expatriation as a bridge over troubled water: a knowledge

Expatriation as a Bridge Over Troubled Water:A Knowledge-Based Perspective Applied toCross-Border AcquisitionsLouis Hébert, Philippe Very and Paul W. Beamish

Abstract

Do expatriate managers fulfil the role of ‘value-seeking connectors’ in cross-borderacquisitions? Building from the organizational knowledge and the MNC literature,this paper focuses on the use of expatriate managers for transferring experience-basedknowledge within the MNC and its impact on the survival of acquired subsidiaries.Using a sample of cross-border acquisitions by Japanese MNCs, we analysed theimpact of expatriate managers on the relationship between the acquirer’s industry,host country and acquisition experience and the survival of the acquired subsidiary.Results show that the contribution of expatriation to the acquired firm’s survival variesconsiderably depending on the type of experience considered. In fact, connectivitythrough expatriation is costly and only when appropriately sent abroad do expatriatemanagers build an effective bridge over the troubled water that characterizes thechallenging post-acquisition integration.

Keywords: mergers and acquisitions, knowledge transfer, expatriate managers, post-acquisition integration, international experience

The integration of a newly acquired foreign firm represents a major challengefor acquirers. The process is frequently performed in a context of ‘troubledwater’ marred with uncertainty, confusion and high expectations (Haspeslaghand Jemison 1991; Larsson and Finkelstein 1999; Vaara 2002). The criticaltask of bridging two or more firms typically falls under the responsibility ofa management team handpicked by the acquirer. According to Schweiger andGoulet (2000), little is known about the management of the integrationprocess itself, and particularly about the composition of the new managementteam of the acquired company. Its composition should logically reflect theacquirer’s intention in terms of integration and expertise transfer. This teamcan be formed either with acquired firm executives, with acquirer managerssent as expatriate management, or even with a mix of managers from eachfirm. Managers from the acquired firm provide access to valuable host countryknowledge in addition to firm-specific tangible and intangible assets. In turn,expatriate managers from the acquirer are likely to transfer some of theirfirm’s knowledge that might enhance the performance of the target firm.Successful value creation requires substantial learning from both sides(Villinger 1996). Knowledge transfer between the acquirer and the foreignacquired firm should contribute to create the value expected from the deal.

OrganizationStudies26(10): 1455–1476ISSN 0170–8406Copyright © 2005SAGE Publications(London, Thousand Oaks,CA & New Delhi)

1455 Authors name

www.egosnet.org/os DOI: 10.1177/0170840605057067

Louis HébertHEC Montréal,Canada

Philippe VeryEDHEC BusinessSchool, France

Paul W. BeamishThe University ofWestern Ontario,Canada

However, recent research has found that acquirers’ ability to successfullytransfer knowledge often falls short of expectations (Schoenberg 2001).Therefore, how can knowledge be efficiently transferred between the acquirerand the acquired company?

To investigate this question, we draw from the literature on organizationalknowledge and knowledge transfer in the multinational company (MNC).MNCs have been conceptualised as social communities that specialize in the creation and internal transfer of knowledge (Kogut and Zander 1993).However, the tacit and embedded nature of organizational knowledge createsbarriers to its efficient transfer (Polanyi 1967; Szulanski 1996). Successfultransfer of such knowledge requires support from a variety of organizationalmechanisms, including people-based mechanisms (Nonaka and Takeuchi1995; Lam 2003). Experience — the accumulation of knowledge throughrepeated operations in an organizational context — belongs to this categoryof complex knowledge. Its embeddedness in its context of creation makes itdifficult to transfer, but its diffusion to other organizational units may providea knowledge advantage to the MNC (Kogut and Zander 1993). As a result,expatriation can be a legitimate mechanism for transferring embeddedknowledge (Downes and Thomas 2000; Bouquet et al. 2004).

There has been growing interest in the relationship linking an acquirer’sexperience-based knowledge with the performance and the success of itsacquisition strategy in domestic and cross-border arenas. However, for co-operative or greenfield entries, most studies have limited themselves to theexperience accumulated by the acquiring firm with little attention to its trans-fer and the mechanisms used for that purpose (Simonin 1999; Lam 2003). Inaddition, the role of expatriate managers in supporting the effective transferof experience between headquarters and newly acquired foreign subsidiarieshas been generally neglected. As a result, our understanding of the conditionsunder which the use of expatriate managers enhances the chance for survivalof a newly acquired subsidiary is still constrained.

This paper explores the relationship between experience, the use of expatri-ate managers and the survival of acquired subsidiaries. It examines differenttypes of experience that should appropriately be transferred by expatriatemanagers. Our review of the knowledge and the MNC literature leads us toformulate hypotheses that were then tested on a sample of foreign acquisitionsmade by Japanese MNCs. We argue that those firms represent an appropriatesetting for studying the conditions under which expatriate managers, actingas carriers of experience, are likely to ensure an efficient connectivity betweenorganizations.

Knowledge Transfer in Multinational Firms

The ability to create and transfer knowledge is generally perceived as a keycompetitive advantage of MNCs (Kogut and Zander 1993; Andersson et al.2001). For the MNC, merely possessing or creating knowledge-based assetsis not sufficient in itself to ensure its competitiveness. Transferring thisknowledge within and across the firm enables it to exploit its knowledge

1456 Organization Studies 26(10)

advantage in various locations (Szulanski 1995; Martin and Salomon 2003).Without this transfer ability, a MNC cannot replicate its knowledge-basedadvantage throughout its operations and compete on a multiple-country scale(Madhok 1997).

