Journal of World Business 45 (2010) 19–28

Explaining variation in reverse diffusion of HR practices: Evidence from the
German and British subsidiaries of American multinationals

Tony Edwards a,*, Anne Tempel b,1

a The Management Department, Franklin Wilkins Building, 150 Stamford Street, London SE1 9NN, UK
b Institute for Applied Work Science, Ruhr-University of Bochum, D-44780 Bochum, Germany

A R T I C L E I N F O

Keywords:

Multinational companies

HR practices

Reverse diffusion

A B S T R A C T

This paper examines the phenomenon of ‘reverse diffusion’ of HR practices in multinational companies,

defined as the diffusion of practices from the foreign operations of MNCs to the home country. Drawing

on research incorporating fieldwork in the British and German subsidiaries of US-based multinationals,

we identify sources of variation in the incidence of reverse diffusion both between firms and between

subsidiaries of the same firm.

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There is a growing literature concerned with the ‘reverse
diffusion’ (RD) of HR practices in multinational companies
(MNCs). This is defined as the diffusion of practices from the
foreign operations to the home country, contrasting with
‘forward diffusion’ in which the direction is from the home
country to the foreign operations and ‘horizontal diffusion’ in
which practices travel from one foreign operation to another.
RD is potentially very significant. Being the source of new
innovations that are subsequently transferred to the heart of the
multinational, reverse diffusion is one mechanism through
which foreign operating units may enhance their status and
claim on resources (Ferner & Varul, 2000). For example,
Kristensen and Zeitlin’s (2005) detailed account of a British
MNC showed how the Danish subsidiary enjoyed an elevated role
through acting as the source of a number of new initiatives that
were diffused across the firm. For the multinational as a whole
engaging in RD has the potential to enhance its competitive
position (Holm & Deo Sharma, 2006). The benefits to the firm are
strongly shaped by its ability to process knowledge effectively
(Ambos, Ambos, & Schlegelmilch, 2006). Thus the phenomenon
of RD matters because it affects relations within, and the
performance of, MNCs.

The issue has relevance for our understanding of MNCs more
generally. Early theories of MNCs assumed that foreign firms were
at an inherent disadvantage when competing with indigenous
ones that understood the local context better. In order to
compensate for this, they had to possess a ‘firm-specific advantage’

* Corresponding author. Tel.: +44 20 7848 4092; fax: +44 20 7848 4092.

E-mail addresses: tony.edwards@kcl.ac.uk (T. Edwards),

anne.tempel@rub.de (A. Tempel).
1 Tel.: +49 0234 32 27 894.

1090-9516/$ – see front matter . Crown Copyright � 2009 Published by Elsevier Inc. A
doi:10.1016/j.jwb.2009.04.001

that was generated at home and spread to other countries (Hymer,
1976). More recent work has recognized that as firms inter-
nationalize they are able to tap into a more diverse body of
expertise and leverage this knowledge across their sites. Dunning
(1993), for example, argues that MNCs can strengthen the
‘resource base of the firm as a whole’ by drawing on their
experience in different countries. Similarly, Doz, Santos, and
Williamson (2001: 4) argue that MNCs’ competitive position is
increasingly shaped by their ability to ‘improve their capacity to
mobilize knowledge that languishes underexploited within their
far-flung network of subsidiaries’ (see also Bartlett & Ghoshal,
1998). Our argument in this paper is that the capacity of MNCs to
mobilize knowledge of HR practices in such a way that leads to RD
is very variable. There are a number of potential barriers to firms
engaging in RD that stem not only from their ability to establish
appropriate firm-level characteristics and conduits through which
it can occur but also from the way that the center manages the
various national subsidiaries. In sum, as they internationalize,
MNCs increase their scope to augment the expertise held within
the firm, but realizing this is far from straightforward.

One distinction in the impact of RD is between ‘evolutionary’
and ‘transformative’ diffusion. The evolutionary form brings about
only incremental changes to a firm’s pre-existing operations as it
results in an optimal mix of practices within an existing ‘modus
operandi’. In this case, the multinational retains a set of
assumptions concerning the way it operates but fine-tunes this
through learning from its foreign plants. One example is the way
that Japanese MNCs identified improvements in work organization
in their foreign subsidiaries that were incorporated into a
corporate model developed in Japan (Edwards & Ferner, 2004).
Transformative RD, on the other hand, moves the multinational to
a new modus operandi. This occurs when MNCs draw on practices
in the foreign subsidiaries that are quite novel to the firm’s

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T. Edwards, A. Tempel / Journal of World Business 45 (2010) 19–2820

domestic sites, as has occurred with the take-up of ‘variable’ forms
of remuneration in many German MNCs (Edwards & Ferner, 2004).

