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Firm characteristics and MNC's intra-network knowledge sharing.

Abstract

* This study examines important firm characteristics that facilitate the scope and diversity of MNC's intra-network knowledge sharing.

* Drawing on the transaction cost concept, it identifies and evaluates major transaction cost affecting factors that determine MNC unit's differential involvements in intra-network knowledge sharing, using experiences of MNC subsidiaries in Korea.

Key Results

* In general, the cultural similarity, the degree of parent's ownership, the product and process similarity, and the MNC's overall competitive advantages (stock of valuable knowledge) contribute to the scope and diversity of MNC's intra-network knowledge sharing.

With increasing integration and interdependence of national markets, the importance of global learning has received considerable attention over the last decade. The value of global learning in the multinational corporation (MNC) can be particularly high since foreign markets often provide access to new ideas and stimuli that can be subsequently applied in other markets. By leveraging knowledge across different markets, MNC's can capitalize on market imperfections and differing market endowments, thus achieving higher returns on their investments. Numerous researchers have argued that higher levels of global learning lead to higher MNC performance (Ghoshal 1987, Grant 1996, Marquardt/Reynolds 1994, Nonaka/Takeuchi 1995, Vermeulen/Barkema 2001). Successful learning from outside the MNC network (extra-network learning) and timely and efficient diffusion of the learning among members of the network (intra-network knowledge sharing) will surely enhance the value of MNC's global learning.

Further, MNC's global learning has also attracted attentions of host governments. Traditionally, foreign direct investments (FDIs) have been a dominant channel of knowledge diffusion and an important conduit of knowledge spillovers to host countries (for example, Aitken/Harrison 1999, Blomstrom/Persson 1983, Chung 2001, Hejazi/Safarian 1999, Kokko 1994). The literature shows that the greater foreign presence in a host country is associated with the greater productivity of host country industry. Thus, many governments offer explicit and implicit incentives to MNC's to establish subsidiaries in their countries in order to benefit from their knowledge diffusion and spillover potential. The knowledge diffusion and spillovers to the host country via FDIs usually involves a two stage process, namely, the knowledge transfer from MNC headquarters and/or sister subsidiaries to the subsidiary in the host country (intra-network knowledge sharing), and the spillovers from the host subsidiary to the host industry.

Despite the clear importance of both stages, past research on international knowledge and technology transfer has traditionally focused on the latter stage (for example, Aitken/Harrison 1999, Blomstrom/Persson 1983, Chung 2001, Kokko 1994). Empirical research on the former stage, i.e., MNC's intra-network knowledge sharing, is rather thin. Further, most existing studies involving intra-firm knowledge transfer focus on the transfer of one value activity, mostly technology, and characteristics of knowledge transferred such as tacitness (Mansfield/Romeo 1980, Kogut/Zander 2003, Simonin 1999). Our focus here is on the intra-network knowledge sharing involving a whole set of value chain activities of the firm and salient subsidiary characteristics. Moreover, most existing studies deal with the parent-subsidiary links in high-income advanced economies. What remains unclear is the extent to which the parent-subsidiary links are important for MNC's operating in emerging markets (Luo 2003). Addressing such gaps, this study focuses on MNC subunit-level experience in relation to intra-network knowledge sharing of MNC subsidiaries in South Korea--a middle-income developing country. The use of a Korean sample extends the empirical scope of the knowledge sharing literatures. The goal of this paper is to examine important firm characteristics that could facilitate learning and knowledge sharing between MNC headquarters and subsidiaries, and among MNC subsidiaries. The central question to be investigated in this paper is to what extent would key MNC characteristics affect knowledge sharing among members of MNC network which are spread out throughout the world. The paper is organized as follows. The following section reviews the relevant literature on the relationship between firm characteristics and MNC's intra-network knowledge sharing, and presents hypotheses to be tested. Data, methodology, and variables are presented in the next section. Finally, concluding remarks follow the presentation and discussion of empirical results.

