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Journal of International Business Studies (201 7) 48, 787-807
© 201 7 Academy of International Business All rights reserved 0047-2506/1 7 «HS

www.jibs.net
Managing valuable knowledge in weak

IP protection countries
Abstract
Heather Berry
Although knowledge assets provide multinational corporations (MNCs) with
School of Business, George Washington University ; competitive advantages in foreign markets, it can be difficult for firms to protect
Funger Hall 401 T, 2201 G Street , Washington , their knowledge in foreign countries - especially countries with weak
DC 20052 , USA intellectual property (IP) protection. Building on and extending the
knowledge management, institutional theory and expatriate literatures, this
Correspondence: article explores whether home country expatriates can substitute for weak IP
H Berry, School of Business, George
protection and drive an increase in more and more valuable knowledge
Washington University, Funger Hall 401 T,
transfers to foreign operations located in weak IP protection countries. Because
2201 G Street, Washington, DC 20052, USA
of their ties to headquarters, knowledge of parent firm assets, priorities and
e-mail: berryh@gwu.edu
routines, and activities in local operations, I argue that home country
expatriates can transform the local operation to offer higher protection for
parent firm knowledge in weak IP countries in ways that local managers cannot.
The results from a comprehensive panel of US multinationals suggest that home
country expatriates can substitute for weak IP protection, but that this effect is
contingent on the manufacturing and knowledge capabilities of foreign
operations for higher value parent firm knowledge transfers. Overall, this
article extends our understanding of the global management and protection of
knowledge by MNCs by exploring how organizational practices can buffer
country-level institutional deficiencies for firm knowledge.
Journal of International Business Studies (201 7) 48, 787-807.
doi: 10. 1 057/s4 1 267-0 1 7-0072- 1
Keywords: knowledge transfer; multinational corporations (MNCs) and enterprises

(MNEs); intellectual property protection; innovation; patents; knowledge value
INTRODUCTION
Multinational corporations (MNCs) are among the most innovative
firms in the world (Cantwell, 1989; UNCTAD, 2005) and a
dominant reason these firms expand abroad is to exploit knowl-
edge assets created in the home market in foreign markets (Hymer,
1960; Buckley & Casson, 1976; Teece, 1977; Kogut & Zander, 1993;
Gupta & Govindarajan, 2000; Berry, 2014). Over 50 years ago,
Hymer (1960) explained how the growth and profitability of MNCs
reflects the possession of strong competitive advantages that can be
exploited across foreign markets and the possession of superior,
Received: 1 October 2015 intangible assets allows firms to overcome liabilities of foreignness
Revised: 15 January 2017 and compete in foreign markets (Hymer, 1960; Buckley & Casson,
Accepted: 24 January 2017 1976; Kogut & Zander, 1993; Zaheer, 1995; Berry, 2015).
Online publication date: 20 March 201 7
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All use subject to https://about.jstor.org/terms
Managing valuable knowledge Heather Berry
788
Despite these arguments, however, knowledge firm knowledge in these countries. I also consider
transfer has dual consequences for MNCs. On the the absorptive capacities of foreign operations, and
one hand and as argued above, when MNCs explore how the knowledge base of the recipient
transfer knowledge to foreign operations, they operations can moderate the influence of expatri-
transfer the details of proprietary know-how and ates on the transfer of higher value parent firm
firm innovations to foreign operations, who then knowledge to operations located in weak IP protec-
exploit this knowledge to gain both market share tion countries.
and additional rents from these assets (Hymer, To test these ideas, I created a new dataset that
1960; Buckley & Casson, 1976; Berry, 2015). On the merges a comprehensive panel of US MNCs and
other hand, however, these same knowledge trans- their worldwide operations based on confidential
fers to foreign markets provide host country com- data from the Bureau of Economic Analysis (BEA)
petitors with opportunities to benefit from and family patent data from the Derwent world-
knowledge spillovers. Local host country firms can wide patent database. Because patents are territo-
adopt MNC technologies through either reverse rial, I assume that MNCs will seek patent protection
engineering or by imitating the products and for their innovations within a country before
production processes introduced by MNCs (Blom- transferring knowledge to their operations located
strom & Kokko, 1998). Research shows that local in that country and I use patent families to explore
firms hire away key employees and work with the transfer of parent firm knowledge to foreign
supplier firms (Javorcik, 2004) to learn about an operations. I use a two-stáge empirical approach,
MNCs proprietary knowledge. And when countries with a first stage selection equation examining
lack strong institutional protections for intellectual whether any knowledge is transferred and an
property (IP), firm proprietary knowledge is outcome equation examining the value of the
exposed to even higher appropriation risk (Zhao, knowledge that is transferred. The empirical results
2006). The management and protection of firm from a comprehensive panel of US multinationals
knowledge assets in foreign countries is thus a show that these firms are more likely to transfer
crucial part of any knowledge transfer decision. parent firm knowledge to foreign operations
Although it is well-established that MNCs can located in weak IP protection countries when those
gain advantages from transferring and exploiting operations have home country expatriates. Further,
home country knowledge in foreign markets the results show that there is a significant increase
(Hymer, 1960; Buckley & Casson, 1976; Berry, in the value of parent firm knowledge that is
2015), this article steps back and explores the role transferred to operations with home country expa-
of MNC organizational practices in buffering coun- triates in weak IP protection countries when those
try-level institutional deficiencies for firm knowl- operations have higher absorptive capacity.
edge. Building on and extending the knowledge Overall, this article extends our understanding of
management, institutional theory and expatriate the global management and protection of knowl-
literatures, this article explores whether home edge by MNCs by exploring how organizational
country expatriates can substitute for weak IP practices can buffer country-level institutional defi-
protection. My main argument is that home coun- ciencies for firm knowledge. Because of the inher-
try expatriates provide a buffer to institutional ent risks associated with knowledge transfer - due
deficiencies in foreign countries and drive an to both transfer difficulties and spillover and
increase in more and more valuable knowledge appropriation risks - it is safer to keep firm knowl-
transfers to foreign operations located in weak IP edge confined to a strong, home-country institu-
protection countries. I argue that expatriate corpo- tional context. However, by keeping firm
rate loyalties (Belderbos & Heijltjes, 2005; Tan & knowledge at home, MNCs miss out on arbitrage
Mahoney, 2006), experiences with parent firm and knowledge exploitation benefits in foreign
knowledge (Reiche, Harzing, & Kraimer, 2009; countries. The results from a comprehensive panel
Harzing, 2001a; Harzing, Pudełko, & Reiche, 2016) of US multinationals support the idea that home
and knowledge transfer and oversight activities in country expatriates can substitute for weak IP
local operations (Gong, 2003; Gaur, Delios, & protection, but show that this effect is contingent
Singh, 2007; Chang, Gong, & Peng, 2012) will on the manufacturing and knowledge capabilities
limit unintended (and intended) knowledge spil- of foreign operations for more valuable parent firm
lovers and provide higher protection for parent knowledge transfers.
journal of International Business Studies ~
______ - - Managing valuable knowledge Heather Berry ■/TS>
EXPLOITING FIRM KNOWLEDGE been regarded as being a dominant agent of inter-