We address two aspects of RD. First, we consider why some
MNCs are more likely than others to engage in it. On this issue we
examine the structures of firms and the mechanisms through
which they can transfer knowledge as sources of variation. Second,
we explore the way that subsidiaries across countries are
differentially placed to be the source of RD. This entails an
investigation of the national context in which the subsidiaries are
embedded, the resources that subsidiaries can draw on and the role
that they play within the multinational.

Addressing these twin questions requires a particular
research design. Most empirical research into RD using case
studies draws on evidence from multiple firms in a single host
country, enabling the analysis to focus on variation between
MNCs. A few studies use data from multiple subsidiaries of a
single firm, allowing the researchers to assess variation between
subsidiaries. We are able to achieve both goals through a design
that incorporates multiple subsidiaries in multiple firms,
involving analysis of the German and British sites of U.S. MNCs.
The resulting data are used in an exploratory way to enhance
theory on this issue and, accordingly, we establish a series of
specific questions to be explored in future research.

The paper proceeds as follows. The various strands of the
literature on RD are reviewed in the next section, leading to the
establishment of a number of implications for our study. The third
section details the way in which data were gathered. The fourth
section presents and analyses the findings and develops questions
for future research. The conclusions of our analysis are drawn in
the final section.

1. Key themes in the literature

1.1. Knowledge transmission perspective

A first strand, the ‘knowledge transmission’ perspective, sees
variation between firms as the result of differences in mechanisms
through which the transfer of knowledge about HR practices can
occur. A common distinction is between ‘codifiable’ and ‘tacit’
knowledge (Adenfelt & Lagerstrom, 2006; Kogut & Zander, 2003;
Minbaeva, 2007). There is some evidence that codifiable knowl-
edge concerning HR practices is transferred through such
mechanisms as manuals, databases and management audits
(e.g., Ferner & Varul, 1999; Gupta & Govindarajan, 2000). Such
‘procedural’ mechanisms are likely to be ineffective for tacit
knowledge, for which ‘people-based’ mechanisms are better
placed to generate the ‘social interaction’ between actors that is
important in facilitating ‘inter-unit resource exchange’ (Tsai &
Ghoshal, 1998). The literature has identified such people-based
mechanisms as multidisciplinary teams, cross-national groups
and the repatriation of those who have been on international
assignments as effective conduits for RD of tacit knowledge
(Bossard & Peterson, 2005; Gourlay, 2006; Harzing, 2001; Martin
& Salomon, 2003; Sanchez Vidal, Sanz Valle, & Barba Aragon,
2007). In sum, this stream of literature suggests that the
prevalence, character and combination of the conduits for
transferring knowledge constitute an important source of
variation between MNCs in the incidence of RD. Indeed, it is
pertinent to explore whether appropriate mechanisms of this sort
are a precondition for RD to occur.

1.2. Corporate structure

A further, and much more modest, strand of the literature on RD
identifies corporate structures as a source of variation between
MNCs. One example of such a ‘structural’ approach concerning the

diffusion of technological innovations is Johnson and Medcof’s
argument. They argue that the ‘network’ structure in which there
are ‘active and flexible links between the HQ and the periphery’
(2007: 482) is the one most conducive to diffusion being initiated
by the subsidiaries. An example in the HR field is Edwards’ (2000)
analysis of UK MNCs where it is argued that the presence of certain
features in MNCs provides fertile ground in which RD can take root.
MNCs that have highly standardized systems of production or
service provision, for instance, are those in which the technological
context and occupational mix of staff at site level are broadly
similar internationally, increasing the scope for MNCs to diffuse
practices across sites. A second factor concerns the degree of
‘global spread’, with MNCs which are not concentrated in their
original country being those in which the foreign operating units
have greater weight within the firm and, therefore, are those in
which RD is most likely to occur (Edwards, 2000). Thus we might
expect that the presence or absence of these structures serves as
one source of variation between MNCs in the incidence of RD.
Overall, though, this line of analysis is under-developed in previous
research and in particular the relationship between such
structures and the knowledge transmission mechanisms discussed
above are poorly understood.