Theoretical Background and Hypotheses

A salient feature of the MNC is the diversity of environments in which it operates. This diversity exposes the MNC network to multiple stimuli, allows it to develop diverse capabilities, and provides it with broad learning opportunities. Internally, open exchanges of information and knowledge are necessary for managers in one organizational unit to learn about and benefit from the experiences of other units embedded in diverse national markets (White/Poynter 1990). Such exchanges allow for the diffusion of innovative ideas from the originating unit to the rest of the MNC network. A firm's capability to "leverage learning on a worldwide basis" is a critical strategic requirement for survival and success in global markets, together with the capability for global efficiency and the capability for local responsiveness (Bartlett/Ghoshal 1987). Knowledge sharing among MNC units can stimulate the creation of such capability. However, such internal exchanges do not necessarily materialize for various reasons. For example, US automobile manufacturers have benefited relatively little historically from the know-how in their European subsidiaries, although the potential for realistic experimentation with small car and performance car production certainly was there (Hedlund/Rolander 1990). What would be critical factors that affect the scope and diversity of intra-network knowledge sharing in MNC's?

Though few studies have explicitly examined this issue, the organizational learning literature offers important insights about the issue using the concepts of 'network position' (Coleman 1990, Tsai/Ghoshal 1998, Tsai 2001) and 'absorptive capacity' (Cohen/Levinthal, 1990, Tsai 2001). An organizational unit's position in its intraorganizational network affects its ability to access information and knowledge (Tsai 2001). A more central network position would allow the unit a better access to key information and knowledge. A unit's absorptive capacity for learning depends on its technological capabilities and R&D investment contributes to the creation of absorptive capacity (Cohen/Levinthal 1990, Tsai 2001). Ultimately, differences in network position and in absorptive capacity among organizational units will determine their differential involvements in interunit learning and knowledge transfer (Tsai 2001).

However, although the two concepts shed informative lights on some important aspects of necessary conditions for effective interunit learning, we feel that other critical condition for the interunit learning has not been addressed properly. 'Access to new knowledge' and 'internal learning capability' would not by themselves guarantee that interunit learning and knowledge transfer will occur if the transaction costs of the learning and transfer are too high. Drawing on the transaction cost concept (for example, Buckley/Casson 1976, Hennart 1982), this study examines key transaction cost affecting factors that would influence the scope and diversity of intra-network knowledge sharing in MNC's, aside from those factors affecting MNC unit's access to new knowledge (network position) and learning capability (absorptive capacity). Although ideas are formed in the minds of individuals, interaction between individuals typically plays a critical role in developing these ideas (Nonaka 1994). Likewise, communities of interaction contribute to the amplification and development of new knowledge in organizations. Reciprocal knowledge transfer, which is cross transfer of knowledge between members of the MNC network, comes with considerable potential for the creation of new knowledge embodied in new competitive products and systems (Bresman/Birkinshaw/Nobel 1999). As knowledge and information are transferred and shared around a wider community of the MNC network, they would be developed and clarified further. Gradually, concepts that are thought to be of value would obtain a wider currency and become crystallized. Thus innovation produced by one part of organization in turn creates a stream of related information and knowledge, which might then trigger changes in the organization's wider knowledge systems (Nonaka 1994). Good ideas and solutions to problems sought throughout the firm and flowed rapidly through the entire organization would surely contribute to the improvement of MNC network's performance.

In MNC's, however, the communities for organizational knowledge creation and sharing would span national boundaries. That means intra-network knowledge sharing is bound to occur in an environment of uncertainty and attendant benefits will not come without costs. An environment of opportunism and uncertainty would necessitate the development of appropriate governance structures involving greater coordination efforts, incurring substantial transaction costs such as high outlays for drafting, negotiating, monitoring, and enforcing proper intranet work knowledge sharing. For example, it would be more difficult to anticipate the behavior of foreign employees who are culturally more distant. Thus, in an environment of questionable credibility, the design of appropriate intra-network knowledge sharing structures will have to bear additional monitoring costs in order to deal with uncertainty and opportunism. The bonding and monitoring costs will absorb much of the expected benefits from the exchange, and consequently the value created by intra-network knowledge sharing involving subunits of questionable credibility would be significantly reduced by the need to set up safeguards for smooth intra-network knowledge sharing including closer monitoring. Such transaction costs could seriously affect the scope and diversity of intra-network knowledge sharing in MNC's. Potential impacts of major transaction cost-causing factors on intra-network knowledge sharing will be discussed and hypothesized in the following sections.