The knowledge-based view of the firm emphasizes national technology diffusion (Cantwell, 1989;
how a firm's accumulated knowledge provides Mansfield, 1994) and firm knowledge may not be
competitive advantages across markets (Buckley & well protected against appropriation in foreign
Casson, 1976; Caves, 1996; Teece, 1977; Grant, countries (Zhao, 2006).
1996), with firm knowledge assets long being While knowledge transfer difficulties and unin-
considered the most important determinant of tended spillovers are relevant in all countries,
foreign direct investment across countries (Hymer, these issues are particularly salient when foreign
1960; Buckley & Casson, 1976; Dunning, 1980; country institutions do not provide adequate
Kogut & Zander, 1992). By transferring knowledge protection for firm proprietary knowledge assets.
assets to foreign operations, MNCs can gain com- Country institutions define the "rules of the
petitive advantages over local and other foreign game" (North, 1990). Institutions include both
rivals (Hymer, 1960; Martin & Salomon, 2003), and formal and informal structures and they define
research has shown both that firms with superior property rights and enforce contracts (North,
knowledge assets are likely to invest in foreign 1990; Kostova & Roth, 2002; Berry, Guillen, &
operations (Morck & Yeung, 1991; Caves, 1996; Zhou, 2010). Political institutions (Henisz, 2000),
Berry & Sakakibara, 2008) and that knowledge a country's legal traditions (La Porta, Lopez-de-
transfers boost the performance of foreign opera- Silanes, & Shleifer, 2008) and gaps between de
tions (Berry, 2015). jure regulation and de facto rule of law (Jand-
Despite these advantages, however, there are hyala, 2013) can increase the risk of appropriation
several risks associated with transferring knowledge by competitors and governments alike. The risk of
across countries. First, several studies have docu- ex post appropriation of firm rents is highest in
mented the difficulties associated with transferring the face of fewer or weaker institutional con-
knowledge (Teece, 1977, 1996; Szulanski, 1996). straints (Henisz, 2000; Sugathan & George, 2015),
Teece's (1977) seminal work on technology transfer when the quality of contract enforcement is weak
by MNCs was one of the first studies to show the or when judicial systems are subjective. Weak
difficulties that MNCs have in transferring knowl- contract enforcement (Acemoglu & Johnson,
edge, even to owned foreign operations. A growing 2005) can allow competitors to appropriate firm
number of studies since Teece's work have found knowledge with little institutional consequences
that knowledge transfer does not always take place within the country. In contrast, stronger institu-
either efficiently or effectively, even within firms tional environments provide firms with more
(Szulanski, 1996; Hansen, 1999; Gupta & Govin- protections in the forms of legal institutions,
darajan, 2000). Szulanski's (1996) work echoes judicial systems and IP enforcement (Berry,
earlier findings by Teece (1977) on the difficulty 2006). Branstetter, Fisman, & Foley (2006) have
of transferring firm resources across related, inter- shown that patent reforms are associated with
nal firm operations. technology transfers.
Second, several studies highlight the risk of The first hypothesis reflects this stream of
unintended spillovers to local competitors in for- research and focuses on how the institutions and
eign markets (Shaver & Flyer, 2000; Alcacer, 2006; IP protection within countries influence the trans-
Alcacer & Zhao, 2012). Studies have shown that fer of parent firm knowledge to foreign operations.
local competitors adopt MNC technologies by The first hypothesis argues that the higher the IP
imitating the products and production processes protection in a country, the more likely MNCs are
that are introduced by MNCs (Blomstrom & Kokko, to transfer parent firm knowledge to foreign oper-
1998; Javorcik, 2004; Keller & Yeaple, 2009). Keller ations located in that country.
& Yeaple (2009) report evidence of spillovers from
Hypothesis 1: The stronger the IP protection in
foreign multinational to domestic firms in the same
a country, the higher the transfer of parent firm
industry in the US while Javorcik (2004) has shown
knowledge to MNC operations located in that
that local firms benefit from spillovers from the
country.
foreign operations of MNCs. Important mecha-
nisms through which local firms access firm knowl- An additional aspect of firm knowledge that is
edge include employee mobility and supplier firm likely to influence the decisions firms make about
overlap (Javorcik, 2004). In fact, MNCs have long knowledge transfer across strong and weak IP
Journal of International Business Studies
-T6 Managing valuable knowledge Heather Berry
790
protection countries is the value of firm knowledge. settings and argues that MNCs are more likely to
Not all firm knowledge is equally valuable (Ahuja & transfer their higher value knowledge to operations
Lampert, 2001; Hall, Jaffe, & Trajtenberg, 2001). located in stronger IP protection countries.
Although valuable knowledge is often of a tacit
Hypothesis 2: The stronger the IP protection in
nature (Minbaeva & Michailova, 2004), not all tacit
a country, the more likely MNCs are to transfer
knowledge will be valuable knowledge. And by
higher value parent firm knowledge to operations
considering the value of parent firm knowledge,
located in that country.
this study allows MNCs to differentiate across
country markets and make different knowledge
transfer decisions for firm knowledge assets that are Weak IP Protection Countries
more or less valuable to the firm. This is important
I now focus specifically on knowledge transfer to
because the higher the value of firm knowledge, the
foreign operations located in weak IP protection
more the firm is putting at risk when it transfers
countries. Prior studies have suggested that by
that knowledge to foreign operations.
keeping their most sensitive knowledge in the
To analyze the value of firm knowledge, prior
home country (Zhao, 2006), MNCs can better
studies have considered both the market value of
protect their knowledge assets. However, this also
firm patents and the impact that firm innovation
means that MNCs cannot fully use their most
has had in an industry (Hall et al., 2001). These valuable knowledge assets in countries that often
studies capture valuable firm knowledge by analyz-
have high growth, low costs and increasing con-
ing forward citations to firm patents, which con-
sumer spending. To take advantage of opportuni-
siders the influence firm knowledge has had within
ties in these countries, MNCs need to figure out
a firm's industry (Trajtenberg, 1990; Harhoff,
how to protect their knowledge assets and I argue
Narin, Scherer, & Vopel, 1999; Kogan, Papaniko-
below that home country expatriates can provide a
laou, Seru, & Stoffman, 2012). While this approach
buffer to institutional deficiencies in foreign coun-
considers the explicit patent document at its base, tries and drive an increase in more valuable
this does not mean to suggest that it is the explicit
knowledge transfers to foreign operations located
components of firm knowledge that drive knowl-
in weak IP protection countries.
edge value. Tacit and explicit knowledge are inex-
tricably linked. Polanyi (1962) gave the example of Home Country Expatriates as Knowledge
geographical maps when pointing out that tacit Protectors
and explicit knowledge are two sides of the same An expatriate is an employee who is a citizen of one
coin. Just like it requires judgment and cognitive country who is working in the operations of a firm
senses to read maps, both tacit and explicit aspects in another country. Expatriates are most often
of firm knowledge work together to create value for corporate employees from a firm's home country
firms.
(parent) operations. When employees move from
Considering knowledge transfer decisions, MNCs one operation to another, they carry knowledge,
may choose to limit transfers of parent firm know-how, experiences and contacts from the prior
knowledge to activities that are based on lower to the new setting (Bonache & Brewster, 2001;
value firm technology and knowledge when faced Belderbos & Heijltjes, 2005) and several studies
with weak contractual enforcement (Acemoglu, have argued that expatriates have a significant
Antras & Helpman, 2007). By transferring only impact on transferring and deploying both parent
lower-value knowledge to foreign operations in firm knowledge and routines to subsidiary opera-
weak IP protection countries, these firms do not tions (Edstrom & Galbraith, 1977; Kobrin, 1988;
expose their more valuable knowledge assets to the Black, Gregersen, & Mendenhall, 1992; Gong,
higher risks associated with weaker IP protection 2003). Extant research emphasizes how expatriates
countries. While the arguments leading up to the increase the transfer of knowledge and organiza-
first hypothesis suggest that MNCs will transfer less
tional practices to foreign subsidiaries (Gong, 2003;
knowledge to countries with lower IP protections in Gaur et al., 2007; Chang et al., 2012).
place, it has not yet been examined whether MNC While extant research has argued that home
knowledge that is transferred is also lower value country expatriates are an important conduit
knowledge. The second hypothesis incorporates through which the more tacit components of firm
the additional risks that firms may incur for their knowledge can flow, their role in protecting parent
higher value knowledge in weaker institution
79Ī
firm knowledge in foreign countries has not been on the performance of the MNC, not just the
adequately explored in extant literature. But pre- performance of the operations in the local market.
cisely because of their ties to headquarters, knowl- Further, home country corporate expatriates have
edge of parent firm assets, priorities and routines, contracts with headquarters that make their defec-
and activities in local operations, home country tion less likely than local managers. Because of the
expatriates can transform the local operation to corporate loyalties of home country expatriates,
offer higher protection for parent firm knowledge parent firm knowledge is likely to be better pro-
in ways that operations with only local managers tected in foreign operations that have expatriates
cannot. I discuss how each of these characteristics and this is likely to lead to higher transfer of parent
of home country expatriates can help to limit firm knowledge to operations located in weak IP
unintended knowledge spillovers and encourage protection countries that have home country expa-
the transfer of more and more valuable parent firm triates versus those that do not have home country
knowledge to operations located in countries with expatriates.
weak IP protection.
MNC-wide Uses of Parent Firm Knowledge
