Does organizational learning matter? A test of the relationship between organizational learning and firm performance in MNC subsidiaries.

Author:Racela, Olimpia C.

    The concept of strategic change and organizational learning is central to the management literature. In particular, the relationship between organizational learning and firm performance is relevant to managers. Thus, it is not surprising that there is a growing body of the literature on the relationship between organizational learning and firm performance (see e.g., Beer et al., 2005; Bergh and Lim, 2008; Lages et al., 2009; Lichtenthaler, 2009). Another important strand of literature examines the relationship between knowledge management and firm performance (see e.g., DeCarolis and Deeds, 1999). One of important insights from the knowledge management literature is a dynamic view of knowledge of the firm (Kogut and Zander, 1992, 1993; Liebeskind et al., 1996; Zander and Kogut, 1995), which essentially paves the way for subsequent work by numerous scholars on how a multinational corporation (MNC) acquires, codifies, disseminates knowledge residing in a network of subunits (locally and internationally). However, until recently, studying the effect of organizational learning on firm performance at the firm level has been the main concern of researchers (e.g., Lichtenthaler, 2009; Malik and Kotabe, 2009). With exception of few studies in recent years (e.g., Lages et al., 2009; Lord and Ranft, 2000), our understanding of the influence of organizational learning at the subunit level has been relatively limited.

    In response to the perceived need for empirical evidence on the effect of organizational learning on firm performance at the subsidiary level in emerging market countries, in this study we seek to address this research gap by examining the relationships among organizational learning, strategic marketing change, and firm performance. Drawing on the literature on organizational learning and knowledge management (e.g., Crossan and Bedrow, 2003; Kogut and Zander, 1992; Lichtenthaler, 2009; Zollo and Winter, 2002), we argue that organizational learning is likely to affect strategic marketing change, which will in turn influence firm performance. Furthermore, we look for evidence of the moderating effect of market dynamism on the relationship between organizational learning and marketing strategic change.

    Our research is undertaken at the subunit level of MNCs. More specifically, MNC subsidiaries located in Thailand are our unit of analysis. By investigating the links between organizational learning, strategic marketing change, market dynamism and firm performance at the MNC subsidiary level, we will be able to, to some extent, address three broad questions. First, how does organizational learning influence marketing strategic change at the subunit level? Second, how does the extent to which marketing strategic change influence firm performance at the subunit level? And finally, how does market dynamism moderate the effect of organizational learning on marketing strategic change at the subunit level?

    In the next section, we provide a brief review of the relationship between organizational learning and firm performance and develop our research framework by drawing upon the literature on organizational learning, marketing strategic change, and market dynamism. We develop a series of testable hypotheses, which are, in spirit, similar to the works of Lages et al. (2009), Lichtenthaler (2009), and Malik and Kotabe (2009). We then describe the context of our study and discuss the results.


    2.1 Organizational Learning and Marketing Strategic Change

    It has been suggested by several scholars that organizational learning is a means through which competitive advantage can be created. For example, Crossan and Bedrow (2003: 1089) have noted that organizational learning is "a means to develop capabilities that are valued by customers, [and] are difficult to imitate and hence contribute to competitive advantage." Generative learning or double-loop learning refers to "an organization's capacity to change its 'view of the world' by unlearning obsolete perspectives, systems, and procedures and proactively replacing them with approaches that are capable of creating or maintaining competitive advantage" (Baker and Sinkula, 1999: 412). Slater and Narver have suggested that "the development of new knowledge or insights that have the potential to influence behavior" (Slater and Narver, 1995: 63). Furthermore, organization learning has been conceptualized as a learning orientation that gives "rise to that set of organizational values that influence the propensity of the firm to create and use knowledge," (Sinkula et al., 1997: 309).