Cultural Similarity and Intra-Network Knowledge Sharing

While the transfer of knowledge between departments or between sister units in the same country is difficult, it is clear that the problems associated with knowledge transfer will increase with cultural distance. It would be difficult to specify fully tacit information embedded in trained personnel and technicians in one country to local employees in another country. Partially, the difficulty lies in the absorptive capacity of the local employees learning the new routines. The difficulty would increase further as the cultural distance between the source and recipient countries increases, since it would become more difficult and costlier to assess the abilities of foreign employees and monitor their performance in the recipient country due to higher information costs (Jones/Hill 1988, Kogut/Singh 1988). Further, the transfer would encounter greater knowledge barriers regarding local political, cultural and societal norms in culturally distant countries (Hennart/Larimo 1998). Consequently, the exchange of ideas and knowledge will be costlier between culturally distant members of the MNC network than between culturally close members. This suggests that MNC units may be expected to exchange knowledge better with those units that are located in culturally more proximate countries.

Hypothesis 1. The cultural similarity between members of MNC network will be positively related to MNC unit's intra-network knowledge sharing.

Degree of Ownership and Intra-Network Knowledge Sharing

The transaction cost theory posits that often market exchanges cannot perform certain transactions as efficiently as do firms (Hennart 1982). Through FDI, the MNC can appropriate higher returns on its investment in certain firm-specific assets like proprietary information and know-how than it would through the market mechanism. Further, tacit and complex knowledge which involves intensive learning would be transmitted more effectively or at a lower cost through more closely related parties (Hejazi/Safarian 1999). Frequently, such knowledge tends to be proprietary and the MNC would be less willing to transfer it to non- or less related parties. Ownership level and its attendant control are often a critical determinant of the degree of closeness between members of the MNC network.

Hypothesis 2. The degree of MNC ownership of unit will be positively related to MNC unit's intra-network knowledge sharing.

Size of MNC Unit and Intra-Network Knowledge Sharing

Intra-network knowledge sharing involves substantial costs. They include the costs of additional payroll and overhead, the costs of added equipments, the costs of administration as well as potential irrelevancies, and the opportunity costs associated with resources committed. In addition, to facilitate the transfer of information and knowledge, standard procedures must be established regarding methods of documentation, standards for blueprints, and a host of other details. In spite of the rapid development and widespread use of new communications technologies, efficient exchange of knowledge may still have to rely heavily on face-to-face interactions. The transfer of strategically important knowledge often involves demonstrations, negotiations and various problem solving activities that require direct personal contacts. Thus intra-network knowledge sharing requires substantial administrative, organizational and monitoring supports that are relatively more burdensome to smaller members of the network than to larger members. Consequently, larger members would be able to participate more in intra-network knowledge sharing than smaller members.

Hypothesis 3. The size of MNC unit will be positively related to MNC unit's intra-network knowledge sharing.

Product and Process Similarity and Intra-Network Knowledge Sharing

Intra-network transfer of management practices and technological improvements could be facilitated by the similarity of processes and products among members of the network. Costs of acquiring new knowledge would be influenced by the similarity of the knowledge to be acquired to the recipient network member's existing knowledge base. Such costs would be lower when both the source and recipient members operate from same knowledge bases. Thus, the degree of similarity in products and processes among internationally dispersed members of MNC will condition the extent and types of intra-network knowledge sharing (Simonin 1999). Similar products and processes also mean that it would be easier to communicate among the dispersed members. The more similar MNC network's production processes are, for example, the more easily production process improvements discovered at one member can be communicated and transferred to other members.

Hypothesis 4. Similarities in products and processes among members of MNC network will be positively related to MNC unit's intra-network knowledge sharing.

Competitive Advantages and Intra-Network Knowledge Sharing

The value and relevance of knowledge influences the interests and willingness of a recipient network member to engage in knowledge sharing. The recipient member will become more willing to learn those knowledge and practices that have proven to be valuable and relevant in the market. Likewise, a source network member would find it much easier and less costly to transfer those knowledge and practices that are regarded as valuable and relevant by the recipient member. Consequently, more valuable knowledge would be more widely shared among the network members, independent of the transaction costs associated with the knowledge sharing. A firm's stock of valuable knowledge and practices is the foundation of its competitive advantages. An MNC network possessing a greater stock of such valuable knowledge and practices tends to have greater competitive advantages in the marketplace.

Hypothesis 5. MNC's overall competitive advantages (stock of valuable knowledge and practices) will be positively related to MNC unit's intra-network knowledge sharing.