Corporate Loyalties In addition to their corporate loyalties, expatriates
First, home country expatriates tend to be trusted have far more experience with parent firm knowl-
managers who have learned the corporate norms, edge than local employees or managers in foreign
values and practices of a firm (Bonache & Brewster, operations, and they understand the importance of
2001). Home country expatriate managers are gen- parent firm knowledge for not only the local
erally believed to have a good understanding of operations, but the rest of the MNC network of
corporate policies and priorities, acceptance of operations as well. Tan & Mahoney (2006) have
headquarter rules, a commitment to corporate goals argued home country expatriates can play a partic-
and extensive contacts with headquarters (Doz & ularly important role in foreign operations when
Prahalad, 1987; Kobrin, 1988). Expatriates have there is the potential for misalignment between
typically worked for and been socialized within headquarters and foreign subsidiaries. Prior studies
headquarters for a substantial period of time (Laing, have suggested that expatriates play brokerage roles
1994; Tan & Mahoney, 2006). These studies suggest (Reiche et al., 2009; Harzing, 2001a, b; Harzing
that home country expatriate managers identify et al., 2016), and encourage shared values and
with the parent company more than with the local common goals that bind together dispersed parts of
country operations. In contrast, local managers the organization. These shared values and knowl-
have a stronger commitment and identification edge bases across the home and local country
with the local operations, and the local political and operations are particularly important for the pro-
economic environments (Forster, 1997). tection of parent firm knowledge because expatri-
Research also shows that one of the main reasons ates can help local employees understand the
that employees accept an international assignment significance of parent firm knowledge beyond the
is because they expect that the assignment will local market operations.
increase their career opportunities within the com- Because of their understanding of the importance
pany (Suutari, 2003). Because of this career trajec- of parent firm knowledge beyond the focal market,
tory within the company, home country home country expatriates can influence how the
expatriates are less likely to defect to local host foreign operation interacts with suppliers, cus-
country competitor companies or knowingly aid in tomers and the government. Home country expa-
unauthorized or unintended knowledge spillovers triates are more likely to actively work to limit who
to local competitors. has access to parent firm knowledge and for those
Although expatriates are experienced with parent that do need access, they can monitor activities
firm knowledge and routines and one of the major with suppliers and other business customers to
responsibilities of expatriates is to transfer skills avoid supplier and customer spillovers (Javorcik,
from the parent firm to foreign subsidiaries 2004). By creating interest alignment not just
(Bonache & Brewster, 2001; Hutchings, 2002), the within the foreign operation, but also across part-
corporate loyalties of home country expatriates and ners, customers and government officials (Kwon,
future career opportunities will influence the over- Haleblian, & Hagedoorn, 2016), a broader goal of
sight of parent firm proprietary assets. The future increasing the oversight and protection of MNC
career paths of home country expatriates depend proprietary assets in weak institutional markets can
journal of International Business Studies
°/Tv
__ Managing valuable knowledge Heather Berry
be achieved. Ultimately, home country expatriates arise and limit either careless or unintended (or
will be better able to coordinate and manage the intended) sharing of parent firm knowledge. They
mutual economic interests across parent and for- can also work with local human resources divisions
eign operations (Tan & Mahoney, 2006) for parent to introduce or develop reward systems that rein-
firm knowledge and to limit unintended spillovers force desired behaviors into the local operations.
within the local environment. Because they under- Home country expatriates can help to limit the
stand the MNC-wide uses of parent firm knowl- extent of sharing within the foreign operation so
edge, home country expatriates will help to limit that only those employees who need to know the
unintended knowledge spillovers, which will most complex and/or valuable aspects of parent
encourage the transfer of parent firm knowledge firm knowledge are so informed. By introducing
to operations located in countries with weak IP and encouraging similar policies across corporate
protection infrastructure. and local operations, home country expatriates are
more likely to create interest alignment over IP
Integration into Local Operations protection than local managers.
Finally, home country expatriates offer a way for Because local firms often learn about MNC
headquarters to align the objectives of its foreign knowledge by hiring away key employees (Javorcik,
operations with its own, and to control the deci- 2004), it is crucial to manage when and why
sions that are made both in those operations and knowledge is shared throughout the local opera-
for those operations (Belderbos & Heijltjes, 2005). tion. In a recent MIT Sloan Management Review
Headquarters can influence the behaviors in sub- article (Schotter & Teagarden, 2014), a US company
sidiaries through home country managers in a way based in San Jose, California explains how "IP
that is in concordance with headquarters policies management became an executive task" in China
and desires (Harzing, 2001a, b). Several studies have for the company, with executives "managing leak-
argued and shown that home country expatriates age threats." They argue that it is crucial that firms
are a means of headquarters control and a mech- manage how much knowledge is shared through-
anism for social control (Belderbos & Heijltjes, out the foreign operation because one of the most
2005; Harzing, 2001b). Expatriate managers allow prevalent causes of IP leakage is staff turnover.
for transfers of strategic best practices (Chang & Home country expatriates are more likely to be
Smale, 2013), corporate policies, operational prac- aware of the problems and try to limit the expan-
tices and business principles from corporate to sive sharing of critical components of firm knowl-
foreign operations (Gong, 2003; Gaur et al., 2007; edge. They can select who to share the most tacit
Chang et al., 2012). components of parent firm knowledge with in the
Expatriates are often used to perform those roles foreign operation.
that locals are not able to perform effectively Because of their ties to headquarter, knowledge of
(Harzing, 2001a, b) and applying more stringent parent firm assets, priorities and routines, and
protections for parent firm knowledge than is activities in local operations, home country expa-
common in weak IP protection countries is one triates can provide higher protections for parent
such role. In weak institutional settings, local firm knowledge compared to operations with only
managers do not have experiences in the home local managers. The third hypothesis argues that
country operations, and they are less aware of firm MNCs are more likely to transfer knowledge to
routines and practices that help to limit spillovers those foreign operations in weak IP protection
to competitors. Studies have argued that local countries that have home country expatriates.
manager skills are not as developed in emerging Thus:
market economies (Steensma & Lyles, 2000; Zhang,
Hypothesis 3: When foreign operations are
George, & Chan, 2006). In contrast, a home
located in countries where IP protection is weak,
country expatriate is an agent from headquarters
who can influence the local staff to work in MNCs are more likely to transfer parent firm
knowledge to operations that have home country
patterns and structures more complementary to
expatriates than to those that do not have home
headquarter than to local competitors (Chang &
country expatriates.
Smale, 2013). Because they are on-site and have
direct surveillance of subsidiaries and employees, While the third hypothesis focuses on all parent
home country expatriates can interfere when issues firm knowledge transfers, the fourth hypothesis
jsi/
Managing valuable knowledge Heather Berry "T"
793
considers the influence of home country expatri- capacity, subsequent studies have extended this
ates on the transfer of higher value parent firm concept to include knowledge similarity (Lane &
knowledge to foreign operations located in weak IP Lubatkin, 1998; Lane, Salk and Lyles, 2001), and
protection countries. The arguments above regard- the importance of a unit's ability to leverage
ing the corporate loyalties, better understanding of knowledge (Zahra & George, 2002). Knowledge
MNC-wide uses of parent firm knowledge and role similarity and leveraging capabilities have been
in oversight in local operations of home country shown to significantly influence knowledge trans-
expatriates suggest that parent firm knowledge will fer, with the overlap between the provider's and the
be better protected when expatriates are present recipient's knowledge increasing the likelihood of
than when they are not. These higher protections knowledge bonding, which positively influences
are likely to be even more relevant to higher value the success of knowledge transfer (Yang, Mudambi,
parent firm knowledge because this type of firm & Meyer, 2008; Mudambi & Navarra, 2004). When
knowledge needs additional protection in weak IP new knowledge to be learned is associated with
country environments. MNCs can send their more existing knowledge, the operation can quickly
valuable parent firm knowledge to foreign opera- identify the potential benefits of this new knowl-
tions located in weak IP protection countries edge and will be more motivated to adopt it
because home country expatriates will be able to (Mudambi & Navarra, 2004).
better transfer and regulate the use and nonuse of In this article, I consider both the knowledge
this higher value firm knowledge. The fourth capabilities of a foreign operation (following Cohen
hypothesis tests this home country substitute effect and Levinthal's original conceptualization of the
considering higher value parent firm knowledge term absorptive capacity) and also knowledge
transfers, arguing that: overlap, which has been shown to aid in the
transfer and adoption of knowledge from outside
the focal operation. Foreign operations can become
very acquainted with parent firm technologies by
MNCs are more likely to transfer higher value
manufacturing and producing inputs and final
parent firm knowledge to operations that have
