Knowledge Inheritance in Global Industries: The Impact of Parent Firm Knowledge on the Performance of Foreign Subsidiaries

Abstract

This paper analyzes the impact of inherited parent firm knowledge on the performance of foreign operations in global industries. I argue that transfers of parent firm knowledge provide different advantages to foreign operations, depending on the technological characteristics of the foreign country and the type of knowledge transferred. Results from a comprehensive panel of U.S. multinational corporations (MNCs), using fixed effects and system general method of moments (GMM) models to correct for endogeneity issues, show that inherited parent firm knowledge is not equally valuable in all countries. The transfer of technological knowledge is value-creating when home country innovation dominates and when parent firm knowledge is transferred to foreign operations in lagging technology countries (when foreign technology dominates). Further, combining managerial knowledge transfers with local subsidiary investments in innovation is shown to boost the performance of foreign operations located in leading technology countries, suggesting that the prior experiences, connections, and knowledge of expatriate managers, can be particularly useful in managing new knowledge generated in these countries. Overall, this paper extends our understanding of knowledge management within MNCs by exploring when transfers of parent technological and managerial knowledge are more likely to improve the performance of foreign operations in increasingly globally competitive industries.