Shelton, 1988; Zajac, Kraatz, & Bresser, 2000). It follows that an MNC’s acquisition in a loca-
tion with a high level of strategic fit is likely to be viewed as strategically important.
Numerous characteristics are associated with each location, including culture, institu-
tions, government regulations, customer preferences, and labor availability. A location’s set
of characteristics determines its strategic fit with the MNC’s objectives and hence its strate-
gic importance. A subsidiary’s knowledge base is embedded in the environment in which it
is developed (Andersson et al., 2002; Cantwell & Mudambi, 2005; Cui et al., 2006; McDonald
et al., 2005). This implies that the same level of knowledge relevance can have a higher or
lower impact on knowledge transfers depending on the strategic importance of subsidiary’s
geographical location (Jensen & Szulanski, 2004).
Therefore, we expect country-specific effects to moderate the effect of knowledge rele-
vance on the amount of knowledge transferred. This effect is likely to work through the
strategic importance of the subsidiary’s location for the parent MNC. The more strategically
important the subsidiary location, the easier it is for the subsidiary to “persuade” the parent
of the value of its knowledge.

Hypothesis 2: A strategically important subsidiary location has a negative moderating effect on the
relationship between knowledge relevance and reverse knowledge transfer.

Organizational Characteristics

Organizational characteristics also play roles in knowledge transfer. Internal knowledge

flows could be a function of the motivational disposition of transfer units (Gupta &
Govindarajan, 2000). Furthermore, formal structure and systems and other attributes of orga-
nizational contexts affect the effectiveness of knowledge transfer (Foss & Pedersen, 2002;
Gupta & Govindarajan, 1991; McCann & Mudambi, 2005).
The acquisition motives of the parent firm not only form the role of the acquired subsidiary
but also determine the relationship of the parent and this unit. In this article, we define
 Yang et al. / Knowledge Flows in Multinational Corporations 887

subsidiary roles in terms of the subsidiary mandates proposed by Cantwell and Mudambi
(2005): competence creation versus competence exploitation. Parent firms expect “competence-
creating” subsidiaries to introduce new knowledge that can be used by other corporate units
or to become centers of excellence (Birkinshaw & Hood, 1998; Frost, Birkinshaw, & Ensign,
2002). In contrast, the parent firms expect “competence-exploiting” subsidiaries to use home-
based knowledge in local markets. These two subsidiary types help the parent MNC advance
its “exploration” and “exploitation” strategic objectives (March, 1991). The motives for
acquisition are categorized accordingly.
Competence-exploiting subsidiaries are expected to transfer and adapt knowledge from
their parent to local markets. In the years immediately following acquisition, these sub-
sidiaries are engaged in implementing established home-based knowledge effectively in
local environments (Cantwell & Piscitello, 2000). These processes require continual knowl-
edge transfers from parent firms (Cantwell & Mudambi, 2005).
On the other hand, competence-creating subsidiaries are expected to develop knowledge
assets that are new to the MNC network, like new products, technologies, practices, and
skills (McDonald et al., 2005; Papanastassiou & Pearce, 1997; Pearce, 1999). Competence-
creating subsidiaries are expected to diffuse knowledge to other units of the MNC network
(Frost et al., 2002). A greater volume of distinctive and valuable knowledge is likely to be
available in competence-creating subsidiaries than in competence-exploiting subsidiaries,
simply by virtue of their organizational role.
Thus, we expect competence-exploiting subsidiaries to be associated with significantly
higher conventional knowledge transfers. Conversely, we expect competence-creating sub-
sidiaries to be associated with significantly higher levels of reverse knowledge transfers.

Hypothesis 3a: A subsidiary acquired with a competence-exploiting motive has significantly higher
conventional knowledge transfers from parent to subsidiary than a subsidiary acquired with a
competence-creating motive.
Hypothesis 3b: A subsidiary acquired with a competence-creating motive has significantly
higher reverse knowledge transfers from subsidiary to parent than a subsidiary acquired with a
competence-exploiting motive.

Methods

Data

The empirical analysis is based on a questionnaire survey administered by local research

teams in three countries in CEE in 2003: Hungary, Poland, and Lithuania (Meyer & Estrin,
2007). The foreign direct investment (FDI) attracted by CEE countries has increased rapidly
since the early 1990s (e.g., Brouthers, Brouthers, & Werner, 2001; UNCTAD, 2005), includ-
ing investments for R&D (Brouthers, Brouthers, & Nakos, 1998). This FDI has grown from
negligible levels, thus providing an opportunity to investigate the evolution of FDI from its
outset (Meyer & Peng, 2005) and includes investments by smaller firms (Nakos & Brouthers,
2002). These countries thus provide a suitable context for us to investigate knowledge
888 Journal of Management / October 2008