Scholars have identified different obstacles to the efficient transfer ofknowledge, including the nature of the knowledge transferred, the absorptivecapacity of the recipient and the relationship between the sender and therecipient (Szulanski 1995). In particular, the tacitness of knowledge createsambiguity and barriers to both transfer and imitation (Polanyi 1967; Grant1996). Building from Reed and DeFillippi (1990), Simonin (1999: 469)defines tacitness as ‘the implicit and non-codifiable accumulation of skillsthat results from learning by doing’. In contrast to explicit knowledge, tacitknowledge is uncodified, complex and difficult to teach (Kogut and Zander1993). Described as ‘knowledge of experience’ (Nonaka 1994), it is rootedin individual action and its transfer requires close dynamic interaction withina context of shared understanding (Lam 2000).

As knowledge can be held by an individual or a collective, scholars havedistinguished between collective and individual levels of organizationalknowledge (Tsoukas and Vladimirou 2001; Malhotra 2003). Individualknowledge refers to the organizational knowledge possessed by an individualmember of an organization. Grant (1996) associated collective knowledgewith capabilities: what a group of people working together is capable of doing.Collective knowledge is the outcome of knowledge integration; it is theproduct of the co-ordinated efforts of individual specialists with shared normswho possess different but complementary skills. It is found in the rules,routines, shared norms and generalizations that drive the activities andinteraction within the firm.

Lam (2000) used these tacit-explicit and individual-collective dimensionsto identify four types of knowledge: embrained (individual-explicit), embodied(individual-tacit), encoded (collective-explicit) and embedded (collective-tacit). Embedded knowledge is of special interest for this study. Not only isit tacit, but also context-specific, ingrained in interdependent routines,technologies and procedures as well as in individuals who share commonexperiences and values (Tsoukas 1996). Such characteristics raise higherambiguity and complexity barriers to knowledge transferability (Reed andDeFillippi 1990) requiring even more intimate and dynamic social interac-tions (Kogut and Zander 1992).

For Lam (1997, 2000), such knowledge is one of the specific characteristicsof Japanese firms. These firms adopt a J-form organization or, in other words,an organizational community model which supports the transfer and develop-ment of tacit knowledge through collective learning. This organizationalcommunity model bears a resemblance to the knowledge projection modelfound in some MNCs. Both cases involve a ‘knowledge broadcasting’organization that derives its competitive strengths from the exploitation offirm-specific and co-located competences (Bartlett and Ghoshal 1989; Dozet al. 2001). Lam (2003) noted that Japanese firms make extensive use ofJapanese expatriate managers to support knowledge transfer.

Hébert et al.: Expatriation as a Bridge Over Troubled Water 1457

‘Are you Experienced?’ or Knowledge and Internationalization

Organizational experience-based knowledge plays an important role in theformulation and performance of an internationalization strategy. Experienceis the knowledge accumulated by a firm in order to operate effectively in anew market or country environment (Johanson and Vahlne 1977). It is a keydeciding factor in the international expansion of the firm and its mode of entry(Eriksson et al. 1997). Foreign experience is associated with higher perfor-mance and market share results as well as greater likelihood of subsidiarysurvival (Shaver et al. 1997). It permits firms to deal more effectively withthe unpredictability of foreign, culturally diverse and potentially unstableenvironments (Delios and Beamish 1999).

Various researchers have investigated more specific and idiosyncratic typesof experience. For instance, host country experience refers to operationalexperience in a particular foreign country (Johanson and Vahlne 1977). Thisexperience enables the firm to develop capabilities in order to be effective inits new environment and to overcome competitive difficulties (Delios andBeamish 2001). Industry experience involves the development of capabilitiesand competences required to compete in a specific industry (Lu and Hébert2005). Also, the experience with a particular entry mode enables a firm tomanage a new subsidiary, either as wholly owned, joint-owned or acquired.For instance, experience with joint ventures or with acquisitions has receivedincreasing attention in recent years (Barkema et al. 1997; Hayward 2002).Since Fowler and Schmidt (1989), experience with acquisition has become akey construct in mergers and acquisitions literature. Angwin (2001) observednational differences in the way acquirers perceive the value of due diligenceand in their use of professional advisers. Acquisition experience is thusembedded in the acquirer’s national context.

Merely possessing experience does not ensure that it will be effectivelyexploited or transferred to the appropriate organizational units. In organiza-tions relying on the knowledge projection model, exploitation of embeddedknowledge rests on the ability to transfer it to foreign subsidiaries. Yet, priorresearch has mostly focused on the possession of experience, rather than onits transfer and exploitation (Simonin 1999; Malhotra 2003). Therefore, thispaper explores how the use of expatriate managers can support the effectivetransfer of experience within MNCs. Like others before, we suggest thattransferring experience-based knowledge can only be achieved by bringingactors together to provide for re-embedded interaction (Nonaka and Takeuchi1995; Goodall and Roberts 2003).

Expatriate Managers as Value-Seeking Connectors

MNCs use expatriate management for a variety of motives and assignments(Black et al. 1991; Peterson et al. 1996). Expatriate managers can represent aneffective strategy to help foreign affiliates adhere to corporate objectives andpractices (Edstrom and Galbraith 1977; Mayrhofer and Brewster 1996). Theyhave the required experience, knowledge and socially embedded skills that canbe transferred to local managers and personnel, through socialization processes


or the implementation of appropriate training programmes. Their deploymentis thus a mechanism for transferring a firm’s unique experience-basedknowledge to its new markets. Expatriation can also be used as a response toperceived need for control and to ensure effective communication withheadquarters (Edstrom and Galbraith 1977). In turn, relying extensively onexpatriate managers can be costly to sustain and a large proportion of expatriatestaffing fails or ends up with early repatriation (Birdseye and Hall 1995).

