Do Management Innovations of Indigenous Firms Benefit from Managerial Spillovers from Multinational Enterprises?.

Author:Zhao, Hongxin

1 Introduction

The pioneering work of Caves (1974) has inspired a plethora of studies on foreign direct investment (FDI) spillover effects (for reviews of this line of research, see Crespo and Fontoura 2007; Keller 2004; Meyer and Sinani 2009; Wooster and Diebel 2010). This stream of research, however, not only documented mixed findings, but also left two important areas underexplored. First, despite the fact that the FDI spillover literature has long recognized employment effects as an important spillover channel for local economies (e.g., Gorg and Strobl 2001), few studies have examined the specific effects of the outflow of managers from multinational enterprises (MNEs) on local firms. Instead, existing studies have relied primarily on the share of MNEs' employment and employee salaries in industrial sectors as proxy variables to estimate spillover effects (e.g., Gorg and Strobl 2001; Tian 2007). Further, these aggregated approaches may mask the more complex impacts of FDI (Spencer 2008) and do not account for the particular roles of the migrated managers as carriers of management knowledge in the domestic firms' management innovations. Second, although the acquisition of managerial knowledge and expertise is considered a key objective of attracting FDI (UNCTAD 2005), and it is generally thought that firms in emerging economies enjoy large spillover benefits in the area of management and administration from the presence of MNEs in all industries (e.g., Chang and Xu 2008; Eapen 2013; Eden 2009; Meyer and Sinani 2009), yet, the existing research has predominantly focused on the spillover effects on local firms' productivity and technology innovation (Eden 2009), offering scant evidence on whether and how management of domestic firms benefits from FDI. Thus, the existing research underestimates the non-productive spillover benefits from MNEs (Buckley et al. 2002). Third, the extant spillover research also tends to take an MNE-centered approach to examining FDI effects and domestic firms are considered merely as "passive recipients of spillover" (Meyer 2004, p. 267). At best, the extant studies provide only a partial picture.

Extending this line of research, our research, rather than adopting a MNE-centered view, approaches the spillover effects from the angle of domestic firms as active recipients. Specifically, integrating the FDI spillover literature with the research on management innovation, we seek to explore: (1) whether managerial spillovers defined as the movement of managers from MNEs to domestic firms affect latter's undertaking of management innovation defined as the introduction of management practices that are new to a focal firm with the intention of enhancing its performance (Birkinshaw et al. 2008; Hamel 2006, 2007); (2) the mediating role of management innovation in the relationship between managerial spillovers and firm performance; and (3) the contextual conditions that facilitate or inhibit the effects of managerial spillovers and the performance effects of management innovation.

Filling these research gaps, our study makes two major contributions to the research on FDI spillover and management innovation. First, integrating these two streams of research, we develop and test a spillover-innovation-performance process model. Rather than tying managerial spillovers to performance directly, we conceptualize the undertaking of management innovation as a key mediating variable accounting for the performance effects of managerial spillover, invoking the notion that firms seek to best utilize their managerial spillovers by behaving in a way that is consistent with the performance predictions of management innovation theory (Birkinshaw et al. 2008). We posit that the managerial spillovers not only influence domestic firms' management innovation but also indirectly affect indigenous firms' performance through the induced changes and improvements in management. By conceptualizing management innovation as a knowledge conversion platform that aligns and combines managerial spillover with firm performance, our study reconciles the divergent findings in the FDI spillover literature and sheds new light on the processes by which the changes in management transform the managerial knowledge embodied in the migrated managers into tangible outcomes. Second, informed respectively by the economic geography literature (e.g., Audretsch and Feldman 1996; Jacobs 1969) and organizational learning theory (Cohen and Levinthal 1990), we also posit the moderating effects of FDI density and absorptive capacity of domestic firms since management innovation as a complex process depends on other external and internal characteristics (Birkinshaw and Mol 2006; Jansen et al. 2006). We predict that the absorptive capacity of the indigenous firms amplifies the performance effects of management innovation by fully realizing the value of management innovation, while a firm's location within an area densely populated by FDI that epitomizes information and career munificence environments weakens the relationships between managerial spillovers and management innovation (see Fig. 1: a conceptual model).