1.3. National business systems

Consideration of these firm-level structures and mechanisms
raises the issue of how subsidiaries of the same MNC are
differentially placed to be the source of RD. Thus a third, and
substantial, strand of the literature addresses this through the lens
of the national business system in which subsidiaries are
embedded. Much research on MNCs has studied how they struggle
to overcome enduring national differences—the ‘psychic distance’
(Johanson & Vahlne, 1977) or ‘institutional distance’ (Kostova,
1999) that some refer to. Research into technological innovations
in MNCs has shown that host country cultures and institutions are
a significant influence on the ability of subsidiaries to initiate RD
(Almeida & Phene, 2004; Ambos & Schlegelmilch, 2008; Andersson,
Forsgren, & Holm, 2002; Cantwell, 1992; Frost, 2001; Frost,
Birkinshaw, & Ensign, 2002). In the literature on RD of HR practices,
national institutions also feature but the evidence is unclear as to
which sort is most conducive to bringing about RD. For example, it
can be argued that subsidiaries in countries where institutions
promote clusters of firms which have stable relations with one
another and collaborate to produce distinctive competencies are
well placed to instigate RD (e.g., Kristensen & Zeitlin, 2005). In
contrast, other evidence indicates that subsidiaries instigate RD
more easily when they are located in countries in which market-
based forms of economic co-ordination predominate (e.g., Ferner &
Varul, 2000; Hayden & Edwards, 2001; Mtar, 2001; Tempel, 2001).
It is evident that the influence of contrasting host country
institutions in shaping the position of the subsidiary to engage
in RD requires further research.

1.4. Dominance effects

One danger of focusing on national institutions is apparent in
a further strand of the literature on MNCs which has implications
for RD. Some observers argue that what matters is not so much
the precise nature of a national system but rather how it is
perceived by corporate managers, with these judgments being
shaped by ‘dominance effects’ (Smith & Meiksins, 1995).
Dominance effects arise from the evolving hierarchy of nations
according to their economic performance, with those at the top of
the hierarchy serving as models that firms across the world look
to emulate. Popular systems and practices, such as ‘lean
production’, achieve a ‘dominant’ status in part because of their

T. Edwards, A. Tempel / Journal of World Business 45 (2010) 19–28 21

association with successful economies, and this conditions what
senior managers look for in diffusing practices across borders.
The evidence on RD of HR practices provides illustrations of how
the success of the Japanese economy until the mid-1990s shaped
what was the subject of RD (e.g., Edwards, 1998). As the
performance of the Japanese economy has faltered, the influence
of the American economy in particular and the Anglo-American
economies in general, has become more apparent in studies of RD
(e.g., Belanger, Berggren, Bjorkman, & Kohler, 1999; Ferner &
Varul, 2000). The perceptions that result from dominance effects
may be inaccurate and may conflate countries which are quite
different into one category (as is often the case with the notion of
‘Anglo-Saxon’ business systems), but they matter nevertheless.
Subsidiary level actors in countries that are perceived negatively
by the HQ will struggle to be the source of RD unless they make
innovations that are compatible with dominant models; in
contrast, those in countries that are viewed favorably are much
better placed. Thus perceptions of actors at the corporate HQ
seem to be important in shaping the position of the various
national operations in initiating RD.

1.5. Micro-political dimension

A fifth strand of the literature examines the micro-political
dimension to RD. Whether RD occurs is not simply a matter of
contact between sites; it also depends on the motivation of
actors. For example, site level managers may be reluctant to
share their distinctive expertise with other site managers with
which they compete for new investment (Bjorkman & Barner-
Rasmussen, 2004). Thus Edwards and Ferner (2004: 69) argue
that ‘knowledge flows are paralleled by corresponding power
and resource flows: the transfer of knowledge involved in RD is a
political as much as a technical problem, in that it involves
expending resources to overcome resistance’. A key role of the
HQ, therefore, is to establish incentives for managers to share
their expertise. This shapes their ‘motivational disposition’
(Gupta & Govindarajan, 2000) to engage in RD (see also
Boojihawon, Dimitratos, & Young, 2007; Dobosz-Bourne,
2006). One way of doing so is stressing the benefits to donor
sites in terms of safeguards for their future or for them to enjoy
elevated status, such as a particular ‘mandate’. Another way is for
individuals who have led the process of RD to be promoted or
given the role of ‘internal consultant’. In this way, individual
actors and sites can raise their profile by instigating the transfer
of knowledge. It also falls to the HQ to set up penalties for those
managers that seek to block RD, for example by benchmarking
sites against one another and creating pressure on sites to
emulate innovative ones (e.g., Mudambi & Navarro, 2004). The
associated ‘positional strategies’ (Kristensen & Zeitlin, 2005) of
managers at site level are crucial to whether RD occurs and these
are shaped by the resources that they control. The profitability of
the sites, managers’ possession of specialist expertise and the
links that they have with local institutions can endow them with
the power to bring about RD. A further challenge for researchers,
then, is to shed light on the factors that shape the differential
disposition and power of actors across sites to instigate RD.