transfers in MNCs, especially transfers between units in developed countries and units in
emerging economies (Brouthers & Bamossy, 2006).
Moreover, these three countries were chosen because they experienced similar transition
processes with high FDI potential and performance (UNCTAD, 2005). FDI inflows to CEE
countries are highly concentrated in Poland and Hungary, with Hungary leading in the early
1990s, whereas Poland became the largest recipient in the late 1990s. Lithuania was for-
merly part of the Soviet Union, and its economy has grown rapidly since independence in
1991. In the period 1993-2000, cumulative FDI inflows reached US$694 per capita, placing
Lithuania seventh among CEE countries (Smarzynska, 2004). All three countries are increas-
ingly attracting FDI on the basis of high education levels and R&D potential, with low-skill-
seeking FDI increasingly locating to countries outside the European Union. With attractive
technological capabilities (UNCTAD, 2005), these three countries provide a good platform
to study the asymmetries of conventional and reverse knowledge flows in the early stage of
MNC subsidiaries’ evolution.
The base population of our research included all FDI projects established from 1990 to
2002 that have at least 10 employees and foreign equity participation of at least 10%, as per
the Organization for Economic Cooperation and Development (OECD) definition of FDI
(OECD, 1996). The research questions and instruments were designed and developed after
three meetings of the research teams. Then the questionnaire was translated into local lan-
guages and sent to the respondents in both languages.
The survey’s sample frame was constructed from multiple locally available databases to
maximize the coverage of FDI (complete databases of FDI projects in these countries do not
exist). The questionnaire was sent to the chief executive of each foreign subsidiary for whom
contact information was available in the database. In most cases, this was followed up with
telephone calls and personal interviews. A total of 4,027 foreign subsidiaries were contacted,
and we obtained responses from 535, representing a response rate of more than 13%. There
were 200 respondents in Poland, 111 in Lithuania, and 224 in Hungary, representing response
rates of 10%, 11%, and 22%, respectively. The databases often reported very imprecise firm
information, such that some contacted firms were not actually in operation (especially in
Poland) or not actually foreign owned (in Hungary) and should theoretically not have been in
the sample frame. Thus, the aforementioned response rates are low estimates.
Of these foreign-affiliated units, 105 (44 in Poland, 21 in Lithuania, and 40 in Hungary)
became MNC subsidiaries through international acquisitions. This is the dataset used in the
current study. The headquarters of the acquiring MNCs were mostly located in Western
Europe (80%), whereas relatively few were located in North America (12%). This is consis-
tent with patterns described in the early research on the importance of proximity for FDI in
CEE enterprises (Meyer & Peng, 2005). The remainder of the parent companies originated
from other CEE countries, East Asia, and Australia.
The acquisitions in our sample cover a broad range of industries. Most of the acquisitions
took place in manufacturing, with foreign investment a little bit higher in light manufacturing
(30%) compared with heavy manufacturing (23%). Twenty percent of the acquisitions
occurred in business and financial services and 13% in sales. Other industries such as utilities,
construction, hotel and restaurants, chemicals, transportation, and communication also appear
in the sample.
 Yang et al. / Knowledge Flows in Multinational Corporations 889

The questionnaire covered different aspects of the characteristics, activities, and knowl-
edge of both parent and subsidiary units. We used the focal acquired subsidiary as our unit of
observation. The next subsection introduces the variables and describes them in detail.

Variables

Dependent variables. The dependent variables are the extent of knowledge transfers
between parent and subsidiary. One variable measures the extent of conventional flows from
parent to subsidiary. The other variable measures the extent of the reverse flows from
subsidiary to parent.
Six questions were asked to measure the extent of conventional transfer: (1) To what
extent have you used technical innovation capabilities from the parent’s existing business to
assist the acquired business? (2) To what extent have you transferred know-how in manu-
facturing to the acquired business? (3) To what extent have you integrated acquired products
into your existing sales networks? (4) To what extent have you shared brand names with the
acquired business? (5) To what extent have you transferred financial resources for R&D to
the acquired business? (6) To what extent have you transferred managerial capabilities to the
acquired business?
For reverse transfers, the following questions were asked: (1) To what extent have you
used the acquired business’s technical innovation capabilities to assist the parent’s existing
business? (2) To what extent have you used acquired the business’s know-how in manufac-
turing? (3) To what extent have you used the acquired business’s sales networks? (4) To what
extent have you used the acquired business’s brand names? (5) To what extent have you used
the acquired business’s financial resources for R&D? (6) To what extent have you used the
acquired business’s managerial capabilities?
Knowledge is composed of know-how and capabilities that “refer to a firm’s capacity to
deploy resources to affect a desired end. They are information based, tangible or intangible
processes that are firm specific and are developed over time through complex interactions
among the firm’s resources” (Amit & Schoemaker, 1993: 35). There are different types of
knowledge that could be transferred between parent and subsidiary. Gupta and Govindarajan
(1994) distinguished six types of knowledge: market data on customers, market data on com-
petitors, marketing know-how, distribution know-how, technology know-how, and purchas-
ing know-how. Schulz (2003) identified three types of organizational knowledge: knowledge
about technologies; knowledge related to sales and marketing; and knowledge pertaining to
government agencies, competitors, and suppliers. In this study, we measured the following
types of transferred knowledge: knowledge about technological know-how, knowledge about
sales and marketing, knowledge about financial resources, and knowledge about manage-
ment. The measures ranged from not at all to a very large extent on a 5-point Likert-type
scale. The Cronbach’s alphas for the scales of conventional knowledge transfer and reverse
knowledge transfer were .851 and .866, respectively.