Data and Research Methodology

Data and Sample

In order to assess the significance of various transaction cost-related factors in explaining MNC subsidiary's intra-network knowledge sharing, we undertook a questionnaire survey of manufacturing subsidiaries of MNC's in Korea. The questionnaire was developed following the procedures suggested by Cullen, Johnson, and Sakano (1995). Firstly, the academic and trade literatures were reviewed. Secondly, relevant existing measures were assembled and bases for new measures were developed. Some existing scales were modified for the research, and new measures were developed in case there were no generally accepted measures. Thirdly, two international business professors reviewed a preliminary version of the questionnaire. It was revised on the basis of their comments. The questionnaire, accompanied by a cover letter explaining the aims of the study, guaranteeing confidentiality and urging response, was sent to top managers of MNC subsidiaries in Korea. In order to improve the response rate, the questionnaire was made to be short, concise and of current interest to respondents. The questionnaire is presented in Appendix.

The data for this study were obtained from Present Status of Firms with Investments by Foreigners 2000, a directory published by Foreign Trade and Investment Bureau, Ministry of Industry and Resources, Republic of Korea (2000). The data included names of firms (Korean subsidiaries), names of parent firms, parents' nationalities, industries in which firms operate, founding dates of firms, and shares of foreign investments. Only manufacturing firms were studied to partially control potential industry effects. The directory listed 2,817 Korean manufacturing subsidiaries of foreign firms. Out of them, 1,802 firms had their telephone numbers listed in the directory. From these firms, we selected those firms that received investments from only a single foreign country, and made telephone calls to each of them to explain the purpose of the study and ask for cooperation for the study. One hundred eighty firms expressed their willingness to participate in the study.

The questionnaires were sent to top managers of these subsidiaries. Ten days later, reminder postcards were sent to all firms that had not yet responded. And another ten days after the first reminders, second reminder postcards were sent to all firms that still had not yet responded. After the two reminders, eighty-six completed questionnaires were received. Of these, five were found to be unusable for various reasons, leaving eighty-one valid responses (45.0%) for evaluation. Non-response bias was investigated with the widely used method suggested by Armstrong and Overton (1977). This involved comparing early and late respondents. Late respondents were defined to be those who responded after receiving the reminder postcards. Three measures (sales, number of employees, and equity ratio) were compared to see if there were any differences between early and late respondents. The results of a series of t tests for each of three measures showed no statistically significant differences between them.

The sample firms had following characteristics: average number of employees of 488, average sales in 1999 of 187.3 billion won (approximately US$ 146 million), average value of assets in 1999 of 188.1 billion won (approximately US$147 million), average 14 years of operations in Korea, and average 57.88% equity share of the foreign parents. Their nationalities included Japan (43.2%), US (30.9%), Germany (9.9%), France (3.7%), Great Britain (1.2%), Switzerland (1.2%), and others (9.9%; two Italian, two Danish, one Swedish, one Belgian, one Taiwanese, and one Saudi Arabian firms). Their industries included machinery and metals (28.6%), electricity and electronics (22.8%), chemicals (14.6%), textiles and clothes (6.2%), transportation equipments (5.2%), pharmaceuticals (2.7%), wood products (1.8%), and others (18.4%).

Dependent Variables

There are two primary dependent variables in this study: scope and diversity of intra- network knowledge sharing. Both are measured at the Korean subsidiary level of MNC's.

Scope of Intra-network Knowledge Sharing (SCOPE)

For learning to be more than a local affair, knowledge must spread quickly and efficiently throughout the MNC. Ideas will carry maximum impact when they are shared globally throughout the MNC's network rather than held locally. Members of the MNC network will be able to advance their capabilities in many fields by learning from each other and applying what they have learned. By integrating valuable ideas from different parts of the world, the MNC network can create competitive advantages. In this study, SCOPE was designed to operationalize the scope of intra-network knowledge sharing among members of MNC's network. Specifically respondents were asked to indicate whether learning occurred among their network members, and whether it occurred between them and headquarters or globally between subsidiary members. The responses were coded as follows: 1 = 'Do not exchange information including management practices and knowledge with either our parent or our foreign sister subsidiaries'; 2 = 'Receive information including management practices and knowledge from our parent and utilize it in our business'; 3 = 'Not only receive information including management practices and knowledge from our parent but also transfer those practices and knowledge developed and proven to be effective by us to our parent and the parent utilizes them in its business'; 4 = 'Do things mentioned in 3 not only with our parent but also with our foreign sister subsidiaries'.