From a knowledge perspective, the controlling function is not sufficientfor justifying the cost of expatriation. Firms should send expatriate managerswhen this action is likely to improve the competitiveness of the firm. To bringvalue to the subsidiary, the expatriate staff must support the transfer ofembedded knowledge (Doz et al. 2001). Therefore, expatriation is justifiedwhen benefits expected from knowledge transfer surpass the cost ofexpatriation and when transfer requires human interaction. In such conditions,expatriate managers are likely to act as ‘value-seeking’ connectors, distillingcore knowledge to the new subsidiary.

When acquiring a foreign firm, the decision to send expatriate managers isclosely linked to the decision concerning the choice of the new target manage-ment team. The literature about team selection in acquisitions confirms theimportance of managers’ individual experience in the choice of integrationleaders. As those in charge of the integration phase have the responsibilityfor value creation, the choice of team members is a critical decision facingacquirers (Schweiger and Weber 1989; Aiello and Watkins 2000). The choiceis generally restricted to the members of the target top-management team andthe acquirer’s managers. Through its integration task, this team bridges andorganizes flows of knowledge between both companies.

For instance, sending managers with acquisition experience can ensureproper monitoring of the integration (Haleblian and Finkelstein 1999). For atransaction in the acquirer’s industry, experts possessing industry experiencecan support effective resource sharing and skill transfer in order to generatesynergies (Bresman et al. 1999). In the presence of significant culturaldifferences, expatriate managers with host country experience, or at leastinternational experience from prior expatriation, can assist negotiations andfacilitate communication between the employees of both firms (Very 2004).

Depending on the collective or individual nature of the knowledge to betransferred, acquirers can decide to send a team of expatriate employees or onlyselected individuals, each possessing a particular skill. A team of employeeswith diverse skills but shared norms can diffuse collective knowledgeembedded in the acquirer’s rules and routines. Acquiring abroad also offers anopportunity to learn from the acquired firm and expatriate managers maysupport such learning. They can act as value-seeking connectors between twosets of knowledge that can overlap or be complementary. They may diffusesome acquirer’s knowledge to the acquired firm or capture some knowledgefrom the local firm to reinforce the acquirer’s knowledge base.

In this paper, we investigate the bridging functions played by expatriatemanagers and particularly their roles in the transfer of knowledge from theacquirer to the acquired firm. We study foreign acquisitions made by Japanese


MNCs since they have been described as organizations relying on expatriationto diffuse knowledge from headquarters to subsidiaries (Lam 2003). We donot make explicit distinctions between collective and individual knowledge,but do consider the size of the expatriate team in our framework. Finally, weconcentrate on three main types of knowledge that can be possessed by the acquirer: industry experience, host country experience and acquisitionexperience.

Expatriate Managers as Carriers of Industry Experience

Following Rumelt (1974), much research in the 1980s examined the degreeof relatedness to explain the performance of the firm in a new business.Relatedness represents a firm’s potential to use accumulated core businessexperience in new businesses. However, this important research stream yieldedmostly inconsistent results, a situation that some explained by the differentmeasures used for assessing relatedness (Ramanujam and Varadarajan 1989;Markides and Williamson 1994). In studying relatedness, researchers havegenerally measured the potential for transferring industry experience insteadof the realized transfer of experience.

A recent study of cross-border acquisitions within Europe reveals that,while European acquirers generally look for transferring functional knowledge(industry experience), their ability to succeed fell short of their expectations(Schoenberg 2001). The author concluded that the challenge of transferrequired detailed pre-bid implementation planning and careful selection oftransfer mechanisms to achieve effective diffusion of knowledge.

Social interactions are necessary for transferring industry experienceaccumulated in a particular context (Kogut and Zander 1992; Bresman et al.1999). When an acquirer is investing abroad in an industry in which itpossesses considerable experience, the use of expatriate industrial expertsshould help reinforce subsidiary competitive strategy. The probability ofsurvival of the unit is likely to increase with the transfer. In contrast, if thefirm has little knowledge of the industry, it should rely on acquired firmexecutives to enhance the likelihood of subsidiary survival. Hence, thefollowing hypothesis:

H1: The greater the acquirer’s industry experience, the more expatriatemanagers increase the chances of survival of the acquired firm.

Expatriate Managers as Carriers of Host Country Experience

When examining the relationship between host country experience,expatriation and acquired subsidiary survival, two perspectives can beconsidered. The first one builds on the efficiency generally associated withexperience while the second accounts for the specific nature of host countryexperience. Each perspective leads to distinct hypotheses.

When entering new countries, firms face multiple obstacles to success, or‘liabilities of foreignness’ (Zaheer 1995). They have to learn how to deal with


local institutions, local customer needs, and a different socio-political andlegal context. They have to develop locally based experience to overcometheir disadvantages versus local firms. Expatriate managers confront a similarchallenge on arrival in a new country; they also have to learn about their newenvironment. Accumulating such experience typically takes time (Johansonand Vahlne 1977).

