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Knowledge flows within emerging multinationals: the case of subsidiaries of Latin multinationals in Europe

Final Report Summary - KNOWLEDGE FLOWS (Knowledge flows within emerging multinationals: the case of subsidiaries of Latin multinationals in Europe)

Managing knowledge flows across different operations in global businesses is a critical element of competitive advantage for companies. Consequently, central to the economic success of emerging economies is likely to be whether multinationals originating in such countries have the ability of managing knowledge flows across borders. This study focuses on ‘multilatinas’, a group of emerging multinationals headquartered in Latin American countries, and explores this issue by analysing the flows of knowledge between the subsidiaries of multilatinas located in Europe and their headquarters in Latin America. The research tracts both the occurrence of conventional flows of knowledge from headquarters to their European subsidiaries, as well those flows going in the reverse direction, (typically referred to as ‘reverse knowledge flows’).

This study is distinctive in several ways. The research reviews our understanding of the post-multinationalisation stage of emerging multinationals. To date most academic studies on this group of companies has been concerned with the multinationalisation process per se, addressing issues such as the drivers and patterns of internationalisation. Our concentration on knowledge flows deepens our understanding of underlying factors determining the success or failure of this type of enterprise. The study also takes into account concepts and insights from two strands of international business studies: the literature on subsidiaries of early multinationals (i.e. those that started their internationalisation around the 1950s), and the literature on knowledge management, particularly on knowledge transfer within multinationals. Until now, these concepts have been largely neglected in studies on emerging multinationals.

The design of the research sample followed a complex and dynamic process. Based on available rankings, as well as on studies on emerging multinationals in general and on multilatinas in particular, the final sample is composed of 124 multilatinas. They come from different industries ranging from stronghold sectors such as mining and commodities, through to pharmaceuticals, cosmetics, automotive, and aerospace industries. The main criteria for inclusion in the final sample were that they should carry out value adding activities outside their home countries, and/or should be actively pursuing international expansion via foreign direct investment. (The sample excludes financial institutions, retail, telecommunication, media and transportation companies.) Fifty-seven companies, 46 per cent of the 124, are present in Europe with production and/or R&D, having a total of 267 units in the region. Sixty percent of these companies started their presence in Europe in ‘Latin’ European countries, of which 43 per cent where located in the Iberian countries alone.

Giving its exploratory nature, the study follows a hybrid methodological approach. The research combined a survey of multilatinas’ headquarters; a case study of a highly internationalised company from the automotive industry; and robust secondary data collection from multiple sources. The analysis of the occurrence of knowledge flows is based on 58 subsidiaries, 49 that answered the original survey, plus nine others based on a complementary survey conducted in Mexico, and publicly available declarations of companies’ top managers. As appropriate for the number of observations available, the data analysis is based on Shapiro-Wilk test of normality, Independent Sample T-tests, Chi-square test of association (Fisher’s Exact Test) and Spearman Rank-Order Correlation.

Multilatinas’ European subsidiaries exchange knowledge with their headquarters in both directions, with conventional and reverse knowledge flows occurring in 73 and 77 per cent of the cases, respectively. The exchange of knowledge between the European subsidiary and multilatinas’ headquarters appears to be more frequent than their exchange of products (i.e. intra-firm trade).

Conventional knowledge flows are associated with multilatinas presence in Europe: the higher the presence in Europe with production and/or R&D, the higher the chances of multilatinas’ headquarters sending knowledge to their European subsidiaries. The occurrence of conventional knowledge flows is also statistically significant associated with whether the exploitation of multilatinas’ existing capabilities was an important motivation for having production and/or R&D in Europe. There is a positive, strong and statistical significant correlation between conventional knowledge flows and whether the European subsidiary is an important supplier of products to the headquarters. Furthermore, the more important as a product supplier, the higher the chances the subsidiary receives knowledge from its parent company. This strong correlation between conventional knowledge flows and being a supplier of products suggests the transfer from headquarters to European subsidiary of process-related knowledge. This finding was supported by evidence from the case study. Such findings suggest that market-seeking drivers may lead to the occurrence of inflows of knowledge to multilatinas’ European subsidiaries, and that this type of knowledge flows takes place via product flows.

Reverse knowledge flows are also significantly associated with multilatinas’ entry mode into Europe: there is a higher chance of the European unit being an important provider of knowledge to multilatinas’ headquarters when the latter enters Europe by acquiring or establishing a partnership with a local company. This suggests that asset-seeking motivations for entering Europe may be related to reverse knowledge flows. This is confirmed by a positive and significant correlation between reverse knowledge flows the importance of knowledge and labour access as motivations to enter Europe with production and/or R&D. As in the case of conventional knowledge flows, reverse flows are also associated with intra-firm trade. Here we found a positive and significant correlation between reverse flows and the importance of the subsidiary as product supplier. This finding suggests that product-related knowledge (i.e. knowledge embedded in products) is an important element of the knowledge transferred from the European subsidiary to the rest of the corporation, and that intra-firm trade is an important mechanism for this type of knowledge flow to take place.

In summary, multilatinas presence in Europe is the result of the combination of market and strategic asset seeking drivers. Europe is both an important market for multilatinas, as well as a key location for their R&D activities. Multilatinas’ European subsidiaries exchange knowledge with their headquarters in Latin America, implying the concurrency of both conventional and reverse knowledge flows. In other words, multilatinas are not only tapping into European knowledge base, they are also bringing knowledge into their European operations. Intra-firm trade is a key mechanism for knowledge transfers, particularly from Europe to Latin America. Most of multilatinas’ subsidiaries in Europe were previously local companies; being acquired by companies with strong financial situation – actually one of multilatinas’ main competitive advantages, gave the previously local companies strengths to carry on their business, maintaining employment and skill levels and key activities, as R&D.

This study broadens the understanding of the emerging phenomenon of emerging multinationals, and, most importantly of the even more-under investigated sub-group of emerging multinationals, the multilatinas. By analysing knowledge flows to and from multilatinas’ European subsidiaries, the study sheds light on important issues of the academic debate on emerging multinationals and the suitability of the received theories to explain the internationalisation process of those companies. However, the main academic contribution of the study rests on the fact that the research looks beyond the internationalisation process, investigating knowledge flows after the company is already an established multinational.

This research contributes to a deeper understanding of the impacts of multilatinas’ local subsidiaries for the competitiveness of the European economies hosting them. This contribution can be built further through replication of this study to the case of emerging multinationals from other countries, such as China and India. The understanding of the patterns of knowledge flows by the European subsidiaries of those companies is crucial in terms of maximising the benefits for the host countries. This current study should be particularly interesting for European policy makers dealing with issues such as, interactions between Europe and Latin America; innovation and R&D; regional development and the presence of emerging countries multinationals in Europe, particularly by acquiring European companies. In particular, investment promotion agencies of different European regions could benefit by gaining insights into the design of policies that can attract multilatinas’ direct investments, especially those related to research and development.

As suggested above, managing knowledge flows across different operations in global businesses is a critical element of competitive advantage for companies. This study contributes to our understanding of this very particular knowledge management challenge. Valuable new light is shed on the contribution of the European operations of multilatinas to the innovation advantages and practices of the corporation they belong to, what may represent an important strategic input for those companies wishing to enhance their knowledge-based competitive advantages and consolidate and even enlarge their presence and operations in the European Union.