Diversity of Intra-network Knowledge Sharing (DIVERSITY)

Firm's competitive advantages consist of multiple 'building blocks' that are physically and technologically distinct. Key 'building blocks' include various value activities (Porter 1985). Learning may take place in any of these value activities. In a global environment where change is fast and competition intense, fast learning in multiple value activities would be crucial for the improvement of MNC performance. Performance differences across firms are due to the variance in the firm's resources and capabilities. Resources that are valuable, unique, and difficult to imitate can provide the basis for firm's competitive advantages (Amit/ Schoemaker 1993, Barney 1991), and these advantages would produce positive returns (Peteraf 1993). Therefore, extensive global learning in multiple value activities are more likely to create competitive advantages because it is often rare and socially complex, thereby making it difficult to imitate. In this study, DIVERSITY measured the variety of learning as being related to specific aspects of a firm's value chain. Porter (1985) identified procurement of raw materials, parts and components (V1), manufacturing (V2), process design and improvements (V3), product design and improvements (V4), marketing (V5), sales (V6), finance (V7), accounting and legal (V8), and human resource management (V9) as physically and technologically distinct activities a finn performs. Respondents were asked to rate transfer of information in each of these nine value activities with members of their MNC networks on a seven-point scale ranging from 1 'not at all' to 7 'very much'. Diversity of intra-network knowledge sharing (DIVERSITY) was measured by the number of value activities rated '4' and higher. If a respondent rated a value activity lower than '4', it would mean that there was not much knowledge sharing between units in that particular value activity. Thus, the more value activities are rated '4' and higher, the more diverse the types of knowledge shared among global units.

To gain more detailed insights about the nature of diversity of intra-network knowledge sharing, we further measured the diversity in two sub-areas: production-related and non-production-related. For this, we divided the aforementioned nine value activities into two types, i.e., production-related activities (V1, V2, V3, and V4) and non-production-related activities (V5, V6, V7, V8, and V9). Diversity of production-related intra-network knowledge sharing (DIVERSITY-P) represent the number of value activities rated '4' and higher out of the four production-related activities (V1, V2, V3, and V4). Diversity of non-production-related intra-network knowledge sharing (DIVERSITY-NP) represents the number of value activities rated '4' and higher out of the five non-production-related activities (V5, V6, V7, V8, and V9).

Independent Variables

Cultural Distance (CDISTANCE)

CDISTANCE is a measure of the cultural similarity between a South Korean subsidiary and other members of the MNC network. We used two homophyly items to operationalize the cultural similarity, following McCroskey, Richmond, and Daly (1975), and Lin and Germain (1998). The two items are 1) 'People from members of our corporate global network including our parent tend to think like us' and 2) 'People from members of our corporate global network including our parent tend to behave like us'. Respondents were asked to rate each item on a seven-point scale ranging from 1 'totally disagree' to 7 'totally agree'. Our measures allowed the respondents to reflect on the extent to which the attitudinal and behavioral patterns of people of source and recipient countries were similar (Lin/Germain 1998). CDISTANCE is a multiple-item construct and the overall score of CDISTANCE was measured by the average of the rating of each item. The reliability of the measures of this construct was tested using Cronbach's alpha coefficient. The result (0.8866) suggested adequate internal consistency.

Degree of MNC Ownership (SHARE)

Prior studies showed that firms frequently relied on majority ownership to achieve effective management control of their foreign subsidiaries' activities (Friedman/Beguin 1971, Stopford/Wells 1972). The degree of ownership and its attendant control are a good proxy for the degree of closeness between the parent and its subsidiary. SHARE is the percentage of equity owned by the MNC parent in the subsidiary's total equity, obtained from information provided by the respondents.

Subsidiary Size (EMPLOYEE)

The subsidiary size is measured by the total number of employees employed by the subsidiary (EMPLOYEE). In order to avoid the problems commonly associated with cross-national research such as different accounting methods, we followed Gatignon and Anderson's (1988) approach and measured the firm size by the total number of employees employed by the subsidiary. Data for this variable were obtained from information provided by the respondents.

