Building R&D Capabilities Abroad and the Role of Reverse Knowledge Transfer in Explaining MNCs' Productivity

Introduction

The strategy of the modern MNC increasingly focuses on building R&D capabilities abroad. Investing in R&D in other markets enables firms to internalize existing ownership advantages (Hymer, 1960; Buckley & Casson 1976), but also build new capabilities (Kuemmerle, 1999; Kafouros et al., 2012). By establishing R&D units abroad, MNCs access new knowledge, ideas and technologies and develop a better understanding of customers’ needs. The parent MNC possesses valuable knowledge that subsidiaries can use to become more competitive. Hence, headquarters is an important source of knowledge for subsidiaries. However, as globally dispersed subsidiaries can accumulate knowledge from the contexts in which they operate, they can assist the parent MNC in the home country to become more productive by transferring such knowledge back to the headquarters (a process known as reverse knowledge transfer (RKT)).

Prior studies have pointed to the strategic role of RKT and offered valuable insights into the factors that facilitate or impede knowledge transfer between subsidiaries and headquarters. This literature shows knowledge transfer depends on factors such as the age and the entry mode of the foreign subsidiary, its integration with the MNC (Håkanson & Nobel, 2001), its embeddedness in host countries (Belderbos, 2003; Blomkvist, 2009), the willingness of the affiliate to share knowledge (Gupta & Govindarajan, 2000; Simonin, 2004; Giroud et al., 2009), and the extent to which the subsidiary’s knowledge is related to the parent’s knowledge base (Mudambi et al., 2007).

Despite their valuable contributions, prior studies focused on the factors that influence the process of knowledge transfer, rather than on the impacts of RKT on the productivity of the parent MNC in the home country (Gupta & Govindarajan, 2000; Håkanson & Nobel, 2001; Blomkvist; 2009; Giroud et al., 2009; Arvanitis & Hollenstein, 2010). Indeed, with very few exceptions (e.g., Ambos et al., 2006), extant research examined the effectiveness of the knowledge transfer process, but did not consider the benefits of RKT for the headquarters. This limitation is important because although RKT from global R&D units may in theory be useful (Piscitello & Santangelo, 2008; Ben Hamida & Piscitello, 2009), it is a process that comes with various challenges and therefore its benefits for the parent MNC should not be taken for granted. Building on these observations, we contribute to the literature by identifying the factors that significantly influence the extent to which RKT from foreign R&D subsidiaries enhances the productivity of the parent MNC.

As knowledge transfer is not equally beneficial for all MNCs, we focus on how the characteristics of the foreign R&D subsidiaries impact the ability of the parent MNC’s to enhance its productivity. To test our framework, we examine how Swiss parent MNCs succeed in increasing their productivity by sourcing knowledge and technologies from their globally dispersed R&D subsidiaries. Our contribution lies in linking inter-firm differences in the productivity effects of RKT to the strategic role of the R&D subsidiary (knowledge seeking or Knowledge exploiting), the embeddedness of the subsidiary in the host country, and the mode of its entry (acquisition or greenfield). By integrating the subsidiary-specific factors in our framework, we offer a more complete account of the role of global R&D in exploiting the knowledge reservoirs of different countries.