BMAN73172 INSTITUTIONS AND FIRMS’

INTERNATIONALIZATION STRATEGY
Lecture 4 Managing Global Innovation

Pei SUN

Professor of International Business

23 February 2024
 Outline of Todays’ Lecture

• Knowledge management and governance in

different types of MNEs

• Globalization of R&D Activities

• Managing R&D centres in emerging markets
• Addressing knowledge leakage problems
(appropriability risk) under weak intellectual
property right protection
Knowledge Management in MNEs
 Managing Knowledge
• Knowledge management: the structures, processes and
systems that actively develop, leverage and transfer
knowledge. It is a broad concept that includes not only
factual information but the know-how and know-why held by
individuals and by the firm.

• Explicit knowledge is codifiable (that is, can be written

down and transferred with little loss of its richness). Virtually
all the knowledge captured, stored and transmitted by IT is
explicit.

• Tacit knowledge is non-codifiable and its acquisition and

transfer require hands-on practice. This knowledge is more
important and harder to transfer and learn; it can only be
acquired through learning by doing.
Knowledge Conversion
 Knowledge Management in the
Four Types of MNEs
• Home replication
– Traditional one-way flow
– Codification of tacit knowledge in the headquarter
• Localization
– Initial knowledge transfer from the headquarter, but then developing a life of its
own
– Limited knowledge transfer between units
• Global standards
– “Act local, think global”
– Knowledge developed and retained at HQ and a few centers of excellence at
other locations
• Transnational
– Multidirectional flow of knowledge
– Reverse Knowledge Transfer: knowledge created in a subsidiary being transferred
from the subsidiary to a parent organization and other subsidiaries
Knowledge Management in
the Four Types of MNEs
Knowledge Governance
 Communities of Practice (CoPs)
• CoPs are groups of people doing similar work and sharing
knowledge about their practices of work.
• Firms often foster social interaction between people doing
similar jobs, encouraging the exchange and evolution of
ideas or innovation before they get codified.
–This can be as simple as a free coffee machine in the
office where people can meet, gossip and exchange.
• Global or Transnational MNEs are more complex CoPs, as
codification is often not sufficient for effective knowledge
exchange; this is due to varying locations, languages,
cultures and distance from so many different parties.
–Virtual (online) communities of practice, workshops,
conferences, ‘away days’ are all common examples here.
 Mechanisms in Support of
Effective Knowledge Governance
• Reduce internal competition within MNEs both at
the interpersonal and inter-subsidiary levels
• Use corporate- or business-unit-based incentives, as
opposed to individual- and single-subsidiary-based
incentives
• Invest in codifying tacit knowledge
• Develop networks among various subsidiaries
through teamwork, training, and conferences
• Promote strong organizational cultures and norms
for cooperation
Globalization of R&D Activities
 Cross-Border R&D Activities
Target countries
Rest of
Triad BRIC
World
Source Triad 3,131 1,332 1,235
countries BRIC 192 23 66
Rest of World 146 86 44

Source: R&D Locations database, http://www.glorad.org.

Note: The numbers refer to those of the cross-border R&D center establishments
as of 2016. The Triad includes Japan, Western Europe, the USA, and Canada.
 Types of Cross-border R&D
• Home-base-exploiting site: Commercializing knowledge by transferring
it from the company’s home base to its foreign site and from there to
local manufacturing and marketing. (Kuemmerle, HBR, 1997)
• Home-base-augmenting site: Tap knowledge from competitors and
scientific communities around the globe; information flows from the
foreign site to the central lab at home.
R&D in Emerging Economies
(McKinsey 2011 Survey)
Organization of Global R&D
Activities within MNEs
 The Ecosystem of an MNE’s Overseas
R&D Center
MNE
Headquarter

Global R&D
Centre Regional Host
Country HQ

R&D Centres in
Other Countries Host country procurement,
manufacturing, and marketing
divisions

Host Country R&D Centre

Host Indigenous Other MNEs in the Local Universities and

Government Firms host market Research Institutes
 Innovation Activities in
Emerging Markets

• Frugal innovation
• Nonessential features are removed, product
complexity is reduced, and costs are slashed
• Product de-featuring or product localization
• “Good enough” solutions

• Reverse innovation
• Introduced to an industrialized advanced market at
some point
• New product category or new business model
 Challenges for Reverse Knowledge
Transfer
• Inherent resistance from the headquarter
• Potential of cannibalizing home-grown and often more
expensive products

• Ability of the headquarter to access the value of the

knowledge created in subsidiaries is questionable.

• In the case of EMNEs entering developed economies,

the absorptive capacity of parent organizations is
essential.
 Appropriability Risk

• Returns/rents from innovation activities may

flow to other stakeholders or competitors

• Knowledge retention in countries with weak

intellectual property rights (IPR) protection
– R&D-intensive MNEs, with their closely interlinked
R&D activities worldwide, depends on their
internal organizations to substitute for weak IPR
protection (Zhao, 2006).
 Essential Readings

• Chapter 15, Peng & Meyer (2023)

• Kuemmerle (1997) in the reading list

• Papanstassiou et al. (2020) and Zhao (2006):

available on Blackboard

• Next week: Managing MNE-government relations

Thank you!