Similarity of Processes and Products (SIMILARITY)

To measure the degree of similarity of processes and products among members of the MNC network, respondents were asked to rate the degree of similarity on a seven-point scale ranging from 1 'not at all' to 7 'very much'.

Competitive Advantages (ADVANTAGE)

Four indicators (product quality, service quality, R&D intensity, and advertising intensity, all relative to its major market competitors) were used to measure MNC's overall competitive advantages. These indicators tap the dimensions underlying the typologies of generic competitive strategies developed by Miles and Snow (1978) and Porter (1980), and are key components of a firm's competitive advantages. Respondents were asked to rate the quality and value of each indicator, using a seven-point scale ranging from 1 'very low' to 7 'very high'. The overall score of ADVANTAGE was measured by the average of ratings of the indicators. The reliability of the measures of this construct was tested using Cronbach's alpha coefficient. The result (0.7571) suggested adequate internal consistency.

Control Variables

Given the multivariate determinants of intra-network knowledge sharing, we sought to control a number of other factors that may have influence on intra-network knowledge sharing. First, subsidiaries vary in ages (SUBAGE). With age come enhanced understanding, competence, and confidence, as well as more accurate perception of foreign risks and returns. Just like a human being, a subsidiary matures as it ages in the local market and would be better able to overcome the negative impacts of cultural difference through deliberate strategies (GomezMejia/Palich 1997). That will help the subsidiary exchange knowledge and expertise more extensively with other network members. Second, we included two national dummies, i.e., NAT1 (US) and NAT2 (Japan) to distinguish the two countries that made the largest number of investments in Korea and to control for whatever effect remained after controlling cultural distance effects. Finally, we included three industry dummies, i.e., IND1 (electronics), IND2 (machinery and metals), and IND3 (chemical products) to distinguish the three major industries in which largest number of foreign investments were made in Korea. Data for the control variables were obtained from the respondents and the Korean Government's directory (Ministry of Industry and Resources, Republic of Korea 2000).

Analysis and Results

A correlation analysis was performed to assess the degree of multicollinearity present in the sample data. The results are provided in Table 1. Multicollinearity was checked by the variance inflation factors (VIF) test. VIF values ([less than or equal to] 2.022) for the models ruled out any serious multicollinearity problem. In Table 2, three models were estimated using ordinary least squares (OLS) regression analysis to identify the relationship between MNC characteristics and various dimensions of intra-network knowledge sharing. Model 1 summarizes the regression results using the scope of intra-network knowledge sharing (SCOPE) as the dependent variable. We found support for Hypothesis 1, where we predicted that the cultural similarity between Korea and members of the MNC network would be positively related to MNC subsidiary's intra-network knowledge sharing. This suggests that the knowledge sharing would occur to a greater extent between culturally closer members than more distant ones. We also found support for Hypothesis 2, where we predicted that the degree of MNC ownership would be positively related to MNC subsidiary's intra-network knowledge sharing. However, we did not find support for Hypothesis 3, Hypothesis 4, and Hypothesis 5. The coefficient for NAT1, the control variable for Korean subsidiaries of US MNCs, is statistically significant and positive. Finally, we did not find any industry effect (across all three models). The regression analysis explained 29.2% of the variance of the dependent variable, and achieved overall significance (p < 0.01).

The regression results with the diversity of intra-network knowledge sharing (DIVERSITY) as the dependent variable in model 2 of Table 2 support Hypothesis 1, the cultural similarity hypothesis. We also found support for Hypothesis 4, where we predicted that similarities in products and processes among members of the MNC network would be positively related to MNC subsidiary's intra-network knowledge sharing. The regression results also supported Hypothesis 5. The coefficient of ADVANTAGE is positive, and statistically significant. This suggests that MNC's overall competitive advantages are positively related to its subsidiary's intra-network knowledge sharing. However, we did not find support for Hypothesis 2 and Hypothesis 3. The regression analysis explained 30.5% of the variance of the dependent variable, and achieved overall significance (p < 0.01).