goods for other operations of the MNC. In addition
home country expatriates than to those that do
to R&D capabilities, the manufacturing integration
not have home country expatriates.
of foreign operations allows these operations to
become familiar with MNC products and process
Absorptive Capacity of Foreign Operations
technologies and to gain the knowledge similarity
Finally, a limiting factor in the transfer of higher
that has been highlighted in several studies (Yang
value firm knowledge may be the receiving foreign
et al., 2008; Lane et al., 2001).
unit's absorptive capabilities as compared to the
Without a common understanding of the basic
home country operations (Gupta & Govindarajan,
knowledge of the parent firm, MNCs may not even
2000). Several studies have shown that efficient
try to send higher value knowledge to these oper-
knowledge sharing demands a collaborative effort, ations because of the risks associated with knowl-
with recipient absorptive capabilities dictating suc-
edge exposure. When considering higher value
cess. Absorptive capacity has been defined as the
parent firm knowledge transfers in particular,
"ability to recognize the value of new, external
higher absorptive capacity in foreign operations
information, assimilate it and apply it" (Cohen &
may be a necessary precondition for such knowl-
Levinthal, 1990) and Gupta & Govindarajan (2000)
edge transfer. Without local capabilities to use and
argue that the absorptive capacity of foreign oper-
exploit parent firm knowledge, MNCs may not be
ations is a key element for successful knowledge
willing to put their higher value knowledge assets
transfer to these operations. Prior research has
at risk in these weak IP protection countries. Home
shown that knowledge is relevant for the recipient
country expatriates will be aware of the capabilities
only if the new knowledge is associated with the
of foreign operations because they have interacted
already existing knowledge base of the recipient.
with local employees and they can play an active
Chang et al. (2012) have shown that foreign
role in either encouraging or discouraging the
operations acquire more knowledge when absorp-
transfer of more or less valuable parent firm
tive capacity is high.
knowledge to these operations. The presence of
Although Cohen & Levinthal (1990) originally
home country expatriates is more strongly related
considered R&D capabilities to gauge absorptive
794
to receiving valuable knowledge when the absorp- reported for US parent companies and their foreign
tive capacity of foreign operations is high because affiliates. Because the BEA surveys are mandatory,
the protection mechanisms discussed above may these data provide the most comprehensive infor-
not be relevant when operations are not capable of mation on the operations of US MNCs that is
receiving parent firm knowledge. Thus: available.1 These confidential firm-level data are
collected for the purpose of producing publically
available, aggregate statistics on US MNC opera-
tions. In the BEA data, separate survey reports are
the greater the absorptive capacity of those
filed for US parent companies and their foreign
operations, the stronger the positive effect of
affiliates. The foreign affiliates in a given host
home country expatriates on the transfer of
country have the option of reporting on a consol-
higher value parent firm knowledge.
idated basis for multiple affiliates, provided those
affiliates operate in the same detailed industry or
DATA AND MEASURES are otherwise integral parts of the same business
To examine parent firm knowledge transfers, I operations. This means that firms may have mul-
consider the family patents of US MNCs using tiple affiliates in one annual country report that is
Thomson Innovation's Derwent Patent Database returned to the BEA. This consolidated reporting
Index (DWPI). DWPI is a comprehensive commer- means that the specific foreign addresses of each
cial database of enhanced patent documents where foreign affiliate are not reported. Instead, MNCs
experts analyze, abstract and manually index every report country level information for these consol-
patent record to create a database of "family idated operations. Because I do not know when an
patents." The OECD Patent Statistics Manual defines MNC has aggregated their affiliate data, I aggre-
patent families as "the set of patents (or applica- gated all foreign affiliate information to the coun-
tions) filed in several countries which are related to try level for each MNC in each year. This means
each other by one or several common priority that in the results reported below, the foreign
filings" (OECD, 2004). A new patent application operation unit of analysis refers to the aggregate
will only be considered part of the family (or an foreign country-year level of information.
'equivalent' to an existing application in the DWPI
Given that there are no common numerical
system) if the set of priorities of the new applica- identifiers across the BEA and patent databases, I
tion are included in the set of priorities of the basic used a name matching program to combine the
document used as the basis for the existing DWPI BEA and Derwent data. Previously, I have used a
record. Most patents claim only a single priority, name matching program to match all US MNCs
with only about 5% of cases claiming more than with the USPTO names (Berry, 2014). This program
one priority. In these cases, all priorities must provides a percent match across names and I
match for a patent to be considered an equivalent manually went through all matches across the
in the Derwent database. BEA and USPTO names, using addresses where
Because patents are territorial, IP protection for necessary to check on firm names that were not
innovations must be applied for within individual exact matches. I started with this prior match, and
countries and I assume that MNCs will seek patent used USPTO-granted patent numbers to extract the
protection for their innovations within a foreign four letter assignee code used by DWPI whenever
country before transferring and using that knowl- possible. The DWPI has created a unique four-letter
edge in their operations in a foreign country. This code for the more patent prolific and larger firms in
means that I am using the patent families to its database. When a unique four letter code was
explore the transfer of knowledge across countries. not available, I used the patent assignee name from
This assumption means that I am studying a lower a USPTO granted patent to match into the DWPI
database.
bound on the knowledge this is transferred to
foreign operations (because it has to be patented I searched for all DWPI patents that were applied
knowledge for family patent trails to exist), but this for during the 1989-2011 time period and ulti-
lower bound is useful because it can be tracked over mately granted (sometimes granted after the time
time and across countries. period for the last year of the sample used below).
Every year, the BEA collects detailed information This resulted in over 650,000 unique family patents
on the operations of US MNCs, which includes data granted to over 2,000 US MNCs. I restricted the
journal of International Business Studies ~ ~
Managing valuable knowledge Heather Berry *
795
sample to US firms in manufacturing industries which represents the section and class to create this
(SIC codes 200-399) because the majority of the weighting. This limits the problem of younger
patents (over 70%) were granted to firms whose main patents (which are closer to the end of the time
industry is manufacturing and it is not obvious that period) having much less time to accumulate
manufacturing and service firms will behave in citations because it weights the focal patent by a
similar ways (leaving service industry firms to be relevant technology/year comparison.
explored in a separate paper). I also restricted my
sample to family patents that were originally gener- Main Independent Variables
ated (first invented) in the US first and then followed My main independent variables are home country
the subsequent family patenting of these US inno- expatriates, the absorptive capacity of foreign
vations to analyze parent firm knowledge transfer to operations and the IP protection of the foreign
foreign operations.2 I restricted my sample to country in which the operation is located. To
include majority-owned affiliates only (because capture home country expatriates in foreign oper-
minority owned affiliates (50% or less ownership) ations, I created a dummy variable that takes a
provide much less comprehensive data to the BEA value of one if the foreign operation has any US
and restrict what I am able to test). Because a key employees. For robustness, I also created a measure
variable of interest (US employees in foreign sub- to capture the ratio of US employees to total
sidiaries) is only available in the benchmark surveys, subsidiary employees for each foreign operation.
and this question was only asked up until 2004, my Each of these measures produced results with the
final sample includes the benchmark survey years of same sign and very close significance levels (with
1989, 1994, 1999 and 2004. the results being slightly stronger using the dummy
variable) and because my hypotheses consider the
Dependent Variable existence of US expatriates rather than a higher
The dependent variable in the selection equation ratio of US employees, I present the results using
analysis below is 0/1 indicator variable for whether the dummy variable below. I used lagged values for
parent firm knowledge was transferred to a foreign this variable (and given that I am only using
operation (with all firm foreign operations being benchmark survey data, my lag is a 5 year-lag).
included in the risk set). As noted above, I focus on To capture the absorptive capacity of foreign
family equivalents of US generated innovations operations, I follow extant research (Cohen &
(patents) to proxy for knowledge transfers from Levinthal, 1990; Almeida & Phene, 2004) and
parent to foreign operations. The dependent vari- consider the RND intensity of the foreign operation
able in the outcome equation is the value of parent (using R&D expenditures scaled by total sales in the
firm knowledge that is transferred. To capture foreign operation). Extending this concept to
differences in the value of firm knowledge across include knowledge similarity (Lane & Lubatkin,
these family patents, I use a measure that is based 1998; Lane et al., 2001; Yang et al., 2008), I also
on the number of forward citations that a family include the manufacturing integration of the focal
patent receives. This forward citation count has operation with the rest of the MNC to capture
been shown to be positively and significantly operations that are producing products and inputs
related to the value of a patent (Trajtenberg, 1990; for other MNC operations. This is operationalized
