The influence of market and cultural environmental factors on technology transfer between foreign MNCs and local subsidiaries: A Croatian illustration

Abstract

Technology transfer from multinational corporations to local subsidiaries is essential for successful local market operations. In this study, the environment-strategy-performance framework is used to investigate the effects of market and cultural environmental factors on international technology transfer, and resultant performance. The relative influence of two factors of the market environment, i.e., competitive intensity and market dynamism, and the relative influence of two factors of the cultural environment, i.e., national cultural distance and organizational cultural distance, are examined. The results of a survey of 131 managers of subsidiaries of foreign multinational corporations indicate the direct effects of market and cultural environmental factors on international technology transfer, with market dynamism found to be a more influential market environmental factor than competitive intensity and organizational cultural distance found to be a more influential cultural environmental factor than national cultural distance. Further, a significant positive relationship between technology transfer and subsidiary performance was found. Theoretical and practitioner implications are discussed.

Full text

The influence of market and cultural environmental factors
on technology transfer between foreign MNCs and local
subsidiaries: A Croatian illustration
Anna Shaojie Cui
a,
*, David A. Griffith
a,1
, S. Tamer Cavusgil
a,2
, Marina Dabic
b
a
Department of Marketing and Supply Chain Management, The Eli Broad Graduate School of Management,
N370 North Business Complex, Michigan State University, East Lansing, MI 48824-1122, USA
b
University of Osijek, Gunduliceva 22, Croatia
Abstract
Technology transfer from multinational corporations to local subsidiaries is essential for successful local market operations. In
this study, the environment-strategy-performance framework is used to investigate the effects of market and cultural environmental
factors on international technology transfer, and resultant performance. The relative influence of two factors of the market
environment, i.e., competitive intensity and market dynamism, and the relative influence of two factors of the cultural environment,
i.e., national cultural distance and organizational cultural distance, are examined. The results of a survey of 131 managers of
subsidiaries of foreign multinational corporations indicate the direct effects of market and cultural environmental factors on
international technology transfer, with market dynamism found to be a more influential market environmental factor than
competitive intensity and organizational cultural distance found to be a more influential cultural environmental factor than national
cultural distance. Further, a significant positive relationship between technology transfer and subsidiary performance was found.
Theoretical and practitioner implications are discussed.
#2006 Elsevier Inc. All rights reserved.
Multinational corporations (MNCs) increasingly
rely on technology to establish competitive postures
in the global marketplace. As MNCs expand into new
markets, their success is in part determined by the
ability to transfer competitive technologies to local
subsidiaries (Chen, 1996; Chung, 2001). As MNC
subsidiaries reside in increasingly diverse environ-
mental contexts, understanding the factors influencing
the transfer of technology becomes more and more
important. Despite the growing interest among scholars
and the business community, there is a lack of research
on those factors influencing technology transfer
between MNCs and their subsidiaries.
A review of the literature reveals several shortcomings
that have limited our understanding of how the
environment a firm operates in influences its strategies,
such as technology transfer, and ultimately performance.
First, with few exceptions (e.g., Simonin, 1999), most
prior research on international technology transfer
focuses on macro-economic or institutional factors as
determinant of technology transfer (Contractor & Sagafi-
Nejad, 1981;Marton, 1986). As such, these studies
overlook the important influence of micro-issues such as
market or cultural environment. For example, as Luo and
Park (2001) demonstrated under the environment-
www.socscinet.com/bam/jwb
Journal of World Business 41 (2006) 100–111
* Corresponding author. Tel.: +1 517 353 6381;
fax: +1 517 432 1112.
E-mail addresses: cuishaoj@msu.edu (A.S. Cui),
griffith@bus.msu.edu (D.A. Griffith),
cavusgil@bus.msu.edu (S.T. Cavusgil),
marina.dabic@sfsb.hr (M. Dabic).
1
Tel.: +1 517 353 6381; fax: +1 517 432 1112.
2
Tel.: +1 517 432 4320; fax: +1 517 432 1112.
1090-9516/$ – see front matter #2006 Elsevier Inc. All rights reserved.
doi:10.1016/j.jwb.2006.01.011

strategy-performance framework, market environment
directly influences a firm’s selection of strategic
orientation. As such, their work highlights the theoretical
importance of investigating micro-issues on managerial
strategic choice. Further, their work suggests the need to
investigate specific strategic initiatives, such as technol-
ogy transfer, under the environment-strategy-perfor-
mance framework if we are to advance our understanding
of international business strategy development.
Second, when exploring the impact of environment
on strategy issues, researchers have tended to employ
environmental factors as moderators of strategy and
performance (e.g., Jaworski & Kohli, 1993;Singh,
2003). This view, while incorporating the role of
environment, fails to incorporate the issue of manage-
rial strategic choice in response to environmental
factors as demonstrated by Luo and Park (2001).
Strategic initiatives directly result from the environ-
mental context in which a firm operates and environ-
mental factors are inseparable considerations in firms’
strategic decisions. The failure to examine the direct
effects of environmental influences on strategy inhibits
the understanding of firms’ strategic decisions related to
international technology transfer.