Independent variables. The independent variables are related to knowledge character-

istics and organizational characteristics. Knowledge characteristics mainly relate to the
890 Journal of Management / October 2008

knowledge relevance between parent and subsidiary, whereas organizational characteristics

relate to the MNC parent’s motives for acquisition.
We defined knowledge relevance as the extent to which the knowledge in the parent and
the knowledge in the acquired subsidiary overlapped or were similar. From a relevance theory
perspective, Schulz argued that “extra-unit knowledge is relevant to a subunit the more it has
implications for the subunit, and the easier it is to derive these implications” (2003: 444). He
measured the following factors to determine knowledge relevance: local knowledge base,
codification of knowledge, extra-unit knowledge base, and the dyadic relationship. Drawing
from these factors, we measured this construct directly by asking the respondents how simi-
lar the knowledge of the parent firm and the acquired firm was before acquisition with respect
to five items: technology, product range, markets, customers, and competition. Responses
were reported on a 5-point Likert scale, with higher scores representing a greater degree of
relevance. The Cronbach’s alpha for the aggregate index is .772.
The motives for the acquisitions are differentiated into two categories: competence cre-
ation and competence exploitation. We used the subsidiary mandate types from Cantwell and
Mudambi (2005) to differentiate the firm’s motives. This variable is operationalized in terms
of the foreign parent’s strategic objectives with regard to the acquired subsidiary’s mission.
Because there are only two strategy objectives, the generated variable is a dummy. If the sub-
sidiary’s responsibilities are to deliver access to local researchers and skilled employees, to
improve efficiency of the parent MNC’s global production network, or to control specific
strategic assets in the host country, the subsidiaries are considered to be competence creat-
ing. There were four items measured using a 5-point Likert scale, coded from 1 (not at all
important) to 5 (very important). If the subsidiary’s responsibilities are to provide access to
local markets, to obtain local natural resources, or to use a local low-cost labor force, the
subsidiaries are considered to be competence exploiting. There were three items measured
on a 5-point Likert scale reverse coded from 1 (very important) to 5 (not at all important).
The seven items were summed, and subsidiaries with high scores (above the mean) were
designated as competence creating and those with low scores (below the mean) as compe-
tence exploiting. In other words, competence-creating subsidiaries are strategically outward
oriented, whereas competence-exploiting subsidiaries are inward oriented.

Control variables. A number of location, industry, and firm variables were included as
controls. These included host country, home country/region, acquisition industry, the acqui-
sition experience, international experience, and relative size of the acquiring MNC as well
as the age of the acquired subsidiary and its absolute size.
To capture differences in host country contexts, the location of the subsidiary was repre-
sented by two dummy variables; one each for Poland and Lithuania with Hungary as the
baseline. In addition, the home country/region contexts were controlled as dummy variables
to represent different home country contexts. Three different home region contexts were
included: European countries, North American countries, and other countries in the world.
European countries were used as the baseline.
The industry context is also likely to have an influence on knowledge transfer within an
organization. Manufacturing industries have different patterns of knowledge flows compared
with industries that are service based (Grosse, 1996; Lahti & Beyerlein, 2000). Following
 Yang et al. / Knowledge Flows in Multinational Corporations 891