Harhoff et al., 1999; Hall et al., 2001; Kogan et al., as the lagged percent of imports and exports with
2012). To create the measure used in this article, I parent firm operations as a percent of total sales of
added the total patent forward citations across all the foreign operations.
patents within the patent family. Because both To examine IP protection differences across
industries and the time period that a patent has countries, I explored three different measures. First,
been in existence differ, however, I do not simply I used Park's (2008) updated index of patent
use a count of forward citations. Instead, I compare protection (from the original Ginarte & Park 1997
the number of forward citations a family patent index). This measure incorporates the unweighted
receives to the average number of forward citations sum of separate scores for coverage, membership in
for any family patent (including single country international treaties, duration of protection,
patents) in the same technology class, granted in enforcement mechanisms, and restrictions to cre-
the same year. The DWPI reports the International ate a time-varying index of patent protection (Park,
Patent Classification codes and I used the three- 2008). Second, I considered the US Trade Represen-
digit code (including one letter and two numbers) tative's Special 301 Priority Watch List, which lists
796
countries that are of concern for American busi- Government barriers may have a negative influence
nesses. I consulted various years that I could access on the transfer of parent firm knowledge to foreign
over the time period 1996-2011 and included all 52 operations. To proxy for the openness of a country,
countries that appear on this list over the time I include the percent of total foreign direct invest-
period of this study. Third, I used Zhao's (2006) ment in a country to its total GDP. I include a
dummy variable which consolidates several sepa- country's lagged GDP growth rate to capture
rate indices (including Kaufmann, Kraay & Zoido- increased local demand for a firm's products. All
Lobaton (1999) Rule of Law index and the USTR's of these time-varying variables come from the
Special 301 Watch list). All three variables produced World Bank's World Development Indicators.
consistent results in both the full country sample Because I include a measure for royalty pay-
(reported in Table 3) and strong and weak IP ments, I include a variable to capture differences in
protection splits (reported in Table 4) and because tax rates. While firms are supposed to apply fair
the latter two are dummy variables, I report all market values for all within-firm payments, differ-
models using the Parks IP protection index below. ences in tax rates can impact the price that is
To split my sample, I used the mean IP value for reported. Hines (1995) and Grubert (1988) found
each year and included countries that were above that host country income tax rates can be used to
the mean in the strong IP protection group and control for the effects of tax incentives on reported
countries that were at or below the mean in the intra-firm royalties. I consulted the World Tax
weak IP protection group. Database at the University of Michigan to gather
time-varying tax rates for host countries. I used the
Subsidiary Controls reported corporate tax rate and generated the
I included several foreign operation level controls. difference from the US corporate tax rate for each
First, I include the log of the local sales of the country for each year.
foreign operation to capture size. In addition, I Tables 1 and 2 provide sources and summary
include a dummy variable for age to control for statistics for these variables and correlations across
established versus new operations. The BEA does variables. All independent variables are lagged by
not report the date of incorporation or establish- one period (which if 5 years) in the results pre-
ment of each firm foreign subsidiary, but I do have sented below.
individual subsidiary information (without R&D
information) back to 1982. 1 tracked when a foreign
subsidiary was first reported in the country in the METHODS
BEA surveys and created a dummy variable that To examine my hypotheses, I use a Heckman
takes a value of one if a subsidiary has been in model. In the present study, the value of trans-
existence in the focal country for five or fewer years. ferred parent firm knowledge is not independent
I also include royalty payments from subsidiaries to from the selection of the foreign country to receive
parents to capture transfer of more explicit tech- any firm knowledge and my empirical approach
nology to foreign operations by parent firms. I also involves the insertion of the correction factor (the
included parent transfer of inputs and products to inverse Mills ratio) calculated from the selection
foreign operations. All foreign operation informa- model into the second OLS outcome model to
tion is reported in current US dollars in the BEA analyze valuable knowledge transfers. I considered
surveys, so no currency exchange rates were needed. all foreign country operations of a US MNC to be at
risk of receiving transfers of parent firm knowledge
Parent Firm Controls and use this risk set as the basis for my first stage
I include parent firm R&D expenditures as a percent equation [with a zero/one dummy taking a value of
of the parent firm's total US sales to control for one when parent firm generated knowledge (US
knowledge investment differences across MNCs. I generated knowledge - with the US listed as the
also control for MNC size, which is measured as the priority patent) is transferred to the focal foreign
log of total worldwide MNC assets. country]. I then used my measure of the value of
parent firm knowledge as the dependent variable in
Country Controls the second stage. Accordingly, the second outcome
There are several country characteristics that may stage in the Heckman model considers the value of
also impact knowledge transfer. First, I include the firm knowledge transfer, conditional on the coun-
log of GDP to proxy for host country size. try being selected for knowledge transfer (and the
¿k.
797
Table 1 Description of variables (sources)
Dependent variables
Knowledge value Average value of the technology class and year weighted count of forward citations of US generated family
patents that are transferred to the foreign country In each year (Derwent matched into BEA data)
Knowledge transfer Selection equation: 0/1 whether the US generated patent has been transferred to the focal country
(Derwent matched Into BEA data)
Independent variables
Expatriates 0/1 Variable for whether the foreign country operation has US employees (BEA)
IP index Ginarte and Park's Index of patent rights, Incorporating coverage, membership In International treaties,
duration of protection, enforcement mechanisms and restrictions. (Park, 2008 provides updated data to the
Ginarte & Park, 1997 Index and Park's website provides data up to 2010)
RND Intensity Lagged R&D expenditures as a percent of total sales of the foreign country operation (BEA)
Manufacturing Lagged percent of Imports and exports with parent firm operations as a percent of total sales of the foreign
Integration country operations (BEA)
Royalty payments Lagged royalties paid to the US parent firm for parent firm technology for the foreign country operation
(BEA)
Foreign operation Lagged log of local sales in host country (BEA)
sales
Young age dummy Dummy variable that takes a value of one for any foreign operation that was established within the past 5
years from time t (BEA)
ParRDIntenslty Parent R&D expenditures as a percent of US sales (BEA)
MNC log assets Lagged log of total assets of the MNC (BEA)
Log GDP Lagged log of gross domestic product in host country In current US dollars (WDI)
FDI Inflow Lagged foreign direct Investment as a percent of host country GDP (WDI)
US tax difference Lagged corporate tax rate difference from host country to US (University of Michigan)
MNC must have operations in the country for the Hennart & Park, 1994; Gimeno & Woo, 1999). This
country to be included in this selection equation). measure is less likely to have as much impact on the
The Heckman approach can seriously inflate value of the knowledge that is transferred to
standard errors due to collinearity between the specific countries because it reflects aggregate com-
correction term and the included regressors. This petitive pressures coming from imports originating
problem can be exacerbated in the absence of an from all competitors in all foreign countries. Tests
exclusion restriction. Like instrumental variables, that included this variable in the second stage
exclusion restrictions are variables that affect the confirm that it does not significantly influence the
selection process but not the substantive equation value of transferred firm knowledge.
of interest. Although the Heckman model does not Finally, theory suggests that after expatriates are in
require exclusion restrictions to be estimated, the foreign operations, they will provide more protections
inclusion of exclusion restrictions contributes to a for parent firm knowledge and my models attempt to
more causal approach to the problem of selection account for causal relationships through the use of
bias. In the present article, I have included the lagged independent variables. In the present study,
percent of related party imports into the US to total the expatriate variable is lagged by 5 years.
(related and nonrelated party) imports into the US
as my exclusion restriction in the selection equa-
tion. This measure comes from the Census data RESULTS
from the US Department of Commerce. This mea- Tables 3 and 4 report the results from the Heckman
sure is intended to capture global competitive models. Table 3 reports the results using the full
pressures that come from products and inputs that sample of countries and Table 4 splits the results
are manufactured in foreign countries in the MNC's into strong and weak IP protection countries (using
main industry in the US but are sent to related/ mean IP protection values for each year to split these
affiliated operations in the US. Thus, this measure countries into either strong of weak IP protection).
reflects aggregate competitive pressures in a firm's In Table 3, Model I reports the results with the
main industry from other MNCs, which will influ- controls. Model II adds the country IP variable and
ence whether a firm needs to transfer its knowledge Model III adds the home country expatriate variable.
to foreign markets or not (Knickerbocker, 1973; Table 4 splits the sample across strong and weak IP
w- ^
* Managing valuable knowledge Heather Berry
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799
Table 3 Heckman results for value of parent knowledge transfers
Models
Expatriate 0.24** (0.03) [0.22]

