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Overseas knowledge transfer

By José Moleiro Martins and Nelson dos Santos António

Executive summary
Multinational enterprises need to know how to transfer knowledge to overseas subsidiaries that operate in the industrial sectors of lesser developed countries. The success of teaching employees in overseas subsidiaries is influenced by three analytical dimensions: the multinational enterprise’s ability to transfer knowledge; the climate of cooperation between the MNE and its subsidiary; and the subsidiary’s absorptive capacity.

Multinational companies have a need to transfer knowledge to their work forces that operate in lesser developed countries. The companies that do this well help their workers learn and develop competencies faster than their competitors, improving operations.

The more individuals learn, the more they increase their abilities and productivity. New knowledge can come via experience from employees carrying out tasks. Knowledge emerges from learning as a process of developing individual abilities. Well-trained employees can use their combination of skills and accumulated knowledge to construct a competitive advantage for their organizations.

In a competitive environment on a global scale, knowledge is one of the most important assets of a multinational enterprise (MNE). Knowledge supplies the skills for efficient action supported by a network of formal and informal relationships. Transfer of that knowledge permits the subsidiaries (recipients) in different countries to access that knowledge.

If this knowledge can be transmitted in formal and systematic language, that is, if it can be expressed in the form of words and numbers, it is designated as explicit knowledge; if it is a more personal knowledge that is difficult to formalize and share with other individuals, it is called tacit knowledge.

In his book The Tacit Dimension, author Michael Polanyi suggests that knowledge is acquired tacitly through experience. It is possible for an individual to acquire tacit knowledge directly by observation, imitation and practices that take place, for example, during on-the-job training.

The major part of a company’s specialized knowledge is of a tacit nature. Its transfer is based on the experience and skills of its members by way of sharing experiences and the interaction of people in a way that creates trust between the parties (such as the source or transmitter of the knowledge and the recipient or receiver) involved in this process. The complexity of knowledge suggests that MNEs use expatriates as a “vehicle” to facilitate the transfer of practices based on a combination of rules with special focus on the subsidiary's work force.

The transfer is an attempt by the organization to reproduce exactly or partially a type of specific knowledge of one unit of an organization for the benefit of another. The success in transferring knowledge to subsidiaries in lesser developed countries (for example, Mozambique) differs depending on how well MNEs in more developed countries (such as Portugal) can adapt transferred knowledge to the subsidiary’s local situation.

The business environment in Mozambique

In 1987, Mozambique was a founding member of the Southern African Development Community (SADC). Since that date, Mozambique’s economy has become much more of a market economy under the supervision of the International Monetary Fund and the World Bank.

In 1993, the country adopted an open door policy by implementing measures to create a better climate for businesses to attract direct foreign investment, which in 2005 came from 27 countries. Some multinational enterprises acquired Mozambican installations, while others entered joint ventures with Mozambican companies. Technical assistance agreements with the parent MNEs were established to increase the competencies of the local employees. These deals helped increase the stock of knowledge and knowledge transfer to the subsidiaries.

Methodology

For this research we had access to key informers through the study of four companies, one of them being a holding company, two with total ownership and one a joint venture.

Company No. 1 carries out its main activity in the sector of telecommunications, while the three other companies operate in the industrial sector, producing energy, plastics, and electromechanics and electronics, respectively. The size of the companies varied between 60 and 1,900 workers, with business volumes between 8 million and 75 million euros in the year 2008.

The data were gathered by semi-structured interviews with top managers. The interview protocol was applied to all interviewed individuals.

Knowledge transfer

We asked three questions about the process of transferring knowledge, aiming to generate results and analysis that could help companies operate more efficiently overseas.

Question one: What is the influence of the source’s ability to transfer knowledge on the knowledge that the recipient assimilates?

According to the results, long experience and accumulated knowledge supply the headquarters with a basis of knowledge, including the tacit knowledge unique to the business. This knowledge partially is reproduced in the subsidiary due because of differences in the local market. Thus, the specialized knowledge transferred to the subsidiary has a lower degree of development than the standards existing in the parent company.