Gupta and Govindarajan (2000), Kuemmerle (1999), and others, we used a dummy variable
to indicate whether the subsidiary was in manufacturing or services, with services serving as
the base case.
At the firm level, it has been argued that firms with prior experience do better than those
without such experience (Lubatkin, 1983) and that firms can develop their dynamic capabili-
ties by learning from repeated practices (Eisenhardt & Martin, 2000). We therefore controlled
for the parent’s experience, in terms of both acquisition and international operations. We mea-
sured acquisition experience by the number of acquisitions the acquiring firm had made
worldwide before the focal acquisition took place. We measured international experience by
the number of countries in which the acquiring firm had affiliates in the year of the acquisi-
tion. In the case of cross-border acquisitions, the relative size of the acquiring and target firms
has been shown to have a significant effect, rather than the absolute size of the acquirer (Lee
& Caves, 1998; Seth, Song, & Pettit, 2002). Hence we controlled for the relative size of the
acquiring MNC and the target subsidiary using the relative sales of the two parties.
We also controlled for acquisition age, measured as the duration from the year that the
subsidiary was acquired to the year that this survey was conducted. We controlled for sub-
sidiary size measured by the natural log of its number of employees. This serves as a proxy
for many subsidiary characteristics, including the extent of local linkages, economies of
scale and scope, and importance within intra-firm and external networks.
To deal with concerns about common methods variance, we performed Harman’s one-
factor test (Podsakoff & Organ, 1986) on items included in our analysis to examine whether
common-method bias augmented relationships. If common-method bias exists in the data, a
single factor will emerge from a factor analysis of all measurement items included in the study,
or one general factor that accounts for most of the variance will result. The factor analyses
reported good properties, supporting the validity of the data. Specifically, four factors emerged
with eigenvalues greater than one. The first factor (eigenvalue = 2.36) explained 14.35% of
the variance, whereas the cumulative variance explained by all four factors was 72%.

Results
The correlation matrix of all variables is shown in Table 1. The mean number of prior for-
eign acquisitions was about 18. This indicates that many MNCs had considerable interna-
tional acquisition experience before they acquired the current subsidiaries. Subsidiary age
was 6 years on average, which shows that most of these acquired subsidiaries were in the
early stage of their development. The average age was slightly lower in Lithuania (just under
5 years) and slightly higher in Hungary (just under 8 years). However, the data reveal sub-
stantial differences in size. The acquired subsidiaries in Poland were the largest (average
employment 1,300) and those in Hungary were the smallest (average employment 250).
Conventional as well as reverse knowledge transfers were significantly correlated with knowl-
edge relevance, the competence-creating motive, and host country dummies.
Focusing on the core issue of this article, we examined the differences between conven-
tional and reverse knowledge transfers. Our research hypotheses were tested using hierar-
chical regression analysis on internal knowledge transfers. Only control variables were
892
Table 1
Correlation Matrix and Descriptive Statistics
Variables Mean SD 1 2 3 4 5 6

1. Reverse knowledge transfer 2.32 1.07 1

2. Conventional knowledge transfer 3.49 1.03 0.14 1
3. Knowledge relevance 2.83 0.98 0.29* 0.16 1
4. Competence-creating motive 0.30 0.46 0.06 0.30* 0.08 1
5. Poland 0.42 0.50 –0.16 –0.12 –0.15 –0.05 1
6. Lithuania 0.20 0.40 0.31** 0.07 0.16 0.07 –0.43** 1
7. Hungary 0.38 0.49 –0.11 0.08 0.02 –0.01 –0.67** –0.39**
8. Industry 0.50 0.50 –0.02 0.16 –0.02 0.00 0.07 –0.17
9. North America 0.12 0.33 0.06 –0.21 –0.10 –0.19 0.33** –0.19
10. European countries 0.85 0.36 –0.04 0.14 0.12 0.21* –0.34** 0.21*
11. Asia/other 0.03 0.17 –0.05 0.16 –0.05 –0.10 0.09 –0.09
12. Acquisition experience (Log) 0.76 0.59 0.24 0.06 0.14 0.23 –0.09 0.08
13. Acquisition age 6.05 3.48 –0.14 0.18 –0.06 0.05 –0.06 –0.20
14. Subsidiary size (Log) 2.26 0.69 –0.06 0.13 –0.14 0.06 0.30** –0.03

Variables 7 8 9 10 11 12 13 14

7. Hungary 1
8. Industry 0.07 1
9. North America –0.18 –0.03 1
10. European countries 0.17 –0.05 –0.89** 1
11. Asia/other –0.02 0.17 –0.06 –0.40** 1
12. Acquisition experience (Log) 0.02 0.05 –0.02 –0.11 0.06 1
13. Acquisition age 0.27* 0.30** –0.13 0.10 0.07 –0.19 1
14. Subsidiary size (Log) –0.28** –0.02 0.09 –0.20 0.24* –0.13 0.01 1