1.6. Subsidiary role

A sixth strand of the literature on MNCs that has implications
for RD concerns subsidiaries’ roles within companies that have
strong inter-firm trading relationships. One line of research has
stressed the way in which production processes that were
previously nationally focused have become segmented across
borders with the national operations performing a distinct
function (e.g., Dicken, 2003). Some research has shown that many

MNCs are organized as ‘webs’ with sites having links with a
number of others (Bartlett & Ghoshal, 1998; Birkinshaw, Hood, &
Jonsson, 1998; Bjorkman, Fey, & Park, 2007; Boehe, 2007; Gupta &
Govindarajan, 2000). Within such webs, sites may specialize in
design and testing, others in assembly, others in providing
customer support, and so on. The extent to which sites have a
distinct specialty varies, with some taking on a unique role within
the multinational and others taking on a role that may be similar to
some of their counterparts but differ from others. This factor has
not featured in the empirical literature on RD of HR practices but it
has some implications for this issue; it is logical to expect that
subsidiaries will be differentially placed in initiating RD according
to their role within the multinational. Thus in explaining variation
in the extent to which subsidiaries are the source of RD it is
important to explore the role of such factors as the size of sites and
their function within the firms, particularly whether they have
been accorded a strategic role by the HQ or carved one out for
themselves.

1.7. Linkages between factors

While these individual strands of the literature are useful in
structuring expectations about variation in RD, the linkages
between them are also important. The literature is only indicative
on this. There is some discussion of the inter-relationships
between the various factors that explain variation between
subsidiaries; one way in which the different types of explanation
are integrated is that the characteristics of the national system in
which subsidiaries operate shapes the power of actors, demon-
strating how the national systems and micro-political approaches
are inter-dependent (e.g., Andersson, Forsgren, & Holm, 2007;
Thory, 2008). Moreover, the power of subsidiaries is also
conditioned by the role they have within the firm and, equally,
the role they have within the firm is shaped by the resources that
they develop locally (Birkinshaw et al., 1998), showing the linkages
between the micro-political and subsidiary role explanations.
There are also grounds for expecting to find linkages between the
factors explaining variation between firms with those that explain
variation between subsidiaries. For example, the nature of
subsidiary roles is shaped by the structure of the company as a
whole: if sites that are taking on strategic roles within the company
are those most likely to initiate RD, then we might suppose that
these are unlikely to be found in highly decentralized firms in
which units are more or less self-sufficient, nor in highly
centralized, hierarchical firms in which key strategic functions
are kept in the home country; rather they are most likely to be
found in networked organizational forms (e.g., Harzing &
Noorderhaven, 2006). Another illustration is provided by Lazarova
and Tarique who argue that there is an inter-relationship between
‘individual readiness to transfer knowledge and organizational
receptivity to knowledge’ (2005: 361), demonstrating the linkages
between the micro-political and the knowledge transmission
strands of the literature. However, these inter-dependencies are
only rarely explicitly developed and many potential linkages are
not covered in the literature. We might anticipate, for example,
that the participative, inclusive forms of networking in particular
functions such as HR that constitute a mechanism through which
RD can occur may be most common in network-based corporate
structures, yet this is not developed.

This review has demonstrated sources of variation both
between firms and between subsidiaries of the same firm. The
literature is well developed in some of these areas (such as
knowledge transmission channels and host country context) and
less well developed in others (of which the ‘structural’ and
‘dominance effects’ explanations are examples), while previous
research has only touched on the linkages between them. The

T. Edwards, A. Tempel / Journal of World Business 45 (2010) 19–2822

paper aims to enhance our understanding of each strand and to
further develop the inter-relationships between these factors.

2. Method

Most case study research on RD has been based either on
data from subsidiary level only (e.g., Bjorkman & Barner-
Rasmussen, 2004) or from the subsidiary level in one country
and the HQ (e.g., Edwards, Almond, Clark, Colling, & Ferner, 2005;
Ferner & Varul, 2000). Kristensen and Zeitlin (2005) and Belanger
et al. (1999) stand out in incorporating fieldwork in several
subsidiaries as well as the HQ into a single case study. The present
study goes beyond even these in one important respect, namely
that we analyze data from two subsidiaries and the HQ in a
multiple case study design. We draw on two case study projects
examining American MNCs. The UK project involved 14 firms
between 2000 and 2003. The companion study was of 10 American
MNCs in Germany and was conducted over a similar timeframe,
using the same method of semi-structured interviews.

At an early stage in the research the teams collaborated in the
production of an interview schedule. This established the key
issues to be covered in each case study organization, which
included the structure of the company, the reporting relationships
between levels of the structure, the nature of the corporate culture
and how this is communicated within the firm, and the nature of
HR policy and practice in areas such as pay, performance
management, training and industrial relations. This schedule
served as a guide rather than a straightjacket for the interviews; in
order to exploit the advantages of this method, a semi-structured
approach was adopted with interviewers tailoring the content of
the questions according to the individual’s position and also
according to the issues that had arisen in previous interviews and
those that arose during each interview. For the purposes of this
paper this exploratory approach was crucial in addressing those
sources of variation in RD for which there is not a well developed
literature and in enhancing our understanding of the linkages
between them. All of the interviews were recorded, fully
transcribed and analyzed. Throughout the research the team
members collaborated with each other, revising the interview
schedules in the light of emerging findings. The choice of language
in interviewing is a delicate issue, affecting how at ease is the
respondent (Marschan-Piekkari & Reis, 2004). Accordingly, Ger-
man respondents, whilst generally fluent in English, were
interviewed in their native language with the resulting transcripts
being translated.