To test these propositions, we collected data from a survey of domestic firms in China. China is a useful study setting for two reasons. First, empirical spillover research has mainly confined to developed economies such as the United Kingdom (Fu 2012; Mol and Birkinshaw 2009a). While the management practices of firms from emerging markets such as China and India are often seen as poor compared with those of firms from more developed countries such as Germany, Japan, Sweden, and the United States (Bloom and Van Reenen 2007), Chinese and Indian firms have recently become competitive both in their domestic and global markets (Mudambi 2008; Zeng and Williamson 2003), implying that the fast catch-up by these firms may be attributed to their learning from their foreign counterparts. Second, while operating in an emerging market, MNEs face steep competition from their host country rivals for talent (Lewin et al. 2009; Turban et al. 2001). In practice, MNEs reportedly have a shortage of available local talent in Latin America and China (Manpower Group 2013). For instance, a survey by the American Chamber of Commerce in China (AmCham 2011) found that hiring and retaining talent was the primary challenge for its member companies operating in China. Thus, conducting the study in a large emerging economy such as China can enrich our general understanding of the consequences of manager movement from MNEs.

The remainder of this paper is organized as follows. The following section delineates the underlying theories and develops hypotheses. The subsequent section describes the research design (sample, data, measures and methods). The results and discussions are presented in the last two sections, respectively.

2 Underlying Theory and Hypotheses

Explaining the motivations for management innovation, Birkinshaw et al. (2008) list four theoretical perspectives: the institutional perspective (focusing on social and economic conditions), the fashion perspective (focusing on the dynamic interplay between the users and providers of management ideas), the culture perspective (focusing on organizational reaction to new management practices), and the rational perspective (focusing on the actions of key individuals). The rational perspective, which posits key individuals as crucial driving forces in the pursuit of management innovation (Birkinshaw et al. 2008), resonates with the long-standing but little-understood spillover claim that employees who move from foreign to local firms serve as an important channel to carry new management practices to local firms (Almeida and Kogut 1999; Djanko and Hoekman 2000; Fosfuri et al. 2001). This shared logic of the two perspectives is particularly relevant for examining the relationship between managerial spillovers, management innovation, and performance, because managerial knowledge, such as knowledge and know-how of changes in administrative processes and restructuring, often resides in the minds of individuals (Greeno 1980; Kim 1993), and human assets that are difficult to imitate due to scarcity and specialization (Polanyi 1962; Teece 1980, 1982) are important sources of competitive edge (Barney and Wright 1998). Thus, it provides the basis for us to develop hypotheses on the relationship between managerial spillovers, management innovation, and performance.

2.1 Managerial Spillover and Management Innovation

Firms from emerging economies are generally considered to lack management advantages (Madhok and Keyhani 2012). To sustain growth in the long run and gain competitive capabilities in global markets, firms in emerging economies strive to improve their management practices. As MNEs are likely to be better managed, which gives them a competitive edge over domestic firms in host countries, they have long been considered sources of managerial knowledge that benefit host economies (Buckley et al. 2002; Dunning 1958). Extending management innovation to multinational corporations, Mol and Birkinshaw (2010) argue that MNEs play two key roles in implementing management innovations: engaging in management innovation by inventing or implementing new management practices, and diffusing management innovations to other countries.

Nevertheless, managerial knowledge--an organization's most valuable knowledge--is often not susceptible to codification (Dhanaraj et al. 2004; Kim and Kogut 1996; Nonaka 1994; Zander and Kogut 1995). Due to this tacit nature, it is often hard to acquire management knowledge simply by observing. Thus, managerial knowledge, expertise and know-how mainly flow from MNEs to domestic firms when managers move to domestic firms. To the recipient domestic firms, managers with prior work experience with MNEs offer a viable and direct way to absorb managerial knowledge. The related research on...

To continue reading