Third, while different environmental factors have
been identified in the literature, the relative influences of
these factors have not been investigated, thus leaving
academics and practitioners without a clear under-
standing of the relative importance of each environ-
mental factor. For example, when studying market
environment, although researchers have identified two
market environmental factors, i.e., competitive intensity
and market dynamism (e.g., Grewal & Tansihaj, 2001;
Jap, 1999;Jaworski & Kohli, 1993), researchers have yet
to compare their effects. Similarly, although national and
organizational cultural distance have been theorized as
important cultural environmental factors influencing
firms’ strategic initiatives, few studies have theorized or
empirically tested their relative influence. The lack of a
relative influence perspective is a noteworthy limitation
in the literature given that the relative effects of
environmental factors on strategic decisions have
substantial theoretical and empirical implications. As
technology transfer is a costly strategic initiative for
firms, understanding the relative influence of environ-
mental factors can help firms make more effective
decisions that ultimately enhance firm performance.
Given these limitations, an important contribution of
this study is that we investigate the environment-
strategy-performance relationship, with technology
transfer as the central strategy element, under a relative
environmental influence perspective. We begin by
presenting a conceptualized model. A method section
specifies the research design, sample frame and
measurement instrument. Results are then presented.
We conclude with a discussion of the results, their
implications for managers and directions for future
research.
1. Conceptualization
Fig. 1 presents the proposed conceptual model. The
model depicts the influence of two sets of environ-
mental factors: (1) market environmental factors of
competitive intensity and market dynamism, and (2)
cultural environmental factors of national cultural
distance and organizational cultural distance on
technology transfer and ultimately performance under
the environment-strategy-performance framework
advanced by Luo and Park (2001).
Luo and Park (2001) put forth the theoretical
framework of environment-strategy-performance which
argues that the environment shapes the context of
business and that firms, reacting to their environments,
set forth upon strategic paths which determine their
performance. Specifically, Luo and Park (2001)
theorized and empirically verified that firms’ choice
of generic strategies (i.e., Miles and Snow’s (1978)
typology of strategic orientation) is in response to its
market environment conditions, and that through co-
alignment of specific generic strategies with the
conditions of the market environment enhanced firm
performance. The linkage between firms’ strategic
profile and its external environment is a basic
characteristic of the strategy paradigm (Astley & Van
de Ven, 1983). This linkage has significant implications
for firm performance (Hofer, 1975;Miller & Friesen,
1983). Empirical studies in the strategy literature
support the contention that firms need to adjust their
strategies according to the environment in which they
operate (e.g., Hofer, 1975;Miller & Friesen, 1983;
Venkatraman & Prescott, 1990). In an international
context, environmental factors have a substantial
influence on the strategy and success of MNC
subsidiaries operating in foreign markets (Carpano,
Chrisman, & Roth, 1994). Country-specific environ-
ments shape the nature and intensity of competition,
influence the mechanisms of interorganizational trans-
actions, and affect the input-output dynamics of local
industries. As such, it is important to understand the
local environment to evaluate MNC subsidiary strategic
requirements (Ghoshal & Nohria, 1993). While the
generic strategies investigated by Luo and Park (2001)
demonstrate general strategic responses of MNC
A.S. Cui et al. / Journal of World Business 41 (2006) 100–111 101

subsidiaries, they did not examine a subsidiary’s
choices related to specific strategic initiatives necessary
for success, such as technology transfer.
Technology transfer is a fundamental strategic
initiative employed by MNCs and their subsidiaries
during international expansion. Technology transfer is
defined as the transmission of know-how to suit local
environments, with effective absorption and diffusion
both within and across countries (Chung, 2001;
Tihanyi & Roath, 2002). Firms (MNCs and subsidi-
aries) capable of effectively employing the strategic
initiative of technology transfer benefit from improved
manufacturing productivity (Gisselquist & Grether,
2000), alliance efficiency and adaptability (Dyer &
Nobeoka, 2000), international expansion (Ofer &
Polterovich, 2000), and sustainable competitive
advantage (Dyer & Nobeoka, 2000). Technology
transfer encompasses a complex process involving
the MNC’s capability of teaching, the subsidiary’s
capability of learning, and the complex interaction
between the two organizations (Griffith, Kiessling, &
Dabic, 2005). Technology transfer in the international
context, when compared to the domestic context, is
subjected to more diversified environmental condi-
tions, inclusive of cultural differences, thus creating
greater challenges for MNCs and their subsidiaries.
This necessitates the understanding of how environ-
mental factors influence a firm’s ability to transfer
technology in an international environment.
2. Hypotheses
2.1. Market environment
Environmental market factors shape the nature and
intensity of competition and influence the dynamics of
local industries. The importance of environmental
factors for influencing strategic initiatives is enhanced
in markets where competition is high and where
underlying market mechanisms fluctuate continuously
(Ghoshal & Nohria, 1993;Luo & Park, 2001;Porter,
1980). Two environmental market factors, i.e., compe-
titive intensity and market dynamism, have been
identified as significant influences on strategic initia-
tives (e.g., Grewal & Tansihaj, 2001;Jap, 1999;
Jaworski & Kohli, 1993).