The data source for this paper comprises three of these case
studies, which were selected on the basis that, first, we were able to
interview a number of key respondents in the corporate HQ in the
U.S. and in the British and German operations and, second, that
they are representative of the sectoral diversity of the wider
projects—one is in services (Business Services), a second is in
manufacturing (CPGco) and a third straddles manufacturing and
services (ITco). In total, 55 interviews were carried out across these
three firms. The cases enable us not only to compare subsidiaries in
contrasting business systems but also to assess the extent to which
their practices were incorporated into corporate policy, something
that is necessary to assess the extent of RD. The findings from the
wider projects are referred to at times, but the analysis in this
paper goes beyond previous analysis in that it focuses solely on the
issue of RD in the three companies for which we undertook
research in all three countries, using these to enhance our
theoretical understanding of RD.

A key methodological issue concerns the evidence that is
necessary to justify an assessment that RD has occurred. One
potential trap here would be to base this assessment on the claims
made by a manager at subsidiary level. This would be dangerous

both because managers at this level may make claims that
exaggerate their influence and also because they may genuinely be
unaware that practices they shared with other sites were not in
fact implemented. Thus the instances of RD in the fieldwork are
only reported here where leaders at the HQ level could corroborate
them. Thus triangulation, which is considered by Ghauri (2004:
115) to be ‘one of the defining features of a case study’, is central to
our approach. Having established where RD had occurred, these
multiple accounts were then used to assess both the mechanisms
through which it took place and whether the impact was
‘evolutionary’ or ‘transformative’. This involved using the respon-
dents’ views on the scale of change in corporate policy that RD
caused and, crucially, whether the practice that was transferred
slotted into an existing ‘modus operandi’ or shifted the multi-
national to a new one.

In sum, the data mean we are well placed to address the paper’s
goals. The fieldwork in two host countries and the home country is
distinctive, the interview-based approach permitted extensive
triangulation and the research in different countries was strongly
comparable. While case study data of this sort are not well suited
to the testing of some hypotheses, they lend themselves very
well to the building of theory in general and the establishment of
specific propositions for future research in particular. We use
the data analysis to build a series of such propositions in the
next section.

3. The case study findings

A theme of the data was of apparent openness to RD. Many
respondents argued that their firm was open to learning from
across its sites and that where managers in the subsidiaries
could demonstrate the efficiency of a new practice then this
could be adopted across the organization. This is in itself not
convincing evidence of RD, of course, since that requires
corroboration of practices originating in foreign subsidiaries
and being diffused to the rest of the multinational. We start by
charting such instances in our case studies, summarized in
Table 1.

3.1. Evidence of

reverse diffusion

The company in which the evidence of RD was most
extensive was Business Services. The UK operations had
pioneered a change to the performance management system
consisting of a ‘general assessment tool’ for storing knowledge.
This was an on-line database and replaced a series of forms; as
such, it represented a relatively minor change to the system,
constituting evolutionary RD. The UK operations were also
responsible for a more significant innovation, relating to the
handling of outsourcing projects in which Business

Services

carries out IT and accounting services for other companies. The
way this was managed became the model for how outsourcing
projects were handled across the firm. It was known as the
‘blueprint’ for managing outsourcing and led the firm to ‘treat
and manage employees fundamentally differently’:

‘The (supermarket) project became essentially a case study for
what to do and what not to do in managing the workforce or
employees of an outsourcing arrangement and those dos and
don’ts and methods and practices have been well documented
and are now part of the foundation of how we look at managing
employees in other outsourcing units’ (Global HR Director).

This resulted in staff that had been active in the supermarket
project in Britain advising on how similar arrangements could be
handled elsewhere. This is evidence of transformative RD since it

Table 1
The incidence of reverse diffusion in the case studies.