The “vision, gravity and ranking of the problems on the part of a middle manager in Mozambique are different from those attributed in the parent company,” according to the study of company No. 1, the telecommunications holding company. The fact that a local industrial tradition doesn’t exist results in the nonfulfillment of work rules that are deemed normal in the parent company (examples are assiduousness, working hours and the carrying out of tasks). Despite this difference,  Mozambicans like to learn, according to results from company No. 3, the plastics producer. However, the companies faced the major difficulty that qualified human resources personnel and departments didn’t really exist in Mozambique. Indeed, the context of implementing the transfer is particularly relevant because of how difficult it is to reconcile the organizational cultures of source and recipient.

The knowledge in question involves training workers to operate the machines of the productive process and work at a systems level to secure the product’s quality. Supplying technicians transmit technological abilities while they install the machines. Also, key expatriate personnel share the specialized knowledge as they teach by doing. This means that employees of the subsidiary learn by demonstration and shared experience, including the exchange of opinions as teacher and student work next to the equipment.

The holding company focused on transferring the headquarters’ best practices to the subsidiary in areas where it had competitive advantages. So its process of knowledge transfer was not directed at the entire organization. But company No. 2, the energy production business, centered its knowledge transfer process on the activities developed in the parent company.

Using expatriates to train the local work force made it possible to teach best practices and delegate their functions to local people, with a view to guaranteeing business sustainability. The expatriates assumed a central function in the transfer by involving the Mozambicans in the transferred practices with “the improvement of business in technical, safety and efficiency terms” at the energy production business. As we will see, it is essential to promote trust between the transmitter and the receiver in an environment of institutional cooperation.

Question two: What is the importance of the climate of cooperation between the source and the recipient with respect to the understanding of the transferred knowledge?

There is a dynamic of adapting to the circumstances of the business and the abilities of the Mozambican workers. For instance, “The number of operative functions of the software programs was reduced to the indispensable” at the telecommunications holding company. Apart from this, the transfer efforts (the time and costs involved) employed in the Mozambican subsidiaries are the result of the importance attributed to them by the MNEs, which conform to the potential of the local market and the geographic zone of the SADC.

The ownership structure of the subsidiary is in all cases controlled by the parent MNE. The telecommunications company and company No. 4, the electronic production business, benefited from a greater market access by creating joint ventures with Mozambican operators.

In the process of knowledge transfer, the studies showed that good interpersonal relationships helped lessen the initial distance between the trainers and the employees. Such personal affinities improved the precision and comprehension of how the knowledge was transmitted.

For example, the Mozambican workers had no experience with the productive processes of the plastics company or the electronics production company. To convince the work force of how important those processes are, the local employees visited technologically advanced production installations. There, they were integrated into work teams and, on the one hand, observed the process of global functioning that needed to be achieved. On the other hand, they learned how the subsidiary would gain from a successful transfer of knowledge.

The telecommunications company’s top management helped avoid barriers to learning by having a constant presence in the workplace and introducing the concept of “intelligent error.” This is important because, lacking an industrial work tradition, some in the work force were discouraged when initial solutions to problems failed.

Under these conditions, the leaders played a crucial role in creating an organizational culture that stimulated the collaboration and participation of all employees in pursuing common objectives and altering the prevailing cultural paradigm. At this point, the search for the optimization of functional processes started with increasing the local individuals’ absorptive capacities.

Question three: What is the role of the recipient’s absorptive capacity in the success of the transfer of knowledge?

Some managers noted that altering the subsidiary’s structure centralized functions and formalized the attribution of tasks and responsibilities. These changes reduced the number of hierarchic command posts and emphasized the middle managers’ importance by creating interdepartmental teams. These teams were designed to accelerate the application of best practices. The companies (the telecommunications and energy production ventures) that made these changes improved training operations and decision making by bringing the deciding entity closer to the employees it was training.

Adjusting operational processes and adapting the transferred knowledge to local realities made the information easier to understand. Given the operating conditions and the market, this process enhanced how the work force accepted and used that information. Following this logic, reproducing the parent company’s business model in the subsidiary must consider the Mozambican market and the type of product or service that local consumers demand or are willing to pay for. For example, managers at the energy company noted that it makes no sense to have self-service operations at Mozambican gas stations because customers prefer full service.

On the other hand, the transferred knowledge must be appropriate for the level of training and professional qualifications of the individuals in the receiving organization. Training can increase how well the subsidiary’s employees absorb and use new knowledge by letting people acquire technical skills, develop practical abilities and institute new routines. Productivity increases, and the subsidiary becomes more competitive by commercializing new products.
Subsidiaries then can automate more procedures, reduce how long it takes to accomplish certain tasks, and respond better to market needs.