2.1.1. Competitive intensity
Competitive intensity is the degree of competition a
firm faces in the market (Grewal & Tansihaj, 2001;
Jaworski & Kohli, 1993). The level of competitive
intensity is related to the competitive activities of firms
in the market, including price competition, promotion
competition, etc. When entering a highly competitive
foreign market MNCs face the challenge of acquiring
market share and establishing a competitive position in
the market via subsidiaries. Providing local customers
unique and high quality products is a key to building
competitive advantage in the market. Technology
A.S. Cui et al. / Journal of World Business 41 (2006) 100–111102
Fig. 1. The influence market environment and cultural environment on technology transfer and performance.

transfer from MNCs enables subsidiaries to improve
product quality, adapt product design to local market
demand, and reduce production costs and prices to
compete for market share. At the same time,
technologies related to supporting and management
activities improve information processing efficiency,
which helps subsidiaries to become competitive. As
such, we theorize:
H1. Competitive intensity in the market environment is
positively related to technology transfer between for-
eign MNC and local subsidiaries.
2.1.2. Market dynamism
Market dynamism refers to frequent changes in the
industry, including changes of market elements such as
customer demand, technology, competitor structure,
etc. (Achrol & Stern, 1988;Jap, 1999). Frequent change
in an industry decreases strategic certainty and
increases the difficulty of accurate planning, forecasting
and cost reductions (Sheth & Parvatiyar, 1992). In
highly dynamic markets, frequent changes in customer
demand, business practices, etc., require firms to
quickly modify their products or services to remain
competitive in the market (Jap, 1999). Production
related technologies provide firms the capability of
changing product design to adjust to new market
demand. Technologies related to supporting and
management activities facilitate the processes of
information processing and decision-making in MNC
subsidiaries, which gives MNC subsidiaries the flex-
ibility of quickly adjusting to market change. Moreover,
technology allows MNC subsidiaries to implement
proactive competitive strategies, which gives the
subsidiaries significant advantage in a highly dynamic
market. Therefore, we theorize:
H2. Market dynamism in the market environment is
positively related to technology transfer between for-
eign MNC and local subsidiaries.
2.1.3. Relative influence of competitive intensity
and market dynamism
While both competitive intensity and market
dynamism are influential environmental market factors,
we theorize that their relative influence on technology
transfer is not equal. Competitive intensity captures the
degree of competition in the market, but does not
account for changes in market competition. Alterna-
tively, market dynamism is related to the change of the
market overtime and captures the dynamic aspect of
competition. Although technology is a basis for
competition, it is tied closely to change. Technology
provides firms the ability to continuously improve
techniques/processes and the flexibility to adapt to
markets, which are directly related to the change of
market environment, as opposed to the intensity of
competition in the market. In a market with frequent and
unpredictable change, quick reaction to the market is
necessary for the success of a firm. This requires a
higher level of technology transfer than in a highly
competitive but stable market, where technology
transfer can happen gradually over time. Further,
technology is more important in a highly dynamic
market, where continuously changing customer demand
requires firms to continuously modify products/services
and adjust operation and competition strategy accord-
ingly, thus necessitating a greater strategic focus on
technology transfer as technology provides firms the
basis of creativity and proactiveness in competition.
More formally stated:
H3. Compared to competitive intensity, market dyna-
mism has a stronger positive influence on technology
transfer between foreign MNC and local subsidiaries.
2.2. Cultural environment
Cultural environment refers to the cultures in
which a firm operates. Culture is the patterns of beliefs
and values that are manifested in practices, behaviors,
and various artifacts that distinguish the members of
one group or category of people from another
(Hofstede, 1980;Trice & Beyer, 1993). Culture
operates at both the national level, i.e., national culture
as put forth by Hofstede (1980), and the organizational
level, i.e., organizational culture (Garsten, 1993;
Hamada, 1989). When considering culture in interna-
tional transactions it becomes most important to speak
of the cultural environment in terms of cultural
distance, where cultural distance refers to the differ-
ences between cultures. Cultural distance has been
demonstrated to influence the effectiveness of com-
munication and information sharing between organiza-
tions, therefore being applicable to the study of
technology transfer between an MNC and its sub-
sidiaries.