Firm Corporate characteristics Subsidiary characteristics Evidence of subsidiary initiatives Evidence of

reverse diffusion
Business
Services

Int’l standardization

high (MNC clients)

Large operations in both

countries, similar

roles

of serving local clients

UK innovations in the management

of outsourced employees and

performance management taken

up globally

From UK Yes,

transformative

and evolutionary

Has operated as an

MNC for 40+ years

UK has grown more

rapidly and perceived to

be ‘five years ahead’

60% of ops outside US The UK has role of

‘virtual’ European HQ

in 3 divisions; Germany

has none

Leadership development program,

developed in Germany provided the

basis for corporate policy

From Germany Yes, evolutionary

Legacy of partnership

ITco Int’l standardization

high (global brands)

Large operations in both

countries with changing

roles

Appraisal system, involving setting

and assessing goals for each individual

on an annual basis that was developed

in the UK was incorporated into

company wide policy

From UK Yes, evolutionary

Has operated as an

MNC for 60+ years

Global cutbacks in 1990s,

but UK has expanded

significantly into the IT

outsourcing market

No initiatives from German subsidiary From Germany No

50% of ops outside US

High centralization Euro HQ in neither country

but UK staff occupy many

positions on it

CPGco Int’l standardization

high (global brands)

Large European operations

serving the regional market

UK site introduced ‘broadbanding’

involving a form of teamwork and

a fall in the number of pay

grades—pushed to the USA but not

taken up. Moves by UK operations

to share anti-harassment training

not taken up by HQ

From UK No

Has operated as an
MNC for 40+ years

Major prod’n and support

ops in UK but prod’n

relocated from Germany with

associated loss in status

No initiatives from German subsidiary From Germany No

50% of ops outside US Euro HQ in neither country

but UK has stronger contacts

to it

High centralization

T. Edwards, A. Tempel / Journal of World Business 45 (2010) 19–28 23

constituted a significantly novel innovation that markedly changed
pre-existing policy.

The instance of RD from Germany consisted of an innovation in
leadership development. The context in Germany was of rapid
growth and a large number of relatively new employees becoming
partners. The leadership development program was designed to
help those partners who were struggling with their new tasks of
managing teams, dealing directly with clients and acquiring new
business. After proving to be successful in Germany, it was
developed into a global program which applies throughout the
company. As one respondent described it:

‘In Germany they have piloted their own leadership develop-
ment course which went down very well. . .(it) was successful.
Those ideas were then developed and we now have a global
leadership development program. . .but the germ of an idea
started in Germany’ (Global HR Manager).

The German innovation went with the grain of the company’s
approach to employee development, representing incremental
changes to it. Thus this is evolutionary RD.

The research in Business Services threw up instances of RD from
other European sites, including a form of 3608 feedback from
France and a technique developed in Spain for handling repeatable
work in discrete packages. In addition, the European region of the
firm had been given the responsibility for developing a way of

assessing the software skills of employees which had been
developed and rolled out across Europe with a view to being
implemented globally. In sum, there were numerous instances of
RD, including of the transformative variety.

There was also some evidence of RD in ITco. The one instance of
the UK sites initiating RD involved a formula for identifying
employee’s ‘Personal Business Commitments’ at the start of the
appraisal process and benchmarks against which they were
measured. This was incorporated into ITco’s international apprai-
sal policy. Its impact was limited since it operated within a pre-
established system of individual appraisal that was linked to a
‘forced distribution’. Thus it constituted a relatively minor
adaptation to existing policy and, hence, it was evolutionary.
Another initiative generated by the UK operations was in the area
of job classifications where British managers had developed a new
practice that had been ‘sent up the lines’ and had become policy in
the European operations, though not across the firm so is not
strictly RD. Our research into the German operations of ITco did not
reveal any evidence of RD, nor of initiatives made by actors in
Germany which had attracted interest from the HQ.

In the third case, CPGco, no clear evidence of RD could be found
from either Britain or Germany. In the UK, this was not for lack of
effort. British managers had pioneered practices in the area of
developing supervisors and anti-harassment training but failed to
attract interest from the HQ. A further innovation in the UK
that made rather more headway, initially at least, related to

T. Edwards, A. Tempel / Journal of World Business 45 (2010) 19–2824

‘broad-banding’. This involved the creation of teams of operators
and a simplification of the payment structure within these teams.
British managers pushed this practice to their U.S. counterparts,
arguing that it resulted in greater flexibility and an enhanced team
spirit but were unsuccessful. The German operations appeared not
to have sought to instigate RD. Managers in Germany were
seemingly more concerned with consolidating their position than
influencing the nature of international policies. As one respondent
put it: ‘We are really more like an administrative unit with little
influence’ (HR Director, Germany).

As Table 1 shows, there is considerable variation between both
firms and subsidiaries that needs explaining. Why is it that RD was
most evident in Business Services, less so in ITco and not at all in
CPGco? And how can we explain why the British subsidiaries were
more frequently the source of RD than their German counterparts?
We consider each question in turn.