Developing and diffusing knowledge about foreign markets has receivedconsiderable attention in the internationalization literature (Lord and Ranft2000). Typically, host country experience facilitates direct investments (Kediaand Bhagat 1988) and increases the likelihood of making an acquisition asthe entry mode (Barkema and Vermeulen 1998).

In the absence of any prior local experience, foreign acquirers are exposedto significant risks including information asymmetry, imperfect transferabilityand value-erosion contingencies (Balakrishnan and Koza 1993). Post-acquisition integration can be difficult due to strategic, cultural and organi-zational differences (Hennart and Reddy 1997; Olie 1990). Consequently,sending expatriate managers possessing host country experience should helpdiffuse the knowledge required for creating or reinforcing the organizationaladvantage of the acquired company. These knowledge carriers should knowhow to adapt central knowledge to local conditions. This rationale leads usto propose the following hypothesis:

H2.1: The greater the acquirer’s host country experience, the more expatriatemanagers increase the chances of survival of the acquired firm.

Nonetheless, there are arguments for a contradictory hypothesis. Somestudies have failed to find support for the relationship between host countryexperience and acquisition success (Hennart and Park 1993; Kogut and Singh1988). The equivocal nature of this research leaves us unclear as to whetherlocal experience influences the success of cross-border transactions. Similarto industry experience, researchers have generally used measures of experi-ence accumulation such as the years of presence in the host country or the number of existing subsidiaries. Also, when an acquirer has host countryexperience, one would expect that the acquirer has some establishedsubsidiaries operating in the host country. Local staff and country natives canprovide assistance in finding local targets, in negotiating and managing theacquisition and in adapting any central knowledge. Considering the high costof expatriate managers and their limited added value for local expertise,acquirers should accordingly rely on local managers. Expatriation may evenhamper the performance of the acquired firm and lead to its termination.Hence, we can formulate this hypothesis:

H2.2: The greater the acquirer’s host country experience, the more expatriatemanagers decrease the chances of survival of the acquired firm.

In synthesis, arguments can be made for these two contradictory hypotheses.We test both of them to address this contradiction when discussing our findings.


Expatriate Managers as Carriers of Acquisition Experience

Acquisitions represent opportunities for increasing and diffusing theknowledge base of the acquirer (Vermeulen and Barkema 2001). What hasbeen learned from past transactions can be used to improve the managementof similar future actions. Transferring this experience in a subsequentacquisition should increase chances of value creation.

When attempting to explain the performance of an acquisition, researchershave studied the possession of acquisition experience but neglected thetransfer of this acquisition experience. Not surprisingly, results are often scantand contradictory. Some observed a positive effect of prior experience(Fowler and Schmidt 1989; Bruton et al. 1994; Pennings et al. 1994) whileothers found a negative impact (Hayward 2002) or a U-curve effect (Haleblianand Finkelstein 1999). These contradictory findings lead us to consider therole of expatriate managers for transferring acquisition knowledge whenacquiring abroad. As integration is a challenging task, acquirer managerspossessing acquisition experience should efficiently monitor the complexintegration process and should increase chances of subsidiary survival. Ourhypothesis can be formulated as follows:

H3: The greater the acquirer’s acquisition experience, the more expatriatemanagers increase the chances of survival of the acquired firm.

Expatriate Managers as Carriers of Combined Experience

Despite mixed empirical support, research on acquisition experiencesuggested that limiting our investigation to the overall acquisition experiencecould be misleading. Some types of experiences could be superposed andexhibit a compounding effect. Acquisition experience should be useful whenthe transaction shares similarities with past deals. Haleblian and Finkelstein(1999) suggested that inexperienced acquirers tend to inappropriately gener-alize to future deals what they learned from their first acquisition, regardlessof the similarity or dissimilarity between the first and subsequent acquisitions.More experienced buyers appropriately discriminate between future acquisi-tions based on similarities with past transactions.

We could expect that the more specific the acquisition experience, the morerelevant it is for a new acquisition. The experience associated with an earlieracquisition in a specific industry is likely to be valuable for a subsequent trans-action in the same industry. The individuals involved in earlier transactionsin the same industry could bring their experience to effectively integratenewly acquired firms operating in this industry. A similar rationale can beapplied to the acquisition experience in a specific host country. Experiencefrom prior transactions is likely to benefit the integration of the newacquisition in the same country. In the absence of local acquisition experience,acquirers generally choose to rely on target executives to manage integration(Very and Schweiger 2001). Yet, possessing local acquisition experience maypermit them to adapt centrally located acquisition knowledge to localconditions. The locally embedded experience of acquisitions by expatriate


managers is likely to improve the management of the integration processimplemented within the same local setting. Relying on expatriate managersto transfer such specific experience should enhance chances of subsidiarysurvival. This suggests the following hypotheses:

H4: The greater the acquirer’s acquisition experience in the industry of the acquired firm, the more expatriate managers increase the chances of survivalof the acquired firm.

H5: The greater the acquirer’s acquisition experience in the country of the acquired firm, the more expatriate managers increase the chances of survivalof the acquired firm.

Empirical Investigation

This study used data available in Kaigai Shinshutsu Kiyou Souran (JapaneseOverseas Investments), an annual publication of Toyo Keizei Inc., whichprovides subsidiary-level information on the overseas activities of JapaneseMNCs. The database has been found to provide reliable data for the study ofJapanese foreign direct investment (FDI) (Beamish et al. 1997). The 1997version contained information on 22,214 subsidiaries representing more than5,000 public and private firms established in over 100 countries.