    Kogut and Zander (1992) have suggested a notion that organizations learn new skills by recombining capabilities currently existing within the firm. Zollo (2002) has suggested that organizational learning involves three learning mechanisms: experience accumulation, knowledge articulation, and knowledge codification. In the context of subunits, Schulz (2001) has shown that the outflows of knowledge from subunits to other subunits are dependent on organizational learning in subunits. Schulz (2001) has found that collecting new knowledge positively affects vertical flows of knowledge while codifying knowledge promotes horizontal and vertical flows of knowledge. Kor and Mahoney (2005) have found that investments in marketing by technology-based firms are a source of competitive advantage.

    Broadly speaking, there are two levels of learning: a single-loop learning and a double-loop learning (Argyris, 1976). If organization learning in most foreign subsidiaries of MNCs is characterized as a single-loop learning, the patterns of strategic change should correspond to a so-called first-order strategic change--that is, firms tend to have small and continuous changes to improve or maintain their competitive position in the product markets. As Levitt and March (1988: 320) have noted that organizational learning is characterized as routine-based, history-dependent, and target-oriented, portfolios of products and services of foreign subsidiaries that exhibit a single-loop learning are likely to follow the patterns of periodic but minor changes. On the other hand, if organizational learning in foreign subsidiaries of MNCs is considered to be a double-loop learning, the patterns of strategic change should correspond to a second-order strategic change--that is, firms tend to make infrequent but radical changes to their strategy, which may result in new radical and innovative products and services. However, it is not to rule out possibilities that firms that exhibit a second-loop learning would follow the patterns of continuous but radical changes in products and services offered to the markets.

    This reasoning is consistent with the literature on organizational learning and knowledge management, which suggests that organizational learning influences innovation speed (Kessler and Chakrabarti, 1996; Zander and Kogut, 1995). With specific reference to organizational learning in MNCs, we posit that MNC subsidiaries, especially in small-market countries, have smaller economic incentives to engage in a wide range of entrepreneurial activity (which means limited opportunities to bring innovative and radical products and services to the local markets on their own).

    There are two plausible reasons to our proposition. First, organizational learning activities are likely to be concentrated in subsidiaries operating in large-market countries. It is reasonable to assume that a large MNC, which operates in many foreign countries, will place a greater emphasis on organizational learning in its foreign subsidiaries in larger-market countries than in smaller-market countries. Empirical studies in international business support this view by showing that research and development (R&D activities occur mostly in developed countries. For instance, R&D centers for many large pharmaceutical firms are primarily located in Germany, France, Switzerland, the US, and the UK. With the exception of Switzerland, the market size of the four countries is considered to be large. Furthermore, (Lord and Ranft (2000) have shown that the extent of knowledge transfer among foreign subsidiaries of the US-based firms is influenced by the nature of local market knowledge and differences in organizational structure.

    Second, the amount of knowledge flows is likely to be greater amongst larger subsidiaries than amongst smaller subsidiaries, which in turn limits the extent to which smaller subsidiaries can recombine knowledge and capacities so as to introduce radical products and services to local markets. As Huber (1991: 89) has suggested that "an organization learns if any of its units acquires knowledge that it recognizes as potentially useful to the organization," it is possible that organizational learning in smaller subsidiaries is limited as they may not be able to take initiatives to exploit or explore the stock of knowledge that resides in other subsidiaries. Furthermore, managers who lack the ability to recognize significant changes in the market may be slow to react to the changes, thereby contributing to poor performance and subsequent corporate decline, while others who are able to recognize the changes and adopt corporate strategy to match changing conditions over time may outperform rivals (Barr et al., 1992). There is evidence to support the notion that learning orientation of a firm tends to indirectly contribute to firm performance by enhancing the quality of the firm's marketing-related decisions and behaviors (Baker and Sinkula, 1999).

    Since Cui, Griffith and Cavusgil (2005) have found that there is a positive relationship between knowledge management capabilities of a multinational corporation's subsidiary and its performance, suggesting that understanding local market conditions is important to a subsidiary's performance, it is logical to argue that organizational...

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