DV: value of parent knowledge transfers (technology and year weighted citations)
Country IP protection 0.16** (0.04) [0.14] 0.16** (0.04) [0.14]
RND intensity 0.41** (0.12) [0.28] 0.41** (0.12) [0.28] 0.41** (0.12) [0.28]
Manufacturing integration 0.08** (0.03) [0.07] 0.08** (0.03) [0.07] 0.08** (0.03) [0.07]
Royalty payments -0.08** (0.02) [-0.07] -0.08** (0.02) [-0.07] -0.08** (0.02) [-0.07]
Foreign operation sales 0.03* (0.01) [0.03] 0.03* (0.01) [0.03] 0.03* (0.01) [0.03]
Young -0.01 (0.01) [-0.01] -0.01 (0.01) [-0.01] -0.01 (0.01) [-0.01]
Parent RND intensity 0.85* (0.39) [0.54] 0.85* (0.39) [0.54] 0.85* (0.39) [0.54]
Log MNC assets 0.04** (0.02) [0.04] 0.04** (0.02) [0.04] 0.04** (0.02) [0.04]
Country distance from US -0.01 (0.02) [0.01] -0.01 (0.02) [0.01] -0.01 (0.02) [0.01]
Tax difference -0.02 (0.01) [-0.02] -0.02 (0.01) [-0.02] -0.02 (0.01) [-0.02]
Language -0.56** (0.08) [-0.52] -0.56** (0.08) [-0.52] -0.56** (0.08) [-0.52]
Log country GDP -0.01 (0.01) [-0.01] -0.01 (0.01) [-0.01] -0.01 (0.01) [-0.01]
Country growth 0.03 (0.02) [0.03] 0.03 (0.02) [0.03] 0.03 (0.02) [0.03]
Intercept 3.03** (0.45) 3.01** (0.45) 3.01** (0.44)
Expatriates 0.04 (0.02) 0.04 (0.02) 0.04 (0.02)
Selection equation
RND intensity 0.41** (0.12) 0.41** (0.12) 0.41** (0.12)