Our initial data set included 672 foreign acquisitions of Japanese MNCsduring the 1986–1997 period, in which the Japanese firms acquired more than50% of the equity ownership. Listwise deletion of cases with missing valuesreduced the sample size to 216 acquisitions distributed across Asia (44),Europe (58) and the USA (114). The relatively small number of acquisitionscompared to the overall population of subsidiaries was thought to beconsistent with the well-known reluctance of Japanese firms to engage inacquisitions compared to other organizational modes of expansion.

Consistent with prior research, our dependent variable is the survival ofthe acquired subsidiary as of 1997. One would expect that a subsidiary wouldremain in operation as long as it represents the most efficient or profitableorganization mode (Geringer and Hébert 1991; Inkpen and Beamish 1997).If it is not the case, the subsidiary is likely to be terminated or divested (Deliosand Beamish 2001). There is a legitimate concern that survival may not be areliable indicator of good performance, and reciprocally, termination of badperformance or failure. However, the operational definition of exit used tobuild the sample is consistent with that employed in previous research(Pennings et al. 1994; Barkema et al. 1997; Shaver et al. 1997). Furthermore,as in Delios and Beamish (2001), the sample was restricted to subsidiariesfounded after 1986 and that had been in existence for less than ten years. Thiscut-off of ten years accounts for the 10- to 15-year period which Japanesefirms use for assessing their investments (Taekichi 1999).

Independent variables were measured as follows:

� Ratio of expatriate managers: The number of expatriate managers as apercentage of the subsidiary’s total employment.


Table 1. Descriptive Statistics

Variables Mean Std. Dev. 1 2 3 4 5 6 7 8 9 10 11 12 13

1. Subsidiary Age 7.717 5.5892. Survival (0) 0.173 0.370 0.062+3.Number of Employees 279.551 597.414 0.048 0.059**4. Ownership 87.685 24.488 0.085+ �0.113* �0.0675. ROE �0.061 17.592 0.007 0.035 �0.037 0.0316. Nation Experience 33.385 74.055 �0.111* 0.440 0.090 �0.034 0.0417. Mode Experience 5.784 13.082 �0.203** �0.059 �0.034 �0.148* 0.027 0.310**8. Industry Experience 15.647 29.510 0.061 �0.077 0.027 �0.041 0.036 0.085 0.118**9. Industry Acq. Experience 0.603 3.189 �0.086+ �0.050 0.065 �0.078+ 0.028 0.143** 0.410** 0.338**10. Local Acq. Experience 1.949 6.636 �0.106* 0.005 0.037 �0.005 0.045 0.594** 0.588** 0.038 0.157**11. Host Country Risk �0.863 0.517 0.530 �0.109** �0.058 �0.181*** �0.047 �0.119** �0.017 0.085 0.027 �0.089*12. FDI Openness 0.008 0.489 �0.094* �0.064 �0.072 0.037 �0.081 �0.125** 0.015 0.002 �0.084+ �0.063 0.141**13. Cultural Distance 2.646 0.915 �0.111** �0.090* �0.020 �0.033 0.053 �0.019 0.155** 0.180** 0.191** �0.003 0.111** 0.02914. Expatriate Ratio 0.005 0.136 0.126 �0.107 �0.153** 0.052 �0.105 �0.082 �0.026 �0.108 �0.054 �0.057 0.064 0.066 0.007

+ p < 0.10* p < 0.05** p < 0.01*** p < 0.001

� Industry experience: The number of years the acquiring firm has beenoperating in the industry of the acquisition (3-digit SIC code) at the timeof the acquisition. If the acquiring firm did not have operations in thatindustry at the time of the acquisition, this variable is equal to zero.

� Host country experience: The number of years the acquiring firm hasbeen operating in the country of the acquired subsidiary at the time ofthe acquisition. If the acquiring firm did not have operations in thatcountry at the time of the acquisition or before, this variable is equal tozero.

� Acquisition experience: The number of years since the acquiring firm hasfirst used an acquisition to enter any foreign country at the time thesubsidiary is formed. If this is its first acquisition, this variable is equalto zero.

� Local acquisition experience: This variable is the intersection of hostcountry and acquisition experience. It is defined as the number of yearssince the acquiring firm first made an acquisition in the country of theacquired subsidiary, at the time of the acquisition.

� Industry acquisition experience: This variable is the intersection ofindustry and acquisition experience. It is defined as the number of yearssince the acquiring firm first made an acquisition in the industry of theacquired subsidiary, at the time of its acquisition.

Several control variables identified in previous research were included toaccount for country-level, subsidiary-level and firm-level effects (See Table1 for descriptive statistics). To control for country-level effects we includedcultural distance, host country risk and FDI openness. The cultural distancebetween Japan and the host countries was computed from Hofstede’s (1980)measures using the methodology outlined in Kogut and Singh (1988). Thismeasure is widely used in entry mode studies (Barkema and Vermeulen1998). Regarding host country risk, we used the Euromoney index which isa commonly used source and has been demonstrated to be replicable usingobjective economic data (Cosset and Roy 1991). Values from the September1996 issue were used. For FDI openness, a measure of local ownership restric-tions was constructed from the World Competitiveness Report (1996). Therelationship with subsidiary survival was expected to be negative for culturaldistance and host country risk but positive for FDI openness.