In model 3, we divide DIVERSITY into two types of knowledge sharing. DIVERSITY-P measures subsidiary's intra-network knowledge sharing involving Porter's (1985) value activities related to production activities (V1 to V4), while DIVERSITY-NP measures subsidiary's knowledge sharing involving value activities related to non-production ones (V5 to V9). With DIVERSITY-P as the dependent variable, we found support for Hypothesis 1, the cultural similarity hypothesis. We did not find support for Hypothesis 2, Hypothesis 3, Hypothesis 4, and Hypothesis 5. The coefficient for NAT2 (Japanese MNC subsidiaries) was statistically significant and positive. The regression analysis explained 23.4% of the variance of the dependent variable, and achieved overall significance (p < 0.01). The regression results with DIVERSITY-NP as the dependent variable support Hypothesis 1, the cultural similarity hypothesis. We also found support for Hypothesis 4, where we predicted that similarities in products and processes among members of the MNC network would be positively related to MNC subsidiary's intra-network knowledge sharing. The regression results also support Hypothesis 5, the competitive advantage hypothesis. We did not find, however, support for Hypothesis 2, and Hypothesis 3. The regression analysis explained 23.6% of the variance of the dependent variable, and achieved overall significance (p < 0.01).

Overall, Hypothesis 1, the cultural similarity hypothesis, is supported in all four regression equations. Hypothesis 4 (the product and process similarity hypothesis) and Hypothesis 5 (the competitive advantage hypothesis) are supported in two of the four equations. Hypothesis 2, the degree of ownership hypothesis, is supported in one of the four regression equations. Finally, Hypothesis 3, the subsidiary size hypothesis, is not supported in any of the four equations. The results show that, due to higher costs and greater difficulties of intra-network knowledge sharing and its associated knowledge creation caused by cultural distance, distant relationships between the parent and its subsidiaries, and product and process dissimilarities, knowledge sharing is undertaken more frequently and more broadly between members of the MNC network which are culturally closer, are more closely related, and have similar products and processes. It is also found that intra-network knowledge sharing is more active in MNC's with greater competitive advantages, particularly those advantages associated with non-production related value activities. Finally, it seems that the costs of building necessary infrastructures of intra-network knowledge sharing might not be too great, contrary to our expectation. Rapid advancement in information, communication, and transportation technologies (hence, subsequent decreases in costs) may have rendered intra-network knowledge sharing affordable regardless of subsidiary size.

Concluding Remarks

The results of this study suggest that the cultural similarity, the degree of parent's ownership, the similarity of processes and products, and the firm competitive advantages are positively related to MNC's intra-network knowledge sharing. We find that the size of subsidiary does not affect MNC's intra-network knowledge sharing. In the absence of generally accepted measures of intra-network knowledge sharing, this study used two primary and two sublevel measures to capture the nature of knowledge sharing, i.e., scope of knowledge sharing, diversity of knowledge sharing, diversity of production-related knowledge sharing, and diversity of non-production-related knowledge sharing. It is hoped that these measures will be further refined to enhance our understanding on MNC's knowledge sharing. For example, the scope of knowledge sharing could be further divided into the scope of knowledge sharing with the parent and the scope of knowledge sharing with sister units.

We draw some valuable managerial implications from the results of this study. The importance of cultural similarity between MNC global units suggests that MNC's should evaluate cultural distance seriously when they consider locations for future subsidiaries since culture is hard to change. The more culturally diverse MNC global units are, the harder it would be for them to reap valuable benefits from intra-network knowledge sharing. However, this does not necessarily imply that MNC's should avoid knowledge sharing across cultural distances. Frequent communication and knowledge sharing between culturally distant units, though harder initially, could mitigate the constraining impacts of cultural distance over time. The role of product and process similarity highlights that product and process similarity between a unit and the rest of the MNC network reduces transaction costs and thereby encourages knowledge sharing between them. Diversification into unfamiliar product and process in foreign locations will deny the MNC the opportunity to appropriate benefits from valuable intra-network knowledge sharing. The findings of this study also shows that the majority ownership of a foreign unit is necessary to achieve effective control of its activities including intra-network knowledge sharing which is a critical determinant of its performance (Ghoshal 1987, Grant 1996, Marquardt/Reynolds 1994, Nonaka/Takeuchi 1995, Vermeulen/Barkema 2001). Finally, knowledge should be relevant and valuable to recipient units in order to be widely shared. Further, effective intra-network knowledge sharing entails substantial costs. Consequently, MNC's should take into account the needs and receptivity of recipient units when selecting types of knowledge to be shared internally, not just the headquarters' or originating unit's perception of the value of knowledge.