3.2. Explaining variation between firms

3.2.1. Knowledge transmission perspective

The first source of firm-level variation is the conduits capable of
transferring knowledge. Here, the evidence demonstrates that the
most well developed mechanisms are in the firm with the most RD.
Business Services had gone to considerable lengths to capture,
codify and subsequently diffuse knowledge across borders. Such
formalized structures were effective in diffusing codified knowl-
edge on HR practices. One example was the ‘Knowledge Exchange’:

‘So all of the best practices, all of the learnings from key projects
around the world – we have what’s called the ‘‘Knowledge
Exchange’’ which is a place where all of that is stored and
housed, content architecture, search engines, how to find the
information, how to harvest it, how to categorize it in a way
that’s easily accessible by our people’ (HR Manager, UK).

Another structure through which knowledge can be spread
around the company is ‘Best Demonstrated Practice’, a formal
record of practices that provided solutions to common problems.
Perhaps most important was ‘People Enablement’, which com-
prised IT tools capable of storing knowledge and making it
available globally. This was described as ‘the creation, harvesting,
organizing and purposeful distribution or sharing of everything we
know how to do and everything we have ever done’ and as the
‘secret ingredient that makes everything else work’. This was a key
mechanism through which the practices associated with the
supermarket project were reverse diffused, through the knowledge
being inputted onto databases and then becoming ‘embedded in
the training the People Enablement function run, particularly in
this case it formed part of the training that our business process
outsourcing people do so that everybody knows about it’. This
involved staff traveling across sites regularly.

The combination of the mining of databases and the face-to-
face training points to the link between the procedural- and
people-based conduits in bringing RD about. The People Enable-
ment function ensured that in many new outsourcing projects ‘one
of the experts from (the British supermarket project) put the deals
together’. The balance between procedural- and people-based
conduits seemed to be shifting to the former owing to a reduction
in travel, limiting the extent to which people moved across
borders, but the interaction between the two is clear.

ITco had established some channels capable of diffusing
codifiable knowledge across sites. For example, ‘Best of Breed’
allowed subsidiaries to identify practices that could be spread
across the firm, enabling them to initiate RD. However, these were
not as high profile as their counterparts in Business Services. In the
third case study, CPGco, the formal mechanisms designed to tap

into innovations across the multinational were less evident. While
the corporate HQ had moved towards involving subsidiary actors
in the development of international HR policies, these were largely
through ad hoc working groups rather than the systematic,
ongoing use of the ‘hardware’ of transfer that was such a feature of
Business Services.

Overall, the analysis raises two propositions for future research.
The case of Business Services suggested that the importance of
procedural conduits of knowledge transfer is growing in relation to
people-based conduits, while developments in ICT may have
increased the ability of the former to handle even tacit knowledge,
reducing the need for face-to-face contact. This leads to the first
proposition:

1a. Procedural conduits of knowledge transfer are becoming more
important for RD.

The data across the cases support the notion that the existence
of appropriate channels for transferring knowledge are very
important if RD is to occur, but is this a pre-condition? Arguably,
RD could occur in the absence of such channels through direct
contact between site actors, though such diffusion is likely to be
limited in how widely spread it is across the firm. This leads to the
second proposition:

1b. Where RD occurs through direct contact between sites as
opposed to organizational conduits, its spread across the multi-
national is likely to be more limited.

3.2.2. Corporate structures

The second source of variation between firms is to do with
corporate structures. However, the variation between the case
study firms can only partially be explained by the structures
already identified in the literature. As Table 1 indicates, they are all
internationally standardized in that the products or services have
strong commonalities, ‘mature’ internationally and have a high
degree of ‘global spread’. However, the evidence does point to a
different structural factor not covered in the literature being
crucial, namely the partnership structure that was part of the
‘administrative heritage’ of Business Services.

Where the HQ of MNCs exercises tight control, the scope for
foreign sites to influence the development of global policies is
restricted. Both ITco and CPGco had a legacy of strong centralized
control. In the former, the influence of corporate management had
markedly risen in the decade prior to our research. In the latter,
centralized control had also increased:

‘The HR function used to be very independent and we had
decision-making autonomy in HR issues. We used to report on
employee numbers and that was about it. This has changed
completely.. . . The directions now come from (the European
HQ). That is, they don’t come from (the European HQ) but from
(the corporate HQ) via (the European HQ)’ (HR Director,
Germany).

In neither case was this so strong that it closed off all scope for
subsidiary initiatives; indeed, the data indicates that the UK sites of
both companies had looked to expand their role within the firms
through supplying practices to other sites (albeit unsuccessfully).
However, the centralist tradition appeared to have created a
significant organizational group that may resist RD, a well-staffed
corporate HR function. A corporate HR function may feel
threatened by subsidiaries becoming more influential in policy-
making and fear that the logic of this would be a reduction in HQ
staff and status within the organization. There was evidence of this
in CPGco where the privileged claim on resources of the corporate
HR function was raised by one of our respondents.