Subsidiary-level effects were captured by assessing the size of thesubsidiary (total number of employees) and the ownership position (as apercentage) held by the Japanese firm. A large subsidiary typically relies ongreater managerial and financial resources that should enhance the likelihoodof survival. Larger acquisitions and larger equity positions also representgreater resource commitments from parent firms. Consequently, they arelikely to be more patient before terminating such subsidiaries. Finally,building from Jensen (1986), profitable firms are more likely to divert freecash flows to unprofitable expansions and less likely to terminate suchexpansions. This phenomenon may influence the survival of foreignacquisitions. The return on equity (ROE) in the year that the acquired


subsidiary was terminated was used to control for the parent firm’s prof-itability. Subsidiary survival is expected to be positively related with size,equity position and ROE.

Data Analysis

Cox’s proportional hazard model was selected to test our model of acquiredsubsidiary survival. Partial likelihood estimates the influence of explanatoryvariables on the hazard of exit without specifying a parametric form for theprecise time to failure. Instead, it ranks acquired subsidiaries in terms of thesequence of exit and maximizes the partial likelihood that the ith subsidiaryshould exit conditional on the characteristics of the other acquired subsidiariesat the time of exit. To correct problems of censored data and aging effects,we used the Cox regression procedure included in SPSS 10.1, whichincorporates the age distribution directly into the estimation. All variableswere centred before conducting data analysis.

Results

Results from Cox regressions are presented in Table 2. According to thecoding of subsidiary survival (exit = 1 and survival = 0), a positive coefficientindicates a positive relationship with the risk of exit and a negativerelationship with the likelihood of survival. The two base models (model 1and 3) present survival analysis using experience variables in two steps.Model 1 includes only initial experience variables while model 3 containstwo specific acquisition experience variables. In either case, none of theexperience variables exhibited significant relationships with subsidiarysurvival. Only parent ownership exhibited a significant and positive relation-ship with acquisition survival, as expected.

The inclusion of the interaction terms yielded significant results insubsequent analyses (model 2). Hypothesis 1 predicted a positive relationshipbetween subsidiary survival and the use of expatriate managers in the presenceof industry experience. The negative and significant coefficient (p < 0.05)supports this hypothesis. The use of expatriation was found to increase chancesof survival with increasing levels of industry experience. Hypotheses 2.1 and2.2 predicted respectively a positive and a negative relationship betweensubsidiary survival and the use of expatriate managers when the acquirer has host country experience. No significant relationship was observed.Consequently, both hypotheses were not supported. Finally, hypothesis 3predicted a positive relationship between subsidiary survival and the use of expatriate managers when the acquirer has acquisition experience. However,the observed relationship was found to be positive (p < 0.01), therebycontradicting H3. In other words, the greater the acquisition experience, theless a firm should send expatriate managers to increase chances of survival.

In model 4, combined experience variables were added. H4 and H5predicted a positive relationship between the use of expatriates and survival


in the presence of acquisition experience in the industry and host country ofthe acquired subsidiary, respectively. Only the interaction term for hostcountry acquisition experience was found to be significant (p < 0.01) and inthe expected direction. H5 was supported while H4 was not. Essentially, theuse of expatriate managers for leveraging the parent’s local acquisition


Table 2. Results from Cox Regression (survival = 0; exit = 1)

Variable Model 1 Model 2 Model 3 Model 4

Country variablesHost Country Risk �1.724* �1.723** �1.860* �1.743**

(5.387) (5.531) (5.136) (5.354

Cultural Distance �0.768 �0.569* �0.538* �0.609*(4.711) (5.335) (5.270) (5.837)

Openness to FDI �0.523* �1.009† �0.673 �0.930†(2.478) (3.604) (1.995) (2.905)

Subsidiary variablesParent Ownership (%) �0.021*** �0.020*** �0.021*** �0.020***

(22.04) (18.571) (22.20) (19.01)Size 0.000 0.000 0.000 0.000

(0.033) (0.011) (0.006) (0.000)

Firm variablesROE 0.015 0.015 0.016 0.013

(0.930) (0.954) (1.047) (0.677)

Independent variablesIndustry Experience 0.001 0.011† 0.000 0.013*

(0.013) (3.020) (0.002) (4.266)Host Country Experience 0.01 0.000 0.002 �0.002

(10.451) (0.000) (1.204) (0.378)Acquisition Experience 0.009 �0.018 0.021 �0.008

(0.322) (0.864) (1.439) (0.136)Industry Acquisition Experience �0.033 0.005

(0.039) (0.001)Local Acquisition Experience �0.031 0.006

(1.183) (0.027)% Expatriate �1.081 �16.291* �0.943 �16.691†

(0.244) (4.394) (0.196) (3.089)

Interaction termsIndustry Experience* �1.410* �2.035*% Expatriate (5.427) (6.181)Host Country Experience* �0.009 0.498***% Expatriate (0.019) (10.50)Acquisition Experience* 1.431** 1.077% Expatriate (7.079) (2.576)Industry Acquisition Experience* �0.683% Expatriate (0.014)Local Acquisition Experience* �5.855***% Expatriate (11.82)�2 Log likelihood 597.661 582.433 596.369 570.595Model chi-square 38.283 80.256 38.976 94.723Degrees of freedom 10 13 12 17Significance p < 0.000 p < 0.000 p < 0.000 p < 0.000

Numbers in parentheses are Wald statistics*** p < 0.001; ** p < 0.01; * p < 0.05; † p < 0.10; all two-tailed testsIncremental chi-square measures the contribution of the interaction terms to the model

experience increases chances of survival. In addition, the industry experienceinteraction term remained negative and significant, consistent with H1.