Manufacturing integration 0.09 (0.06) 0.09 (0.06) 0.09 (0.06)
Country IP protection 0.34** (0.11) 0.34** (0.11) 0.34** (0.11)
Royalty payments 0.25** (0.05) 0.25** (0.05) 0.25** (0.05)
Foreign operation sales 0.16** (0.03) 0.16** (0.03) 0.16** (0.03)
Young 0.07** (0.02) 0.07** (0.02) 0.07** (0.02)
Parent RND intensity 1.41** (0.23) 1.41** (0.23) 1.41** (0.23)
Log MNC assets -0.03 (0.02) -0.03 (0.02) -0.03 (0.02)
Country distance from US -0.01(0.01) -0.01(0.01) -0.01(0.01)
Tax difference -0.03* (0.01) -0.03* (0.01) -0.03* (0.01)
Language -0.35** (0.12) -0.35** (0.12) -0.35** (0.12)
Log country GDP 0.01(0.01) 0.01(0.01) 0.01(0.01)
Country growth 0.02(0.01) 0.02 (0.01) 0.02(0.01)
Related US imports percent 0.03* (0.01) 0.03* (0.01) 0.03* (0.01)
Rho -0.29**
Intercept -0.29**
0.31* (0.12) 0.31* (0.12)-0.29**
0.31* (0.12)
Wald Chi square 766.34** 772.25** 781 .50**
Observations 350,584 350,584 350,584
Uncensored observation 294,81 3 294,81 3 294,81 3
Year dummies Yes
MNCCtryCluster Yes Yes
Yes Yes
Censored observation 55,771 55,771 55,771
Yes
Note: (standard errors) [conditional marginal effects] Sig.: * <5%, ** <1%.
protection countries and includes interactions across each column, suggesting the necessity of the
across the expatriate and absorptive capacity vari- selection model. Each model reports the coefficient,
ables. Models I and IV report the results for the standard errors and conditional marginal effects
interactions between the expatriate variable and (which are the predicted probabilities of success
foreign operation RND intensity variable while conditional on selection).
Models II and V report the results for the interaction The first two hypotheses explore the impact of
between the expatriate and manufacturing variable. the foreign country's institutional IP protection on
The correlation between the error term in the parent firm knowledge transfers to foreign opera-
outcome model and the error term in the selection tions in that country. In Hypothesis 1, it was argued
model (rho) is significantly different from zero that the stronger the IP protection in a country, the
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higher the transfer of parent firm knowledge to