2.2.1. National cultural distance
National cultural distance refers to the underlying
differences in national cultures between a home and a
host country (Shenkar, 2001). Given the underlying
distinctions between cultures throughout the world,
understanding the similarities and differences, or
A.S. Cui et al. / Journal of World Business 41 (2006) 100–111 103

relative ‘‘distance’’ between cultures becomes important
from a management standpoint as these similarities and
distinctions form the foundation from which managers
operate and make strategic decisions (Barkema, Bell, &
Pennings, 1996;Brouthers & Brouthers, 2001). As the
national cultural distance between MNCs and their
subsidiaries increases, the underlying gap in the norms,
values and institutions that govern exchange between the
parties increases. Increased national cultural distance
increases the complexity of operations and reduces
communication effectiveness. As increased cultural
distance produces difficulties and challenges in com-
munication, national cultural distance has the potential of
influencing every aspect of collaboration, including the
processes of technology transfer (Tiemessen, Lane,
Crossan, & Inkpen, 1997). For example, national cultural
distance increases conflicts and misunderstandings,
decreases the flow of information and learning between
partners, therefore constitutes an obstacle to technology
transfer between MNCs and their local subsidiaries
(Lyles & Salk, 1996;Mowery, Oxley, & Silverman,
1996). Based on these arguments we theorize:
H4. National cultural distance is negatively related to
technology transfer between foreign MNC and local
subsidiaries.
2.2.2. Organizational cultural distance
MNC and local subsidiaries are not only embedded
in different national cultures, but are also characterized
by organizational cultures. Organizational cultural
distance refers to the underlying differences in
organizational cultures between two firms. Organiza-
tional cultural distance has been observed to impact the
success of interorganizational interactions (Garsten,
1993; Hamada, 1989). When two or more organizations
are communicating with each other, the relative level of
consistency of core elements between organizational
cultures can directly influence the effectiveness of
communication. Two diverse organizational cultures
can lead to differences in expectations and mismatch in
the communication processes (Harvey & Griffith, 2002;
Jablin, Putnam, Roberts, & Porter, 1987). As technol-
ogy transfer builds on numerous individual exchanges
that rely on effective communication, organizational
cultural distance between an MNC and its local
subsidiary can hinder information exchange and
increase the potential of misunderstanding and con-
flicts, which not only increases the difficulty of
technology transfer but can also lead to the deterioration
of joint efforts needed for successful technology
transfer (Fey & Beamish, 2001;Simonin, 1999). Based
on these arguments we theorize:
H5. Organizational cultural distance is negatively
related to technology transfer between foreign MNC
and local subsidiaries.
2.2.3. Relative influence of national cultural
distance and organizational cultural distance
While both organizational cultural distance and
national cultural distance can influence technology
transfer between MNC and local subsidiaries, we
theorize that their relative influence is not equal.
National cultural differences reside mostly in values,
less in practice; while organizational cultural differences
reside mostly in practice, less in values (Hofstede,
1991). While values are deeper manifestation of culture,
practice is more directly related to people’s behavior and
activities (Hofstede, 1991). The core of an organiza-
tional culture is the shared perceptions of daily practice
(Hofstede, 1991). Therefore, although organizations
engaged in international relations are embedded
different national cultures, it can be argued that
individuals in an organization behave more closely
according to the specific organizational culture than the
general national culture. Correspondingly, the influence
of organizational culture is more dominant than the
influence of national culture. For example, in a study of
joint venture performance, Pothukuchi et al. (2002)
found that organizational culture differences account for
more of the negative effects of partner dissimilarity on
joint venture performance than national culture. They
argued that when two organizations interact with each
other in a business context, the processes of commu-
nication and information sharing are more directly
affected by the organizational cultures of the two firms
compared to national cultures. As such, we theorize:
H6. Compared to national cultural distance, organiza-
tional cultural distance has a stronger influence on
technology transfer between foreign MNC and local
subsidiaries.
2.3. Technology transfer and performance
Technology is embodied in every value activity of a
firm and is involved in achieving linkages of the
activities (Porter, 1980). By improving efficiency of
these activities, technology helps to reduce production
cost and increase manufacturing productivity (Gissel-
quist & Grether, 2000). Technology also contributes to
the quality and uniqueness of products, which enhances
product differentiation and increases market demand
A.S. Cui et al. / Journal of World Business 41 (2006) 100–111104

and sales. At the same time, technology is closely
related to the supporting management activities in a
firm. For example, information technology improves
the efficiency of information processing in an organiza-
tion, which supports management decision-making and
strategy implementation. Cost reduction and increased
product demand directly contribute to firms’ financial
performance; improved management activities enhance
the implementation of effective competition strategies
and contribute indirectly to firm performance.
In the expansion of MNCs, technology transfer to
local subsidiaries is essential for successful operation of
the subsidiaries in the local market (e.g., Chen, 1996;
Chung, 2001;Ofer & Polterovich, 2000). Technologies
that have provided MNCs competitive advantage in the
home country, if leveraged to the host country, enable
local subsidiaries to establish a competitive advantage
in the local market. The transfer of technology to MNC
subsidiaries contributes to production efficiency and
product quality, and therefore helps local subsidiaries
acquire market share. Application of technology also
enables local subsidiaries to make necessary modifica-
tions of the product to adapt to local market demand. At
the same time, technology transfer improves local
subsidiaries’ capabilities of management information
processing and increases the efficiency of management
activities. The enhancement of both production
efficiency and management efficiency improves MNC
subsidiaries performance. Formally stated:
H7. Technology transfer between MNC and local sub-
sidiaries are positively related to the performance of
MNC subsidiaries.