Note: N = 105.
*p < .05 (two-tailed)
**p < .01 (two-tailed)
 Yang et al. / Knowledge Flows in Multinational Corporations 893

entered in the first specification. In the second specification, we entered the main effects for
knowledge characteristics (knowledge relevance) and organizational characteristics (the
motives for the acquisition). In the third specification, we entered interaction terms. The
parameter estimates of the regression models of both directions of knowledge transfers are
provided in Table 2. Model 3 (reverse knowledge flows) and Model 4 (conventional knowl-
edge flows) present the overall results, controlling for location, industry, and firm effects.
The adjusted R2 values for models 3 and 4 are .06 and .10, respectively. In Model 5 (reverse
knowledge flows) and Model 6 (conventional knowledge flows), we included the interactions
between knowledge relevance and the host environments. We observed that the insertion of
these interaction effects improved the explanatory power, with the adjusted R2 increasing in
Models 5 and 6. The absolute values of the adjusted R2 are very similar to those reported in
recent studies of knowledge transfer in MNCs (e.g., Minbaeva, 2007; Williams, 2007). The
F statistics’ significance levels improve as the main effects and interaction terms are added,
supporting the chosen model specifications. Furthermore, the variance inflation factors in all
models are not significant.
In both Models 3 and 5, relating to reverse knowledge transfers, knowledge relevance is
highly statistically significant. In other words, increased similarity or overlap between the
subsidiary’s knowledge and that of the parent is associated a higher level of reverse knowl-
edge transfer. However, in Models 4 and 6, knowledge relevance is not significant in explain-
ing the extent of conventional knowledge transfer. Thus, Hypothesis 1 is strongly supported
by the results, suggesting that the knowledge relevance between source and target is impor-
tant in determining the extent of reverse knowledge transfer. These results clearly confirm
our argument that there is an asymmetry between conventional and reverse knowledge flows
in terms of the effects of knowledge relevance.
Moreover, we found that the host country has a significant moderating effect on the rela-
tionship between knowledge relevance and knowledge transfers, as predicted in Hypothesis
2. As expected, location in the large and strategically important Polish market negatively
moderates the effect of knowledge relevance on reverse knowledge transfer in acquired sub-
sidiaries. Hence, the effects of knowledge relevance on reverse knowledge transfers are sig-
nificantly less important in Polish subsidiaries compared with subsidiaries in the other two
host locations.
A more subtle examination of the moderating effect of location on the relationship
between knowledge relevance and reverse knowledge transfer (Model 5) is provided in
Figure 1. Here we depict the relationship between knowledge relevance and reverse knowl-
edge flows separately for the different host locations. The estimated values are computed at
the average values of all other regressors in Table 2. Figure 1 shows that knowledge rele-
vance for reverse knowledge transfers was much more important for subsidiaries located in
the smaller markets of Hungary and Lithuania.
The motive for acquisition was significant in determining the extent of conventional
knowledge transfers. However, we found that conventional knowledge transfers were larger
in the case of subsidiaries established with competence-creating motives. This contradicts
Hypothesis 3a. Furthermore, the motive for acquisition was not significant in the case of
reverse knowledge transfers, so that Hypothesis 3b was not supported.
894
Table 2
Hierarchical Regression Analysis of Knowledge Flows
Knowledge Flows (Control Variables) Knowledge Flows (Main Effects) Knowledge Flows (Interactions)

Reverse Conventional Reverse Conventional Reverse Conventional

Variables (Model 1) (Model 2) (Model 3) (Model 4) (Model 5) (Model 6)

Constant 1.93 (3.79)** 2.88 (5.79)** 1.28 (2.21)* 2.49 (4.49)** 0.71 (1.03) 2.83 (4.20)**
Location effects
Host: Lithuania 0.59 (2.30)** 0.15 (0.60) 0.53 (2.11)* 0.11 (0.43) 0.86 (1.04) –0.03 (0.04)
Host: Poland –0.07 (0.50) –0.17 (0.78) –0.06 (0.27) –0.18 (0.85) 0.99 (1.78)† –0.84 (1.55)
Home: N. America 0.31 (1.07) –0.40 (1.44) 0.36 (1.25) –0.25 (0.88) 0.28 (0.98) –0.20 (0.69)
Home: Asia/other –0.10 (0.18) 0.34 (0.61) –0.05 (0.10) 0.53 (0.99) –0.08 (0.14) 0.55 (1.02)
Firm and industry effects
Industry 0.11 (0.55) 0.15 (0.80) 0.10 (0.51) 0.14 (0.75) 0.07 (0.36) 0.15 (0.84)
Parent acquisition experience (Log) 0.36 (1.44) 0.01 (0.04) 0.30 (1.19) –0.15 (0.55) 0.26 (1.05) –0.11 (0.43)
Parent firm relative size 0.04 (0.66) 0.03 (0.41) 0.03 (0.46) 0.00 (0.01) 0.02 (0.35) 0.01 (0.10)
Parent firm international experience 0.00 (0.04) 0.01 (1.82)† 0.00 (0.28) 0.01 (1.90) † 0.00 (0.109) 0.01 (1.78)†
Acquisition age –0.02 (0.70) 0.04 (1.27) –0.02 (0.59) 0.04 (1.51) –0.01 (0.43) 0.04 (1.40)
Acquired subsidiary size (Log) –0.02 (0.12) 0.08 (0.50) –0.00 (0.02) 0.06 (0.47) 0.02 (0.12) 0.05 (0.34)
Knowledge variable
Knowledge relevance 0.23 (2.27)* 0.15 (1.52) 0.44 (2.73)** 0.02 (0.15)
Organization variable
Competence-creating motive 0.05 (0.22) 0.48 (2.34)** –0.02 (0.09) 0.52 (2.52)**
Interaction effects
Relevance × Lithuania –0.12 (0.47) 0.05 (0.21)
Relevance × Poland –0.40 (2.07)* 0.25 (1.34)
Adjusted R2 0.03 0.04 0.06 0.10 0.08 0.10
F statistic (p value) 1.23 (0.25) 1.42 (0.19) 1.55 (0.12) 1.92 (0.04) 1.68 (0.07) 1.79 (0.05)