In models 2 and 4, some control variables yielded significant results. Parentownership percentage, host country risk and cultural distance were signifi-cantly and positively related with survival. The other control variables didnot contribute to explaining survival.

Discussion

This paper explores the role of ‘value-seeking’ connector played by expatriatemanagers when acquiring abroad and particularly the linkages among the possession of experience-based knowledge, the use of expatriate managersand the survival of foreign firms acquired by Japanese MNCs. Prior researchhas argued that it was the ability to transfer knowledge within their organiza-tional network, and not merely possessing knowledge assets, which representsMNCs’ main source of value creation. Our paper intends to contribute to thisliterature by examining, not only the accumulation of knowledge, but also howexpatriate managers can serve as a connector between the organization’sembedded knowledge and the acquired foreign subsidiaries.

Knowledge Accumulation versus Knowledge Transfer

Our study provides some empirical support for two basic propositions. First,the possession of any type of experience-based assets did not appear to besufficient to enhance chances of survival of an acquisition. Second, it is theability of an MNC to transfer some of its knowledge-based assets that wouldcontribute to survival and value creation.

The Importance of Knowledge Transfer

Regarding the first proposition, none of the experience variables was foundto have a significant relationship with acquisition survival when we consideredthem individually (e.g. models 1 and 3). Prior research suggested thatexperience with a host country and with a specific entry mode is likely toenhance subsidiary stability, at least in the case of wholly owned and jointlyowned modes (Delios and Beamish 2001). Obviously, this contention did notapply to acquisition entry modes. It thus appears inappropriate to assume thatany experience possessed by the acquirer is systematically used for increasingchances of acquisition success. These findings support studying themechanisms used for diffusing knowledge, as advocated by Simonin (1999).

The Case for Transferring Industry Experience Through Expatriate Managers

Regarding the second proposition, our findings suggest that only some typesof experience are worth transferring through expatriation in cross-borderacquisitions. In the presence of industry experience, relying on expatriatestaffing can increase the likelihood of survival of an acquired subsidiary. Thisresult is consistent with the knowledge projection model in MNCs. The


presence of expatriates may support the transfer of ‘best practices’ and enablethe attainment of synergy objectives (Szulanski 1995; Schoenberg 2001).Industry knowledge will pay off when people-based mechanisms are used totransfer it to foreign acquired firms. In turn, these findings suggest that in caseof an acquisition made in a new industry, the limited use of expatriatemanagers could enhance chances of survival.

The Case against Transferring Host Country Experience

Our results questioned the efficiency of expatriate managers as knowledgecarriers when firms possess host country experience. We proposed twocontradictory hypotheses to reflect the limited insight from prior research onthe interaction between host country experience and expatriate managers asknowledge carriers. Results suggested that the transfer of host countryexperience through expatriation might be loosely associated with subsidiarytermination, rather than survival. A firm with limited host country experiencemay use expatriate managers to acquire local experience or achieve greatercontrol over its operations. However, as firms acquire local experience, theyare likely to develop locally based capabilities — by developing or hiringlocal managers — that make irrelevant foreign-based general knowledgeabout the host country. Using expatriate managers may even become detri-mental to operational efficiency due to their costs and resource commitmentif they cannot contribute any value-added knowledge beyond localknowledge. This rationale would thus explain the negative impact on survivalfor the use of expatriate staffing in the presence of host country experience.

The Complex Nature of Acquisition Experience

The efficiency of expatriate managers as carriers of acquisition experience isan intricate phenomenon. Sending expatriate staff in the presence of generalacquisition experience was found to be detrimental to acquisition survival.The limited experience of Japanese firms in acquisitions and their reluctanceto resort to them may serve to explain these results. Inexperienced acquirerstend to apply any acquisition experience to subsequent acquisitions (Haleblianand Finkelstein 1999). They may attempt to impose discipline and conformitywhen flexibility and adaptation would be more effective (Haspeslagh andJemison 1991). Even with acquisition experience in the acquired firm’sindustry, there was little benefit from expatriation, even though the presenceof industry experience should have enhanced chances of survival. Expatriateemployees possessing specific experience of acquisitions in the industry mightshow too much determinism (Haspeslagh and Jemison 1991). Overconfidencein their capabilities and perceptions of similarity can lead to an integrationscheme that overlooks the context of the focal acquired firms. They mayneglect the national-imprinted nature of acquisition experience and generalizeacquisition experience that is region-specific (Angwin 2001). Generalizingsuch experience may prove to be inadequate as experience in one area of theworld may not be applicable elsewhere.

However, while general acquisition experience and host country experiencedid not independently yield expected results, their combination was effective.


When the acquirer possessed acquisition experience in the subsidiary’s country,expatriate staffing appeared to positively impact the survival of acquiredfirms. Local acquisition experience would permit effective adaptations tolocal competitive and socio-cultural conditions and support continuingoperations (Barkema and Vermeulen 1998). Expatriate managers carryingthis knowledge are likely to apply it in a context similar to the context of itscreation. Therefore, for skilled connectors, contextual embeddedness nolonger constitutes a barrier to experience (Angwin 2001). Such results alsoargue for the embedded and national-imprinted nature of acquisition managersfor transferring host country-specific acquisition experience.