3. The study
To test the hypotheses, we examined MNC sub-
sidiaries operating in Croatia. We selected this setting for
three specific reasons. First, much of the research
conducted on environmental influences, with a few
exceptions (e.g., Luo & Park, 2001), has been conducted
in Western markets. As such, Croatia was selected as an
opportunity to extend our application of the theory under
study to a non-Western market. Second, Croatia offers a
market characterized by a variety of competitive and
market conditions and is marked by a diversity of foreign
MNCs establishing subsidiaries, thus providing for
diversity in national and organizational cultural distance.
Given the transitional nature of the economy, a significant
amount of MNC technology transfer exists. These
factors, taken together, provide a context directly related
to the issues under study. Third, Central and Eastern
European (CEE) transitional economies have become
major business opportunities, though complex socio-
economic problems (e.g., high inflation and debt, high
unemployment, organized crime) hinder MNC’s sub-
sidiaries performance (Tihanyi & Roath, 2002). Even
with these issues, CEE economies have attracted
considerable foreign direct investment (i.e., $110 billion
by 1999 (UNCTAD, 2000) with another 27 billion alone
in year 2001 (UNCTAD, 2003)). Croatia, as a former
socialist republic, offers significant opportunities for
business and is reflective of CEE transitional economies.
Continued legislative efforts to open Croatia to foreign
investment are increasing its attractiveness to foreign
businesses resulting in a stream of significant investments
since its post-war independence, reaching over US$ 1
billion in 2000 alone (Ministry of Economy, 2000; UN,
1999) and growing to US$ 1.5 billion in2001 (UNCTAD,
2003). Given these three factors, we believe Croatia is
appropriate from both a theoretical and practitioner
perspective.
3.1. Sample
The sample frame consists of 500 firms engaging in
FDI on file with the Croatian National Bank. The sample
was reduced to 300 firms by restricting the MNCs
subsidiaries to those with the largest amount of FDI in
the marketplace, since companies with substantial
foreign investment are more likely to be involved in
technology transfer. The three hundred subsidiary firms
were initially contacted via mail. The person most
knowledgeable about the operational interactions
between the foreign MNC and the subsidiary was
asked to complete the survey. Multiple follow-up phone
calls and e-mails were then used to increase the response
rate. This resulted in 131 responses to the questionnaire
for a response rate of 43.7%. Respondent firms averaged
1075 employees, 20 years of international experience
and over $1 million USD of annual sales revenue. The
sample covers a wide range of industries including
agricultural, biotech, chemical, electric equipment,
leather, naval technology, plastics, printing, rubber
manufacturing and electronics. Respondent managers
averaged 41 years of age and 14 years of international
experience. Twenty-seven percent of the respondents
were senior executives (e.g., Vice-President level or
above) with the remaining 63% being senior managers.
3.2. Pre-test
The initial survey was developed based upon
previous measures developed for and used within the
A.S. Cui et al. / Journal of World Business 41 (2006) 100–111 105

United States. Refining of the English version of the
survey was done before translation. The proposed
survey packet was examined and modified by interna-
tional market researchers, business professionals and
translators. The survey instrument was then translated
into Croatian by an independent translator and back-
translated by committee (cf., Sperber, Devellis, &
Boehlecke, 1994). The survey instrument was checked
for form and meaning equivalence with adjustments
being made as necessary (cf., Sperber et al., 1994).
3.3. Measures
Competitive intensity was conceptualized as the
level of competition in a market. Following Grewal and
Tansihaj (2001) and Jaworski and Kohli (1993), a four-
item, seven point Likert-type scale assessed the extant
of competition in terms of (1) general competition, (2)
promotional wars, (3) price competition, and (4) new
competitive moves (a= .90).
Market dynamism was conceptualized as encom-
passing environmental demands and business practices.
Market dynamism was measured via a two-item, seven-
point, Likert-type scale derived from Jap (1999). The
two items assessed the extent to which (1) the
environment demands on the firm are constantly
changing and (2) the business practices in the industry
are constantly changing (a= .76).
National cultural distance was conceptualized as the
underlying differences in national cultures between a
home and a host country. Following Simonin (1999),
national cultural distance was measured with two items:
(1) the national culture of our primary business partner
greatly differs from ours, and (2) language difference is
a major obstacle in communication with our primary
business partner. During the analysis, it was found that
the second item did not correlate with the first item. One
explanation could be that language obstacles do not
capture differences in national culture in this setting,
i.e., Croatia. As language is only one element of the
greater construct of national cultural distance, and the
first item of the measure captures the construct being
measured more broadly, only the first item was
employed for the analysis.
Organizational cultural distance was conceptualized
as the underlying differences in organizational cultures
between two firms. Organizational cultural distance was
measured by Simonin’s (1999) two-item scale: (1) the
business practice and operational mechanisms of our
primary business partner are very similar to ours, and
(2) the corporate culture and management style of our
primary business partner are very similar to ours
(a= .74). Since the items are based on similarity of
organizational cultures rather than difference of
organizational culture, the scale is a reverse scale.