Note: N = 105. Values are coefficients.

†
p < .10
*p < .05
**p < .01
 Yang et al. / Knowledge Flows in Multinational Corporations 895

Figure 1
Reverse Knowledge Transfer Across Host Countries

1.4 0
Poland
1.2 0
Lithuania
1.0 0
Knowledge Flows

Hungary
0.8 0
(Reverse)

0.6 0
0.4 0
0.2 0
0.0 0
–0.2 0
–0.4 0
–1 SD Mean +1 SD
Knowledge Relevance

Discussion and Conclusions

The objective of this study was to understand how knowledge and organizational and
location characteristics affect hierarchical knowledge transfers between an MNC parent
and its acquired subsidiary. Specifically, we studied the influence of knowledge relevance
and acquisition motives on internal knowledge transfers after controlling for location factors.
Our findings indicate that these factors have an asymmetrical influence on knowledge trans-
fers. Thus, conventional and reverse knowledge transfers are different processes, and our
empirical results provide insights into the determinants of these differences.

Knowledge Relevance

Our approach of using knowledge relevance links the knowledge to the organization; that
is, we focused on the levels of knowledge relatedness between the source and target. This is in
contrast to the approach adopted in much of the literature, where knowledge characteris-
tics such as tacitness, causal ambiguity, and complexity are not linked to the organization.
However, our approach is consistent with the notion of absorptive capacity (Cohen &
Levinthal, 1990) and more specifically the notion of relative absorptive capacity (Lane &
Lubatkin, 1998). This is because we expected knowledge relevance to increase relative absorp-
tive capacity in the dyad and thus to be positively related to the ability of a unit to understand
and adopt knowledge inflows. We found that relevance is an important factor influencing
knowledge flows within multinational organizations, which concurs with ideas in the literature
(e.g., Hansen & Løvas, 2004; Schulz, 2003). However, we found relevance to be important in
reverse knowledge transfer rather than conventional knowledge transfer. The significance of
the directional context in knowledge transfers is an important new finding.
896 Journal of Management / October 2008

This asymmetry could result from the different nature of learning processes in conventional
and reverse knowledge transfers. The transfer of knowledge from parent to subsidiary is a
process of either knowledge supplantation or knowledge transplantation (Mudambi, 2002).
That is, the parent company transplants its home-based knowledge or uses it to supplant an
existing knowledge base in the acquired subsidiary. In addition, the parent company has the
authority and power to require the acquired subsidiary to adopt the knowledge inflow. In con-
trast, the transfer of knowledge from subsidiaries to parents is a process of searching for recog-
nition and acceptance. To transfer knowledge, the subsidiary first needs to make the parent
interested in it. An effective way for a subsidiary to attract its parent’s attention is to show how
its knowledge can support the parent’s products or processes. When the subsidiary’s knowledge
is highly related to the parent’s knowledge base, it is easier for the subsidiary to establish
rapport with personnel at the parent and gain recognition (Mudambi et al., 2007).

Acquisition Motives

We explored the relationship between subsidiary roles and knowledge transfers. We