operations located in that country. The results from
the selection equation in Table 3 show support for
a.
this hypothesis. The selection equation results
-£ ° vo
reflect all parent firm knowledge that has been
> » v rn on on
- r- iO T- 0» a> transferred (via family patenting) to a foreign
I>
> m <N vo >- >-

country (in which a firm has operations). Table 3
reveals that the coefficient for the country IP
protection variable is positive and significant across
every model. This confirms that the higher the IP
Q_
0 VO
protection in a country, the more likely an MNC is
ķ (N O 1 to send parent firm knowledge to that country. In
^> T- un T-
m rsi vo a>
>- a>
>- the second hypothesis, it was argued that the
stronger the IP protection in a country, the higher
the transfer of more valuable parent firm knowledge
to operations located in that country. The outcome
Cl equation results across every model in Table 3 show
io o VO that contingent on knowledge being transferred to a
a> r- i'
>>S^WW
a> ^ > rvj r- O J ^ foreign operation, higher value parent firm knowl-
_ ^ > r- un r- CL) O)
-g _ ^ > m (N VO >- >- edge is more likely to be transferred to countries
"O
o with higher IP protections Thus the results show
support for both Hypotheses 1 and 2.
In the remaining three hypotheses, I focus on
Û-
knowledge transfer to operations located in weak IP
?£ n^ ro N protection countries. For these hypotheses, I focus
o m rs m
■M - vo on the results in Table 4, which split the sample
= m M t >■ > into above mean (strong) and at or below mean
(weak) IP protection countries. In the third hypoth-
esis, I argued that when foreign operations are
located in weak IP protection countries, MNCs are
o.
more likely to transfer parent firm knowledge to
Oí ^
c rv m i' operations that have home country expatriates
o
t, m
s sr'VA
m
+-¿ On ON •.</)</) >P than to operations that do not have home country
t- vo On a) a> zl
= m rvj t > >■ y expatriates. The selection equation in Table 4
shows that the coefficient for the home country
*
*
o. .é
#
U-) expatriate variable across Models IV-VI is positive
V
*
and significant. This lends support to the idea that
home country expatriates have a significant impact
en ? ^ ^ Xl on knowledge transfer compared to other firm
£
OO mvo
m ai
tj
en ? n m N
**
+_» Ov Ov * </>«/> operations in weak IP protection countries that do
oo * - vû ON li aj <u
_ m (N «t >- >- _ not have home country expatriates. However, there
ç
'ov is no statistically significant difference across the
Co
E home country expatriate coefficients across the
"Ü
c selection equation results in the strong and weak IP
•S c € protection models. Overall, while this suggests that
5 -S §
5?
home country expatriates play an important role in
<£ 2 ,_ ^ parent firm knowledge transfers to foreign opera-
p ° JS .S 3 S tions located in weak IP protection countries as
c
§ "S ° E ū « argued in the third hypothesis, it also shows that
O wU LI 33,n,n
1ow £ "iw
w
a» a» oo , U c
C w C L O "O ,n H "2 c there is not a significant difference across the role
oo (j c , J= -7 <5
they play in strong and weak IP protection coun-
O3u>2r
S oo (j c c s si J= -7 & <5
_Q¿
-O
Oj
O
tries when considering all knowledge transfers of
fi £ MNCs.
^Co
__ Managing valuable knowledge Heather Berry
In the fourth hypothesis, I argued that when knowledge in weak IP protection countries, but not
foreign operations are located in weak IP protection in strong IP protection countries. And second, the
countries, MNCs are more likely to transfer higher main effects from manufacturing integration are
value parent firm knowledge to operations that statistically and significantly different for valuable
have home country expatriates than to operations parent firm knowledge transfers to foreign opera-
that do not have home country expatriates. The tions located in strong and weak IP protection
results do not support this hypothesis. Model IV in countries (and it is significant in strong, but not
Table 4 shows that conditional on foreign country weak IP protection countries). The selection equa-
operations receiving transfers of parent firm knowl- tion shows the opposite effects for manufacturing
edge, the coefficient for the lagged home country integration - with a significant effect on transfers of
expatriate variable is not significant in weak IP parent firm knowledge to foreign operations
protection countries. This does not support the located in weak IP protection countries only. The
logic that all foreign operations located in weak IP results also show that RND intensity has a stronger
protection countries that have home country expa- effect for operations located in strong IP protection
triates will receive transfers of higher value parent countries versus weak IP protection countries.
firm knowledge. These results show interesting differences across
Finally, in the last hypothesis, I considered strong and weak IP protection countries that could
whether foreign operations need higher absorptive be explored in future research.
capacity before the positive effect of home country
expatriates on higher value knowledge transfers
DISCUSSION
would be realized in weak IP protection countries.
The results in Models V and VI in Table 4 support Although it is well established in the international
this hypothesis. In these models, the coefficients management literature that MNCs gain advantages
for the interaction terms indicate how the effect of when exploiting parent firm knowledge in foreign
local R&D capabilities and manufacturing integra- countries (Hymer, 1960; Kogut & Zander, 1992;
tion differ across foreign operations with and Martin & Salomon, 2003), these firms cannot ignore
without expatriates. The positive and significant the increased appropriation risks, especially in coun-
coefficients for both of the interaction terms show tries with weak institutional protections for IP
that these absorptive capacity measures have a (Blomstrom & Kokko, 1998; Javorcik, 2004; Keller
significantly larger effect in foreign operations with & Yeaple, 2009). This article contributes to our
expatriates than in those without expatriates (in understanding of the global management of knowl-
addition, both interaction terms and the main edge by MNCs by exploring whether home country
home country expatriate coefficients are statisti- expatriates can substitute for weak IP protection and
cally and significantly different across models increase the protection of parent firm knowledge in
comparing the strong and weak IP country models foreign operations located in weak IP protection
in Table 4). This means that there is a significant countries. The results from a comprehensive panel of
increase in the value of parent firm knowledge that US multinationals suggest that they do, but that this
is transferred to operations in weak IP protection effect is contingent on the manufacturing and
countries when home country expatriates are pre- knowledge capabilities of foreign operations for
sent in operations with higher absorptive capacity, more valuable parent firm knowledge transfers.
and that this effect is significantly stronger in weak A focus on parent firm knowledge transfers is
IP protection countries as compared to strong IP important because parent firm operations still
protection countries. This suggests that the influ- dominate the knowledge generation activities of
ence of home country expatriates on transfers of MNCs (UNCTAD, 2005; Berry, 2014; Gupta &
higher value parent firm knowledge to operations Govindarajan, 2000). In fact, in their survey of 75
in weak IP protection countries is contingent on MNCs, Gupta & Govindarajan (2000) found that
the capabilities of foreign operations, supporting knowledge transfers from parents to foreign oper-
the logic underlying Hypothesis 5. ations are significantly greater than knowledge
The control variables also reveal some other outflows from foreign operations to parents, knowl-
interesting differences across strong and weak IP edge outflows from foreign operations to third
protection countries. First, the size of the foreign country operations or knowledge transfers from
operation has a positive and significant relation- foreign operation to foreign operation and Berry
ship with higher value transfers of parent firm (2014) showed that well over two-thirds of the R&D
Managing valuable knowledge Heather Berry "HP* __
expenditures of US MNCs occur in the home 15%) and even lower R&D expenditures in devel-
country of these firms during the time period of oping countries, this suggests that there is more
this study. Other studies have shown that transfers than one route to developing absorptive capabili-
of home country knowledge improve the perfor- ties in developing country markets. Given the
mance of foreign operations (Berry, 2015; Fang, cheaper input costs available in these countries,
Jiang, Makino, & Beamish, 2010). this highlights multiple routes through which
While extant research has argued that home foreign operations can develop the capabilities that
country expatriates are an important conduit for are needed to receive and use higher value parent
tacit knowledge (Bonache & Brewster, 2001; Gong, firm knowledge. Overall, the arguments and find-
2003; Gaur et al., 2007; Chang et al., 2012), their ings in this article provide a more nuanced under-
role in protecting parent firm knowledge in coun- standing of the antecedents of knowledge transfer
tries that lack institutional IP protections has not than has been identified in extant literature while
been adequately explored. This article argues that highlighting opportunities for future research to
home country expatriates can provide a buffer to extend the study of different firm knowledge
institutional deficiencies in foreign countries characteristics and differences in locational institu-
because their ties to headquarter, their knowledge tional infrastructures and foreign operation
of parent firm assets, priorities and routines, and capabilities.
their role in overseeing activities in local operations This article also makes important empirical con-
can transform the local operation to offer higher tributions. First, the results are based on the most
protection for parent firm knowledge in ways that comprehensive database on the population of US
operations with only local managers cannot. This is MNCs from the BEA at the US Department of
particularly relevant for higher value parent firm Commerce that is available. Second, this article
knowledge, which not only provides benefits to contributes to the literature on knowledge man-
MNCs in their home market, but can also help agement by offering a new approach to capturing
these firms be more competitive in foreign markets. knowledge transfer by MNCs. Current approaches
Prior studies have found conflicting results on the in extant studies to analyzing knowledge transfers
influence of expatriates on knowledge transfer, include using parent R&D expenditures (see Fang
with some studies finding no significant impact of et al., 2010; Belderbos & Heijltjes, 2005; Anand &
local versus parent firm nationals on knowledge Delios, 1997, for example) or backward citations to
transfers into foreign operations (Gupta & Govin- firm patents (see Almeida & Phene, 2004 or Berry,
darajan, 2000; Bjorkman, Barner-Rasmussen, & Li, 2014, for example) to capture MNC knowledge
2004) and others finding a positive impact when transfers. However, the first approach essentially
considering the RND intensity of the parent firm assumes that all parent firm knowledge is being
(Fang et al., 2010). The lack of consistent results in transferred to foreign operations while the reality is
prior studies may stem from the need to more fully that firms tend to keep proprietary knowledge in
examine differences in the characteristics of knowl- their home market, especially when that home
edge that is being transferred to foreign operations market has strong IP protections in place (Zhao,
and differences in both the organizational buffers 2006). A problem with the second approach (back-
and absorptive capacity of the foreign operations of ward citations) is that researchers can only capture
MNCs. knowledge citations when new knowledge is gen-
The results show that the substitute role for more erated. But firms can use their knowledge in foreign
valuable parent firm knowledge transfers to weak IP operations to not only generate new knowledge but
protection countries is contingent on the absorp- also exploit existing firm knowledge created in
tive capabilities of foreign operations in terms of home or third-country markets. Relying on the fact
manufacturing and knowledge capabilities in weak that the patents are territorial, I assume that MNCs
IP protection countries. Although the R&D capa- will seek patent protection for their innovations
bilities interaction with home country expatriates within a country before transferring knowledge to
is positive and significant in both strong and weak that country and I use patent families to explore
IP protection countries, the manufacturing integra- knowledge transfer across MNC operations. This
tion interaction with home country expatriates is approach allows me to focus on knowledge trans-
only significant in weak IP protection countries. fers that are for exploitative reasons and that are
Given the overall low proportion of foreign R&D to based on the decisions of MNCs regarding which
total R&D by most US MNCs (on average, under firm knowledge to transfer to which foreign
■T" Managing valuable knowledge Heather Berry
804
countries. Of course, the use of patents means that country expatriate managers may have experiences
this approach only captures transfers of parent and connections with headquarters and parent firm
firm knowledge that has been patented (and thus, knowledge.
represents a lower bound on knowledge transfers). In sum, this article examines the antecedents of
But I would argue that the family patents of MNCs parent firm knowledge transfers to foreign opera-
present an interesting and underexplored avenue tions, focusing on the impact of home country
for analyzing both the patenting and knowledge expatriates on the transfer of parent firm knowl-
transfer decisions of MNCs. Third, I have also edge to foreign operations. My main argument is
considered differences in the value of firm knowl- that home country expatriates can substitute for
edge that is transferred to foreign operations. weak IP protection and drive an increase in more
Because firm knowledge offers differences in terms and more valuable knowledge transfers to foreign
of both the value it provides to firms and the level operations located in weak IP protection countries
of appropriation risk when exposed in foreign because expatriate corporate loyalties, experiences
countries, this represents an important addition with parent firm knowledge and knowledge trans-
to the literature that analyzes global knowledge fer and oversight activities in local operations will
management by MNCs. contribute to higher protection of parent firm
As with all papers, this study has limitations. knowledge and help to limit unintended spillovers
First, the empirical analysis considers US firms only. in these countries. The results from a comprehen-
Other country samples may use expatriate man- sive panel of US multinationals suggest that home
agers in different ways and the results from this country expatriates can substitute for weak IP
study may not generalize beyond US MNCs. protection, but that this effect is contingent on
Second, the expatriate variable that I use in this the manufacturing and knowledge capabilities of
article is unique in that it provides information foreign operations for more valuable parent firm
about US employees in foreign operations as knowledge transfers to weak IP protection
reported by parent firm operations for the popula- countries.
tion of US MNCs. But here too, it would be
interesting to capture shorter-term assignments or
information about the expatriates themselves, vs
ACKNOWLEDGEMENTS
using a more simple dummy (or even the count of
The statistical analysis of firm level data on US
US home country employees to total employees
multinational companies was conducted at the BEA
that I use in robustness results) that is collected by
US Department of Commerce under arrangements
the survey. While the BEA data provides great
that maintain legal confidentiality requirements. Views
coverage of US MNCs across time, these more
expressed in this article do not reflect those of the BEA
nuanced issues will need to be explored in smaller
or the Department of Commerce. I thank three
surveys with more detailed personnel data. Prior
anonymous reviewers for their comments and sug-
research has also considered the competencies and
gestions. I also appreciate helpful comments from
motivations of the expatriates themselves (Min-
Raymond Maialoni and William Zeile on the BEA data.
baeva & Michailova, 2004; Reiche et al., 2009;
I am grateful to participants at the Academy of
Chang et al., 2012) and these characteristics may
Management and Academy of International Business
moderate the relationships explored in this article.
conferences for feedback on earlier versions of this
Third, the BEA surveys only ask about home
article. Finally, I thank and acknowledge Mack Institute
country employees on the benchmark surveys
for Innovation funding for access to the Derwent
(and stopped asking this question altogether in Patent Database Index.
2004), which limits the panel that can be used to
explore the influence of home country employees
on knowledge transfers. Although this variable
provides interesting foreign operation level infor- NOTES
mation, it has clearly not been a priority variable on 1 Specifically, the International Investment and Trade
the BEA surveys. Finally, I have not considered the in Services Survey Act requires US MNCs to report
third-country expatriates of my MNCs. The BEA detailed information on the financial and operating
does not collect data on these managers, but they activities of both US parent companies and their
could certainly influence valuable parent firm foreign affiliates, as well as information on the value of
knowledge flows given that many of these third
¿k.
Managing valuable knowledge Heather Berry aTSi
80S
transactions between the parents and affiliates. (See but also subsequent patenting by firms beyond the
Mataloni & Yorgason, 2006, for a thorough descrip- period after which firms can no longer use the earliest
tion of definitions and survey methodology used by priority date in the DWPI database.
the BEA.)
2Experts at Thomson Innovation have tracked not
only Paris Convention 12-month equivalent patents,
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Managing valuable knowledge Heather Berry °/TSi
8Õ7
Zhang, Y., George, )., & Chan, T. 2006. The paradox of dueling Business and the Elliott School of International
identities: The case of local senior executives in M NC
subsidiaries, tournai of Management, 32(3): 400-425.
Affairs at George Washington University. She
Zhao, M. 2006. Conducting R&D in countries with weak received her PhD with a Joint Degree in Strategy
intellectual property rights protection. Management Science, and Organization and International Business from
52: 1185-1199. the Anderson School at UCLA. Her research exam-
ines how the strategic and organizational choices
multinational corporations make impact their suc-
ABOUT THE AUTHOR cess in product and geographic markets. She can be
Heather Berry is an Associate Professor of Inter- reached at berryh@gwu.edu.
national Business and International Affairs in the
International Business Department of the School of
Accepted by Paula Caligiuri, Area Editor, on 24 January 201 7. This article has been with the author for four revisions.

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Journal of International Business Studies (201 7) 48, 787-807

© 201 7 Academy of International Business All rights reserved 0047-2506/1 7 «HS

Managing valuable knowledge in weak

Keywords: knowledge transfer; multinational corporations (MNCs) and enterprises

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EXPLOITING FIRM KNOWLEDGE been regarded as being a dominant agent of inter-

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Table 1 Description of variables (sources)

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Table 3 Heckman results for value of parent knowledge transfers

Expatriate 0.24** (0.03) [0.22]

RND intensity 0.41** (0.12) 0.41** (0.12) 0.41** (0.12)

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higher the transfer of parent firm knowledge to

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RND intensity 0.41 (0.12) 0.41 (0.12) 0.41** (0.12)

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