Technology transfer was conceptualized as the
transmission of know-how to suit local environments,
with effective absorption and diffusion both within and
across countries. Technology transfer was measured via
Simonin’s (1999) three-item scale and included the
items: (1) learning about the technology/process know-
how of primary business partner; (2) reducing initial
technological reliance or dependence on primary
business partner; and (3) technology/process know-
how held by our primary partner has been assimilated
by the firm and has contributed to other projects
developed by the firm (a= .79).
Performance was conceptualized as consisting of
both internal and competitive dimensions. Following
Jaworski and Kohli (1993), performance was measured
via a two-item scale assessing whether (1) the firms
overall performance last year was greater than expected
and (2) the firm outperformed its major competitors in
the last year (a= .78).
4. Analysis and results
Confirmatory factor analysis (CFA) was conducted
to establish the measurement of the constructs in the
model. Table 1 shows the results of confirmatory factor
analysis for the measurement model. The adequacy of
the measurement model is evaluated on the criteria of
overall model fit with the data, convergent validity,
discriminant validity, and reliability. The overall fit of
the measurement model was deemed appropriate with a
x
2
value of 105.72 with 63 d.f.; CFI = .947; IFI = .949;
SRMR = .058; RMSEA = .072. All measure items
loaded significantly on their intended constructs,
demonstrating convergent validity. As shown in
Table 1, the t-values for all the items are high, with
the lowest at 5.398. The standardized ls are reasonably
high, with the lowest at .612.
Table 2 presents the correlations between the latent
constructs (as shown in the phi matrix). The highest
correlation coefficient (.561, between market dynamism
and competitive intensity) is significantly less than 1,
demonstrating discriminant validity of the constructs.
The reliability of the measures, as indicated by
Cronbach’s a, is greater than .70.
To initially explore each hypothesis we examined the
pair-wise correlations between the individual constructs
(Table 2). As hypothesized, the correlation matrix of the
latent constructs shows positive associations between
technology transfer and market environmental factors
A.S. Cui et al. / Journal of World Business 41 (2006) 100–111106

including competitive intensity and market dynamism,
and negative associations between technology transfer
and cultural environment including national cultural
distance and organizational cultural distance. Further,
technology transfer is positively related to performance
(.463). These results provide initial support for the
hypotheses.
The model was then tested with structural equation
modeling in EQS. The model demonstrated good overall
fit with a x
2
value of 129.133 with 70 d.f.; CFI = .927;
IFI = .929; SRMR = .108; and RMSEA = .081. Results
for the hypotheses are shown in Table 3.
Hypothesis 1 theorized that competitive intensity in
the market environment would be positively related to
technology transfer between foreign MNC and local
subsidiaries. The results do not support H1 (standar-
dized b= .138, p>.05). However, supportive of H2,
market dynamism was found to be positively related to
technology transfer (standardized b= .435, p<.01).
Although the correlation matrix showed that both
A.S. Cui et al. / Journal of World Business 41 (2006) 100–111 107
Table 1
Measurement model and confirmatory factor analysis
Constructs Item-construct loading Cronbach’s a
Standardized lt-value
Competitive intensity .90
1. The level of competition in the industry in high .862 12.08
2. This industry has many promotional wars .702 8.965
3. Price competition in this industry in great .933 13.735
4. There are many new moves by our competitors in the industry .837 11.528
Market dynamism .76
1. The environment demands on our firm are constantly changing .709 8.221
2. The business practices in our industry are constantly changing .867 10.124
National cultural distance
1. The national culture of our primary business partner greatly differs from ours 1.00 16.125 –
Organizational cultural distance .74
1. The business practice and operational mechanisms of our primary business
partner are very similar to ours
.612 5.398
2. The corporate culture and management style of our primary business partner
are very similar to ours
.967 6.741
Technology transfer .79
1. Our firm has learned a great deal about the technology/process know-how of our
primary business partner
.772 9.452
2. Our firm has reduced its initial technological reliance or dependence on our
primary business partner since beginning to work together
.648 7.613
3. The technology/process know-how held by our primary partner has been assimilated
by our firm and has contributed to other projects developed by our firm
.840 10.510
Performance .78
1. The overall performance last year was greater than expected .679 7.342
2. Overall, we outperformed our major competitors last year .936 9.687
Note: x
2
= 105.72 (d.f. = 63); CFI = .947; IFI = .949; SRMR = .058; RMSEA = .072.
Because there is only one item measuring national cultural distance, the standardized lfor this item is 1.
Table 2
Correlations between constructs
123 4 56
1. Competitive intensity 1
2. Market dynamism .561
a
1
3. National cultural distance .195
a
.272
a
1
4. Organizational cultural distance .126 .258
a
.046 1
5. Technology transfer .384
a
.553
a
219
a
.382
a
1
6. Performance .395
a
.538
a
.187
a
.277
a
.463
a
1
a
Note: Correlations are significant at the .05 level.

