How does it impact performance? Researcher: Luis Lages

A recent study by Nova SBE’s Professor Luis Filipe Lages, in co-authorship with Cátia Fernandes Crespo (IPL, Portugal) and David A. Griffith (Lehigh University, USA), investigates knowledge outflows in multinational corporations (MNCs) both in terms of intra-subsidiary (horizontal) and subsidiary-headquarters (vertical) relationships. Results indicate that knowledge outflows to headquarters and to peer-subsidiaries enhance MNC’s financial performance. Moreover, explicitness and frequency of communication positively influence vertical and horizontal subsidiary knowledge outflows. Finally, it is discussed how national cultural distance, centralization, formalization, and specialized resources moderate the previous relationships. 

Knowledge outflows' strategic importance

Knowledge is a critical firm resource because it has the ability to serve as a source of sustainable competitive advantage. The ability to manage this knowledge is perceived as a major strategic challenge for multinational enterprises and its subsidiaries. Firms and their business units differ not only in their abilities to create knowledge, but also in their abilities to transfer knowledge. While some MNCs are effective at accumulating knowledge, but lack the capacity to transfer it efficiently, other MNCs have weak capacities to create this knowledge but are quite able to understand, articulate, and transfer it. 

MNCs as a knowledge network as subsequently performance effects

The results demonstrate that not only do vertical and horizontal subsidiary knowledge outflows enhance MNC performance, but that the magnitude of this effect is considerable. This study demonstrates that there can be multiple centers of knowledge within a MNC that are able to develop knowledge-based competencies. When comparing knowledge flows established between peer subsidiaries and knowledge flows established between subsidiaries and headquarters, our study reveals that MNCs are often characterized by an interdependent rather than by a hierarchical structure. 

Key findings and managerial implications: knowledge outflows and performance

• Explicitness and frequency of communication effect on subsidiary knowledge outflows

The explicitness of knowledge is a critical antecedent of subsidiary knowledge outflows, demonstrating that not all knowledge may effectively transfer vertically or horizontally. To enhance knowledge outflows, management should work to implement processes for converting tacit into explicit knowledge. As knowledge becomes less tacit and more explicit, it becomes cheaper to share with others.
The frequency of communication between MNCs’ members also plays a central role in facilitating subsidiary knowledge outflows within the MNC because it helps managers to become aware of opportunities for leveraging competencies. 

• Determinants of knowledge outflows process and performance

While knowledge explicitness is a driver of knowledge outflows, these effects are suppressed as national cultural distance increases within the MNC. Centralization is one of the crucial dimensions of organization design and the implementation of these control mechanisms can significantly enhance vertical subsidiary knowledge outflows.

The headquarters-subsidiary relationship formalization is able to strengthen the influence of frequency of communication on knowledge outflows. However, formalization exerts a negative influence on horizontal knowledge transfers within the MNC. This finding demonstrates that MNC’s control mechanism of formalization can have disruptive effects on knowledge flows within the MNC subsidiary network, thereby hampering the performance of the MNC itself.

Subsidiaries’ specialized resources are a facilitator of the relationship between knowledge outflows and a MNC’s performance, with the potential to increase the positive effect that inter-subsidiary knowledge transfers have on MNC performance improvement.

Overall, we conclude that subsidiaries with strong resources, competencies and capabilities are better able to increase the positive influence that knowledge outflows have on performance. This suggests that MNCs and subsidiaries should strongly consider the effect of knowledge outflows in developing and retaining a competitive advantage.

This article is based on the paper "The performance effects of vertical and horizontal subsidiary knowledge outflows in multinational corporations", International Business Review, 23(5), 993-1007.