Lastly, like any multivariate study, the interpretation of our results hinges on how well we control for other factors that might affect MNC's intra-network knowledge sharing. In this study we have controlled firm-level, industry-level, and national level variables that might affect MNC's knowledge sharing. Nevertheless, such controls are necessarily imperfect because our knowledge of the determinants of MNC's intra-network knowledge sharing is still limited. There are other limitations to this study. It has a rather small sample, and thus it may not be representative of MNC subsidiaries in Korea. This may be responsible for the insignificance of some independent variables in some equations. Our study is limited to manufacturing industries. Thus, the generalizability of the results beyond the manufacturing industries remains unknown. Furthermore, the use of some perceptual measures may cause concerns about potential subjectivity of the responses. More refined measures should be able to address some of these concerns in the future.
Appendix

Questionnaire

Part 1. General Information

1. The nationality of the parent company:--

2. Number of years your firm has been in business in Korea:--years

3. Major products you produce in Korea:--

4. Equity percentage owned by the parent company:-- %

5. Number of employees:--

Part 2. Please rate following items on a seven-point scale ranging
from 7 "very much" to 1 "not at all".

1. People from members of our corporate global network including our
parent and sister subsidiaries tend to think like us.
not at all very much

1 2 3 4 5 6 7

2. People from members of our corporate global network including our
parent and sister subsidiaries tend to behave like us.
not at all very much

1 2 3 4 5 6 7

3. We produce products similar to those produced by members of our
corporate global network including our parent and sister subsidiaries
and we use production processes similar to those used by members of
our corporate global network including our parent and sister
subsidiaries.
not at all very much

1 2 3 4 5 6 7

Part 3. Please rate following items on a seven-point scale ranging
from 7 "very high" to 1 "very low".

1. Compared to our major market competitors, the average quality level
of our products is
very low very high

1 2 3 4 5 6 7

2. Compared to our major market competitors, the average quality level
of services we provide to our customers is
very low very high

1 2 3 4 5 6 7

3. Compared to our major market competitors, our average R&D
expenditures as % of sales are
very low very high

1 2 3 4 5 6 7

4. Compared to our major market competitors, our average advertising
expenditures
as % of sales are
very low very high

1 2 3 4 5 6 7

Part 4. This is the question to see the extent to which you exchange
Information including management practices and knowledge with members
of your corporate global network including your parent and sister
subsidiaries. Please check the number that indicates what you are doing.

1. We do not exchange information including management practices and
knowledge either with our parent or with any of our sister subsidiaries
around the world.

2. We receive information including management practices and knowledge
from our parent and utilize it in our business.

3. We not only receive information including management practices and
knowledge from our parent but also transfer those practices and
knowledge developed and proven to be effective by us to our parent and
the parent utilizes them in its business.

4. We do things mentioned in 3 not only with our parent but also with
our sister subsidiaries around the world.

Part 5. For each of the following nine value activities, please rate
on a seven-point scale ranging from 7 "very much" to 1 "not at all",
the extent to which information including management practices and
knowledge is exchanged between you and members of your corporate
global network including your parent and sister subsidiaries.

Procurement of raw materials, parts and components
not at all very much

1 2 3 4 5 6 7

2. Manufacturing
not at all very much

1 2 3 4 5 6 7

3. Process design and improvement
not at all very much

1 2 3 4 5 6 7

4. Product design and improvement
not at all very much

1 2 3 4 5 6 7

5. Marketing
not at all very much

1 2 3 4 5 6 7

6. Sales activities
not at all very much

1 2 3 4 5 6 7

7. Finance
not at all very much

1 2 3 4 5 6 7

8. Accounting/Legal
not at all very much

1 2 3 4 5 6 7

9. Human resource management
not at all very much

1 2 3 4 5 6 7


Acknowledgment

(1) Professor Lee was supported by the Brain Korea 21 Project for this research in 2003.

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Authors

Kang Rae Cho, Associate Professor of International Business, Business School, University of Colorado at Denver, Denver, Colorado, USA. Jangho Lee, Professor of International Business, School of Business Administration, Sogang University, Seoul, Korea.

Manuscript received May 2003, revised February 2004, revised April 2004.
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Title Annotation:South Korea; includes Appendix: Questionnaire
Author:Cho, Kang Rae; Lee, Jangho
Publication:Management International Review
Geographic Code:9SOUT
Date:Oct 1, 2004
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