competitive intensity and market dynamism were
positively related to technology transfer, when con-
sidered jointly, only market dynamism has a positive
effect on technology transfer. Further, to examine H3, a
t-test was conducted to statistically examine the relative
influence of competitive intensity and market dyna-
mism. The t-test indicated that the coefficient of market
dynamism on technology transfer is significantly larger
than that of competitive intensity (t-value = 25.53,
p<.01), thus providing support for H3.
Hypothesis 4 argued that national cultural distance
would be negatively related to technology transfer
between foreign MNC and local subsidiaries. Results do
not support H4 (standardized b=.135, p>.05).
However, supportive of H5, organizational cultural
distance was found to be negatively related to technology
transfer (standardized b=.333, p<.01). Although the
correlation matrix showed that both organizational and
national cultural distances were negatively related to
technology transfer, when considered jointly, only
organizational cultural distance has a significant effect
on technology transfer. A t-test was conducted to further
examine the relative influence of national cultural
distance and organizational cultural distance. The t-test
showed that the coefficient of organizational cultural
distance on technology transfer was significantly larger
than that of national cultural distance (t-value = 26.18,
p<.01), thus providing support for H6.
Finally, Hypothesis 7 argued that technology transfer
between MNC and local subsidiaries would be
positively related to the performance of MNC
subsidiaries. The results are supportive of H7 (stan-
dardized b= .497 and p<.01).
5. Discussion and conclusion
This study was motivated by a desire to understand
how the specific strategic initiative of technology transfer
between MNC and its subsidiaries was influenced by
environmental factors. Our findings offer initial insights
into these issues and provide concrete directions for
future research and managerial guidelines.
First, the results indicate that, when the two market
environmental factors of competitive intensity and
market dynamism are examined jointly, market dyna-
mism influenced MNC subsidiaries strategic initiative
toward technology transfer, while competitive intensity
in the market did not. As such, we can conclude that
market environmental factors have a direct effect on
technology transfer, but when comparing the effects of
different market environmental factors, dynamic markets
require more technological proficiency of MNC sub-
sidiaries than a market characterized with high competi-
tion but low dynamism. This finding is somewhat
surprising as prior research suggests that competitive
intensity is a market environmental factor influencing
strategic initiatives. Comparison of the correlation
analysis with the structural analysis suggests that prior
research may have confounded results given individual
assessment of each market environmental factor rather
than testing these factors jointly. As such, the findings of
this study highlight the necessity and importance of
examining the two market environmental factors, i.e.,
competitive intensity and market dynamism, jointly in
future research.
Next, the results indicate that, when the cultural
environmental factors of national and organizational
A.S. Cui et al. / Journal of World Business 41 (2006) 100–111108
Table 3
Test results of the path model
Path Hypothesis Standardized bt-value Assessment ( p.01)
Competitive intensity
!technology transfer
H1 .138 1.254 n.s.
Market dynamism
!technology transfer
H2 .435 3.457 s.
Competitive intensity
!technology transfer v.s. Market
dynamism !technology transfer
H3 – 25.53 s.
National cultural distance
!technology transfer
H4 .135 1.604 n.s.
Organizational cultural distance
!technology transfer
H5 .333 3.241 s.
National cultural distance
!technology transfer v.s. Organizational
cultural distance !technology transfer
H6 – 26.18 s.
Technology transfer !performance H7 .497 3.351 s.
Note: x
2
= 129.133 (d.f. = 70); CFI = .927; IFI = .929; SRMR = .108; RMSEA = .081. s.—path significant; n.s.—path not significant.

cultural distances are examined jointly, organizational
cultural distance influenced MNC subsidiaries strategic
initiative toward technology transfer, but national
cultural distance did not. This suggests that organiza-
tional culture differences are more important compared
to national cultural differences in influencing technol-
ogy transfer between MNCs and their local subsidiaries.
These results once again are somewhat surprising in that
prior research on technology transfer has found national
cultural distance (or environmental factors) to be
influential. However, most of these studies failed to
include organizational cultural distance in their models.
It can be argued that organizational cultural issues are
more influential than national culture when operating in
an MNC subsidiary relationship. This finding thus
provides some empirical support for arguments made in
the literature contending that findings related to national
cultural distance may actually be artifacts of other
issues, e.g., organizational cultural distance.
Taken together, these results demonstrate, building
on Luo and Park (2001), the direct effect of
environmental factors (both market and cultural) on
specific strategic initiatives of MNC subsidiaries. As
such, this study departs from much of the prior research
in that it explicitly examines the direct effect rather than
the moderating effect of environmental factors on
strategy relationships. Moderating effects suggest the
influence of environment on the strength of technology
transfer and performance relationship, and imply that
environment only provides for contextual influence on
strategic decision-making. The findings of this study,
however, indicate that environmental factors operate as
antecedents to specific firm strategic initiatives,
specifically technology transfer, thus extending the
current literature and are supportive of strategic choice
theory.