found that MNC parents transfer more knowledge to acquired subsidiaries if they have a
competence-creating motive rather than a competence-exploiting motive. Our results here are
counter to our hypotheses. However, they reflect the nature of our sample, which is made up
of acquisition targets in transition economies, few of whose knowledge assets will be usable
without major knowledge “investments” by the parent firm. We observed the early period,
when the parent was making large knowledge start-up investments to develop the subsidiary.
Although knowledge was also transferred to competence-exploiting subsidiaries and such
flows were likely to be continual, they did not have large start-up type investments in the
early years.
Competence-creating subsidiaries in transition economies must transplant knowledge
inflows (Mudambi, 2002), developing absorptive capacity relative to the specific knowledge
base of their new MNC parents (Lane & Lubatkin, 1998). They must integrate the trans-
planted knowledge with their locally existing knowledge (McCann & Mudambi, 2005).
These processes of transplantation and integration require large knowledge transfers from
the parent in the early years after acquisition. The greater the extent of the subsidiary’s com-
petence creating mandate, the more the investment of both knowledge and other resources
from parent to the acquired unit.
This is in line with the subsidiary evolution literature in international business (Birkinshaw
& Hood, 1998; Cantwell & Mudambi, 2005), wherein a predominant determinant of subsidiary
mandates is headquarters assignment. Subsidiaries are strategically assigned roles and man-
dates early in their existence. However, they grow into these mandates over time, progress-
ing to higher levels of responsibility through headquarters support. High levels of knowledge
transfers in the early years of the subsidiary’s existence can be seen as an aspect of head-
quarters’ support of its competence-creating mandate assignment.
In this early stage of subsidiary evolution, knowledge transfer processes are governed by
hierarchy rather than the parity that would be characteristic of more evolved subsidiaries.
Eventually we would expect these competence-creating subsidiaries to act like their counterparts
 Yang et al. / Knowledge Flows in Multinational Corporations 897

in developed economies, that is, to exhibit higher levels of reverse knowledge transfers as
hypothesized.

Location Context

The host country context significantly influences reverse knowledge transfers, mainly by
moderating the relationship between knowledge relevance and transfer (Figure 1). Thus, the
location of the subsidiary has very important effects on the implementation of knowledge
transfers.
Although CEE economies share many features, they vary with respect to institutional envi-
ronment and market size, which are likely to moderate MNC knowledge transfer (Meyer,
2007). This allowed us to adopt a three-country study design that overcomes a major limita-
tion of many prior studies in the literature that used single-context datasets (e.g., Cantwell &
Mudambi, 2005; Lyles & Salk, 1996). Specifically, our results suggest that location had a
moderating effect on the relationship between knowledge relevance and knowledge transfer.
Relevance was less important for reverse knowledge transfers in Poland relative to Hungary
and Lithuania. This is graphically illustrated in Figure 1, where the slope effect for Polish
subsidiaries is small compared with subsidiaries in Hungary and Lithuania.
Poland has by far the largest domestic market of the three host locations and also had a
faster rate of transition in the study period (Meyer & Estrin, 2007). This is supported in our
data, where the Polish subsidiaries were considerably larger in terms of employment than
those in Hungary or Lithuania. This suggests that the Polish subsidiaries were strategically
more important to their parent groups and therefore had less of a problem convincing their
parent MNCs that their knowledge is valuable. This would account for the fact that a Polish
location negatively moderates the effect of knowledge relevance.
Hungary had the largest flow rate of FDI during the study period (UNCTAD, 2005). This
is reflected in our data, where the Hungarian subsidiaries were acquired earlier, on average.
These subsidiaries also had the smallest average employment in our sample, suggesting a
higher level of capital intensity. It is likely that these subsidiaries are more highly special-
ized. Both small size and greater specialization would account for the greater importance of
knowledge relevance in reverse knowledge transfers.
These findings may generalize to other locational contexts. Large subsidiaries in big mar-
kets may exercise greater intrafirm bargaining power (Mudambi & Navarra, 2004). Thus,
they may find it easier to transfer knowledge back to their parents, even if the level of rele-
vance is low. On the other hand, specialized subsidiaries in smaller markets may be viewed
as peripheral to the value-maximizing objectives of the parent MNC. Relevance may there-
fore be a crucial characteristic in ensuring that reverse knowledge transfers take place.
Host country institutional factors are likely to be crucial in determining the broad char-
acteristics of the subsidiaries in each location. These broad characteristics are important
determinants of the nature of intra-MNC knowledge transfers. Our results therefore under-
line the importance of validating results from any single country study by replication in other
country contexts (Meyer, 2007).
898 Journal of Management / October 2008

Surprisingly, home country and industry factors did not have significant effects on hier-
archical knowledge transfer. Regarding home country factors, a possible explanation is that
most of the acquirers originate from other European countries (84.8%), so that their geo-
graphic and cultural distance to the acquired firms is not very high. With regard to industry
factors, an explanation could be that the acquired subsidiaries are in an early stage of devel-
opment, so that the different knowledge trajectories between manufacturing and services
have not yet emerged.