Conclusions

Generalized conclusions from this research can apply to any MNE that has subsidiaries operating overseas.

These cases show that the success of the knowledge transfer depends on whether there is a compatibility of priorities between the MNE and the subsidiary. In addition to this, it is necessary to create conditions that allow the receiver to understand that the transferred knowledge is not being imposed by the transmitter. To this effect, it is important to involve the local individuals when identifying what knowledge the subsidiary needs.

The analysis of the process of knowledge transfer may be extended to other countries as well as to MNEs of other nationalities. To this effect, the conceptual framework in Figure 1 consists of three operational dimensions with structural factors that influence the transfer of knowledge from the MNE to the subsidiary.

Dimension one in Figure 1 is the source’s ability to transfer knowledge. Its structural factors are:

  • Basis of knowledge of the MNE: The transfer of knowledge comes from experience, the variety of resources and the geographic presence in the MNE network.
  • Context of the transfer: Compatibility of organizational cultures between the source and the recipient minimizes conflict and cultural misunderstanding so as not to affect the recipient’s performance.
  • Nature of the knowledge: The transfer of tacit knowledge requires a process of interaction between the individual transmitter and receiver.
  • Transfer mechanisms: Individual participation in socialization mechanisms provides an interactive communication that helps transfer knowledge based on experience.
  • Competencies of the expatriates: A main responsibility of the expatriates is to transfer capabilities from the MNE to the subsidiary, particularly in the early stages. They also serve to facilitate the transfer of organizational philosophy and practices.

Dimension two in Figure 1 is the climate of cooperation between source and recipient. Its structural factors are:

  • Importance of the subsidiary: Efforts to transfer knowledge to develop the skills of the subsidiary reveal their importance in terms of production and strategic presence in the geographical location.
  • Type of ownership: The acquisitions and joint ventures are the most recurring operating modes by MNEs that operate in foreign markets since they are an instrument of obtaining technological capabilities and local market knowledge.
  • Relationship between source and recipient: For credibility and goodwill, it is important for the parties to communicate. Fostering personal relationships leads to better learning.
  • Motivation in the transfer process: Familiarity with the new knowledge encourages acquisition and sharing, making the transfer easier. Making decisions in an environment open and accessible to employees increases the confidence level in the organization and improves communication and information sharing.
  • Organizational leadership: A culture of cooperation between employees creates a social environment conducive to learning. Strong leadership conveys a proactive search for understanding and collaboration.

Dimension three in Figure 1 is the absorptive capacity of the recipient. Its structural factors are:

  • Molding the organizational structure: The degree of formalization and centralization used in assigning tasks and responsibilities influences the attitudes and actions of employees.
  • Adaptation to the transfer difficulties: Overcoming the difficulties in the transfer of knowledge depends on how adequate the business model is for the local situation and adapting best practices to the subsidiary’s environment.
  • Learning ability: The absorptive capacity is the result of the capabilities and skills acquired by individuals through training. It represents the related knowledge that the recipient needs to assimilate to use the new knowledge.
  • Realized absorptive capacity: The recipients explore the new knowledge by creating and commercializing new products and improving their performance.

By operating within the framework of the three examined dimensions, MNEs can transfer essential knowledge about operations and processes to their overseas subsidiaries with success, thus enhancing the long-term value of their overseas operations.

José Moleiro Martins is adjunct professor of strategic management at ISCAL (Instituto Superior de Contabilidade e Administração de Lisboa). He also is visiting professor at Lisbon University in a doctoral strategic management seminar and a researcher at UNIDE-IUL research group in general management studies. His current research interests are in foreign direct investment in Africa. He holds a doctoral degree in strategic management from ISCTE-Lisbon University Institute and a master’s degree in strategy and business development. He has published several articles and books, including Knowledge Management: Creation and Knowledge Transfer and Organizational Dynamic Strategy, both in Portuguese.

Nelson dos Santos Antonio is a professor of strategic management at ISCTE Business School in Lisbon. His research interests are in Chinese and African business cultures. He has a Ph.D. in management from Bergischen University, Wuppertal, Germany. He worked and lived in Asia for 13 years and is a visiting professor in different universities in China, Mozambique and Cape Verde. He has published several articles and books, including Organizational Strategy: From Positioning to Movement and Chinese Economy and Management: Fundamental Aspects, both in Portuguese.

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