Further, this study extends the understanding of the
environment-strategy-performance theoretical frame-
work proposed by Luo and Park (2001) by investigating
the relationships in the context of international
technology transfer. The results of this study suggest
that strategic initiatives, such as technology transfer, are
managerial strategic choices related to environmental
market assessment, and that such a choice results in
enhanced performance. As such, this research not only
provides a more complete understanding of the relative
influence of environmental factors on firm strategy, but
also provides insights into specific strategic initiatives
as well as support for the environment-strategy-
performance framework.
From a managerial perspective, the findings of this
study shed light on subsidiary’ strategic decisions
related to technology transfer. Technology transfer is a
complex and costly strategic initiative. As the impor-
tance of technology transfer is different under differing
environmental conditions, it is necessary for firms to
understand under what specific environmental condi-
tions it is most advantageous to become proactive in
their approach to technology transfer from their MNC.
The results indicate to managers that when operating in
dynamic markets technology transfer appears to be
more beneficial than costly, and thus subsidiaries
working with their MNCs toward technology transfer
may be able to achieve enhanced performance gains.
Alternatively, in markets where competitive intensity is
high, but market dynamism is low, the costs of investing
in technology transfer may exceed the benefits. This is
not to suggest that technology transfer is not necessary
in highly competitive markets, but rather to indicate that
firms need to understand the relative influence of market
environmental factors on the need for the technology
transfer.
Further, differing influences of organizational
cultural distance and national cultural distance on
technology transfer also raise important managerial
implications for international technology transfer.
Though managers have been aware of the national
culture differences between MNC and their local
subsidiaries, greater managerial attention is needed in
recognizing the influence of differences in organiza-
tional culture, most notably between MNCs and their
subsidiaries. The results of this study suggest that firms
should consider how differences in organizational
cultures can influence the effectiveness of their
underlying strategies. Further, one could argue that
working toward the development of similar or
compatible organizational cultures between an MNC
and its subsidiaries can improve effective technology
transfer and ultimately performance of local subsidi-
aries for firms, thus supportive of expansion to diverse
cultural environments overcoming national cultural
differences.
5.1. Limitations and directions for future research
While this research has provided a number of new
insights, as with prior studies, it has its limitations. First,
perceptual measures were used in this study. Though
some researchers contend that objective measures are
more appropriate (Sawyerr, 1993), a substantial
research history exists supportive of the fact that
managers operate based upon perceptions and that
therefore perceptual measures of issues such as
environmental factors are appropriate (e.g., Luo &
A.S. Cui et al. / Journal of World Business 41 (2006) 100–111 109

Park, 2001;Weick, 1969). That is to say, the adoption of
a strategic initiative such as technology transfer is a
conscious decision on the part of management in
response to the perceived environmental conditions.
Second, although multiple market and cultural envir-
onmental factors were examined, we are by no means
suggesting that this is a definitive set of environmental
factors that should be examined. Rather, researchers
should continue to refine and expand the set of
environmental factors studied to enhance our under-
standing of this issue. Similarly, covariates, such as
length of MNC-subsidiary relationship, product cate-
gory, etc., should be included in future research to
enhance the clarity of the findings. Further, the
relationships were examined only with cross-sectional
data. It would be worthwhile to conduct longitudinal
explorations of the environment-strategy-performance
relationship. The field could substantially benefit by
understanding the dynamic nature of this relationship.
Finally, although the context of Croatian subsidiaries of
MNCs provided an illustration of the model for testing
purposes, the context itself presents a limitation.
The study was conducted in a single country, i.e.,
Croatia, a country in transition. The restriction of
the data collection to a single country limits the
generalizability of the results. Thus, although we can
argue that the theoretical model would hold in
additional markets, only future research can adequately
address this issue.
This research suggests that a firm’s strategy choice is
contingent on the specific environmental conditions the
firm faces. More research efforts are needed to
understand the direct effects of environmental factors
on firms’ international business strategy. Future
research could investigate the impacts of environmental
factors on firm’s other strategic initiatives in interna-
tional competition, such as product standardization, the
development of knowledge management capabilities,
and partnering strategies, etc. Studying the direct effects
of environment can also contribute to the understanding
of firms’ globalization strategy. For a firm, whether to
globalize or not and the extent of globalization are
contingent decisions based on specific environmental
factors. Considering the existence of both costs and
benefits of globalization, environmental factors directly
determine the level of globalization a firm should
choose.
In conclusion, this research utilized the environment-
strategy-performance framework of Luo and Park
(2001) to model the direct and relative influence of
two factors of the market environment, i.e., competitive
intensity and market dynamism, and two factors of the
cultural environment, i.e., national cultural distance and
organizational cultural distance, on the specific strategic
initiative of technology transfer and resultant subsidiary
performance. While the results provide considerably
new insights, a continued research effort is needed for a
greater understanding of the environment-strategy-
performance relationship.
Acknowledgement
The authors wish to express their appreciation to
Marina Dabic for her efforts pertaining to the data
collection for this study.
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