Limitations and Directions for Future Research

As with all empirical research, this study has its limitations. All measures were derived
from questionnaires, which may result in bias because of the use of a single data-gathering
method. However, supplementary data were gathered using telephone calls and personal
interviews. The responses from these methods corroborated our questionnaire responses,
providing support for the veracity of the survey data.
We only used the MNC parent’s motives in acquiring the subsidiary to examine its strate-
gic mandate. This is because in the early stage of the acquired subsidiary’s life, parental
assignments are crucial determinants of its strategic context. However, subsidiary mandates
evolve over time with the interaction of parent assignment, subsidiary choice, and the local
environment (Birkinshaw & Hood, 1998; Cantwell & Mudambi, 2005). Because this study
was based on cross-sectional data, we were not able to observe the process of subsidiary evo-
lution. Time will play a role in both conventional knowledge transfer and reverse knowledge
transfer between parent and acquired subsidiaries. Thus, it would be interesting to examine
the evolution of the asymmetries we have uncovered in a longitudinal study.
The data for this study came from acquired subsidiaries in three Central and Eastern
European countries, and most of the acquirer firms were from nearby Western European
countries. This may reduce the influence of geographical distance and cultural heterogeneity.
Thus, the results might not generalize to other contexts, such as the emerging market economies
in East Asia.
Our research focused on knowledge transfers in international acquisitions and on hierarchi-
cal knowledge flows between parents and subsidiaries. Other foreign investment modes (e.g.,
greenfield entries and joint ventures) and lateral knowledge flows among subsidiaries were not
studied. Entry mode could affect the extent of knowledge transfers because the objectives of
the investment and the roles of the subsidiary vary with it. Our study did not examine lateral
knowledge flows, which may have different characteristics than hierarchical flows. However,
such flows may be less important in the early years of a subsidiary’s existence.
Data obtained simultaneously from both sides of the parent–subsidiary dyad would be
very helpful in exploring asymmetries in the perceptions of hierarchical knowledge transfers
and the mechanism used. For example, knowledge relevance may be perceived differently
from the two sides of the knowledge transfer relationship. Furthermore, conventional and
reverse knowledge transfers may be undertaken using different transfer mechanisms.
Finally, one may conjecture that the organizational levels at which conventional and reverse
knowledge flows occur may be different. Anecdotal evidence suggests that conventional
 Yang et al. / Knowledge Flows in Multinational Corporations 899

knowledge flows occur through cooperation between headquarters and subsidiary top man-
agement so that adoption occurs by fiat (Asakawa, 2001). Reverse knowledge flows tend to
occur through communication between subsidiary middle managers and their counterparts at
headquarters (Mudambi et al., 2007). Such asymmetry in transfer governance may reinforce
asymmetries in transfer logics. These topics are fruitful avenues for future research.
Our results demonstrate that knowledge and organizational and location factors have
asymmetric effects on internal knowledge transfers. This study goes beyond prior research
in that it examined conventional and reverse knowledge transfers within the same sample of
firms. Earlier research suggests that there are many determinants of the success of knowl-
edge transfer. We show that the determinants vary with the direction of knowledge flows.
Schulz measured knowledge relevance as an abstract intervening concept. He recom-
mended that “this line of research could be significantly strengthened if future studies
develop empirical measures of knowledge relevance and explore the direct effects on knowl-
edge flows” (Schulz, 2003: 455). This article implements this recommendation by measuring
knowledge relevance directly.
Knowledge transfer is complex. We have demonstrated that the process of knowledge
transfer is different for conventional and reverse knowledge flows as well as for different
subsidiary strategic types. Hence, it is necessary for both parent and subsidiary to focus on
those factors that are most important to the knowledge transfers being implemented.

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Biographical Notes
Qin Yang is an assistant professor at the School of Business, Robert Morris University. She holds a PhD from
Temple University. Her primary research interests relate to the knowledge management strategies of multinational
firms. She is also interested in the internationalization of firms from emerging countries, especially issues related
to R&D strategies, strategic leadership, and entrepreneurial activities. Her work has appeared in the Asia Pacific
Journal of Management.

Ram Mudambi is professor and Perelman senior research fellow at the Fox School of Business at Temple
University. He holds a visiting professorship at the University of Reading and an honorary professorship at the
Center of International Business, University of Leeds (CIBUL), and is a member of the advisory council of the
University of Bradford Centre in International Business (BCIB). He holds a master’s degree from the London
School of Economics and a PhD from Cornell University. His current research projects focus on the location and
R&D strategies of multinational firms. He has published more than 50 peer-reviewed articles, including work in the
Strategic Management Journal, the Journal of International Business Studies, and the Journal of Political Economy.

Klaus E. Meyer is a professor of strategy and international business at the School of Management, University of Bath,
since autumn 2007. He also holds an adjunct professorship at Copenhagen Business School. He holds a PhD from
London Business School. His research focuses on strategies of multinational enterprises in emerging economies, in
particular the relation of their business strategies to the specific conditions prevailing in each emerging economy. His
work has been published in, among other places, Journal of International Business Studies, Journal of Management
Studies, and the Strategic Management Journal. His personal Web site is www.klausmeyer.co.uk.