Other Influences on Acquisition Survival

Results obtained for control variables merit some attention. For instance, theparent firm’s ownership position in the acquired subsidiary and the use ofexpatriate management were found to increase chances of survival. One couldinterpret that expatriate managers and the ownership stake reflect a commit-ment of the parent firm toward the success of the subsidiary. They may alsomirror the goal of effectively integrating the newly acquired subsidiary.Regarding host country variables, results for FDI openness were consistentwith expectations. In turn, though unexpected, the results for host countryrisk and cultural distance can potentially be explained by what has beenlabelled the ‘psychic distance paradox’. Psychic distance encompasses cultural,structural and language differences (Nordström and Vahlne 1994). Operationsin psychically close countries may result in failure, because the perception ofsimilarity with home country prevents the managers from addressing thesubtle but critical differences that exist between the countries (O’Grady andLane 1996).

Expatriate Managers as Value-Seeking Connectors, but with Limitations

Our findings invite us to take a more nuanced perspective of expatriatemanagers as value-added connectors in MNCs. The transfer of headquarter-centralized experience through home country expatriate managers may impactboth positively and negatively the stability of foreign subsidiary. Our findingsalso question the efficiency of the ‘knowledge projection’ model of MNCs.Sending experts abroad to broadcast headquarters experience appears valu-able only for specific types of experience. A uniform approach would mostlikely yield mixed results.

Adapting transfer mechanisms to the type of knowledge appears necessaryfor ensuring subsidiary stability and survival. In particular, transfer mecha-nisms need to account for the collective nature of embedded knowledge.Because of its cross-functional nature, industry knowledge is inherentlycollective; it integrates individual but complementary expertise (Lam 2003).Acquisition experience in a specific host country is also multidimensional.Its mobilization is likely to require the integration of diverse capabilities.Empirical evidence suggests that expatriate managers represent an effectivetransfer platform for such particular knowledge. In other circumstances,however, as advocated by Doz et al. (2001) among others, new organizational


models may be required to optimize knowledge flows within the MNC’sorganizational network.

Still, MNCs, Japanese or not, may be using expatriates for control orpersonal training purposes rather than for strict knowledge transfer purposes.In that context, individual managerial qualities and the ability to diffuseorganizational procedures can become more important qualities than theknowledge transfer capacity. Recently, Carlos Goshn, CEO of Renault-Nissan, explained that the selection of French managers to accompany himto Japan had been primarily based on personal qualities such as curiosity,openness to other cultures, and envy of learning. Host country and foreignexperiences were considered favourably but could not be substituted forpersonal qualities (Emerson 2001).

Conclusion

This research draws attention to the management of knowledge flows betweenan acquirer and a foreign acquired company. Expatriation in cross-borderacquisitions is not a universal ‘bridge over troubled water’ that supports the transfer of any embedded knowledge. Under appropriate conditions,expatriation can constitute the bridge between organizations that is necessaryto develop and diffuse knowledge-based competitive advantages. Expatriatemanagers can rely on their local acquisition experience and their industryexpertise to manage successfully the period of troubled water characterizingmany acquisition integrations. However, they might not add value whentransferring other types of knowledge, such as the general experience of thehost country. This research proves that more investigation is needed aboutadequate transfer mechanisms; while researchers have extensively studiedknowledge accumulation, few have analysed the linkage between the choiceof transfer mechanism and the performance of foreign subsidiaries.

Our findings have also implications for the selection of the integration teamfollowing a cross-border acquisition. Acquirers should not rely exclusivelyon accumulated experience for selecting those expatriate managers who willparticipate in subsidiary management. As expatriation can be an inappropriatetransfer mechanism, selecting managers according to their experience caneven increase chances of acquisition failure. Furthermore, overwhelming themanagement team with either expatriate managers or local managers mayprove to be detrimental to the survival of the subsidiary. Improper balancesin either direction can lead to tensions between perceived ‘winners’ and‘losers’ (Hellgren et al. 2002). It can create a working environment filled withconfusion, hypocrisy and politicizing, which may impede effective integrationand value creation (Vaara 2003). From a knowledge perspective, the manage-ment of the acquisition integration might also benefit from being viewed asa learning process (Very and Schweiger 2001). In this process, the integrationmanagement team remains a prominent element of the organizational contextthat the acquirer should utilize to ensure value creation through knowledge-based advantages. The integration team as a whole constitutes the main bridgeover troubled water.


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Louis Hébert is Professor of Strategy and International Business at HEC Montréal.His research interests deal with the value creation strategies that firms implement to expand and exploit their international scope of activities, in particular throughstrategic alliances, and mergers and acquisitions.Address: HEC Montréal, 3000 Cote Ste Catherine, Montreal, Quebec, H3T 2A7,Canada.E-mail: [email protected]

Philippe Very is Professor of Strategic Management and Associate Dean of FacultyDevelopment at EDHEC Business School, France. He is the author of papers andbooks related to mergers and acquisitions and international management. He recentlypublished The Management of Mergers and Acquisitions (Wiley, 2004).Address: EDHEC, 393 Promenade des Anglais, BP 3116, 06202 Nice Cedex 03,France.E-mail: [email protected]

Paul Beamish holds the Canada Research Chair in International Business at Ivey. He is the author of over 40 books and over 100 papers in the areas of internationalstrategy, joint ventures, and Japanese foreign investment. He is a Fellow of theAcademy of International Business.Address: Richard Ivey School of Business, The University of Western Ontario, 1151Richmond Street North, London, Ontario N6A 3K7, Canada.E-mail: [email protected]

Louis Hébert

Philippe Very

Paul W. Beamish

expatriation as a bridge over troubled water: a knowledge

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