T. Edwards, A. Tempel / Journal of World Business 45 (2010) 19–28 25

A highly decentralized approach is also not conducive to RD
since such MNCs may lack mechanisms that bring managers
together across borders. Rather, it appears that a ‘network’
structure, in which authority is spread across the firm with the
HQ playing a coordinating, as opposed to a controlling role, is more
conducive to RD. This was the essence of the partnership legacy in
Business Services, which persisted even after the company had
become publicly listed. The ‘network’ structure afforded foreign
operations a significant role in the policy formation process. As one
respondent put it: ‘I actually think that our mentality to a certain
extent is still a partnership . . .. We still like to consult and talk and
get buy-in of the partners’ (UK HR manager). Another argued that
‘because our heritage is a partnership . . . other countries in the
leadership and other groups round the world expect to be asked for
their opinion, expect to have the opportunity to provide input and
feedback’ (Senior HR manager, US). This was key in actors within
the U.S. being favorably disposed towards modeling corporate
policies on innovations made in Britain and Germany, differentiat-
ing Business Services from the other firms.

This analysis raises two further questions that could be tested in
future research:

2a. There is a curvilinear relationship between the degree of
centralization of decision making and the extent of RD.

2b. Transmission channels that are effective in bringing about RD
are most likely to be found in network-based structures.

3.3. Explaining variation between subsidiaries

In seeking to explain why the British subsidiaries were better
placed to instigate RD compared with the German sites we
structure our discussion around the subsidiary level factors
previously discussed.

3.3.1. National business systems

The first of these concerns the role of the national systems in
which subsidiaries are located. The evidence from the UK revealed
instances of RD in a number of areas that arguably reflect key
features of the British business system. One broad area where this
was evident was appraisal, performance management systems and
variable pay. RD was found in both Business Services and ITco in
this area and this was consistent with a pattern of UK subsidiaries
pushing innovations to other parent firms in the British project
(Edwards, Collings, Quintanilla, & Tempel, 2006). The UK opera-
tions have greater potential than their German counterparts to be
the source of RD partly because the requirement to negotiate the
introduction of, or changes to, variable pay with employee
representatives is less widespread, and partly because some
aspects of ‘variable’ pay mesh with a system of corporate
governance in which managers pay heed to the primacy of
‘shareholder value’. A second area in which instances of RD from
UK subsidiaries were detected was job classification, particularly
in relation to teams. We have seen how there were moves in this
direction in both ITco and CPGco. In addition, the development of
teams of operators that function without occupational divides and
elect their own ‘co-coordinator’ was an initiative developed in
another firm in the wider project (Edwards et al., 2006). Again, the
weakness of workplace employee representation in the UK means
that British subsidiaries have greater potential than those based in
Germany to make innovations in this area. A third instance of RD
from the UK also bears the imprint of the British business system.
In Business Services, as we have seen, the British operations
pioneered a new way of handling employees transferred into the
multinational through the outsourcing of IT, a phenomenon that
has grown rapidly in the UK. As Grimshaw and Miozzo (2004: 13)

put it, ‘the UK was for much of the 1990s the leading country
driving the European IT outsourcing market’. While this phenom-
enon has increased in Germany in recent years, much of it is
between firms with a strong ownership link, such as Siemens
Business Services with Siemens; in contrast, in the UK outsourcing
is more commonly between firms without ownership links. More
generally, one of the key features of the British business system is
its reliance on ‘arm’s-length’ trading relationships with co-
ordination between firms governed by formal, written contracts
rather than informal, collaborative networks. Given this, it is not
surprising that it was the British subsidiary that developed
expertise in this area.

The substance of RD originating in Germany also reflected
national effects. In Business Services the German subsidiary’s
innovation related to the training of managers. Training and
development in German firms is heavily shaped by the institu-
tional context. This context can limit the ‘diffusability’ of practices.
However, the innovation made by the German operations was not
a direct product of the formal institutions in this area and so was
relatively easy to diffuse. One interpretation of this is that RD
occurred in an area in which the German business system provides
a source of strength, taking the form of a disposition to developing
employees, but not one in which practices were dependent on
specific institutional supports. The wider study of American MNCs
in Germany contained a case of RD of temporal flexibility, involving
a flexible working time system, which had been subject to
extensive negotiations with the works council, being incorporated
into corporate policy (see Edwards et al., 2006). The original
innovation was a product of the generally collaborative manage-
ment-works council relations in the German site.

Thus we have shown how the character of the host country
affects the substance of RD. The evidence also indicates that the
greater compatibilities between key institutions in the British and
American business systems help to explain why the British
subsidiaries were more active in being the source of RD. In the
same way as many corporate policies could be adopted with
greater ease in Britain than in Germany because they went with the
grain of local institutions, so there was more scope for UK practices
to be adopted in domestic operations. It was easier for managers in
the UK to ‘speak the language of the Americans’, as the works
council chair in ITco in Germany put it, helping them to push their
innovations into company policy. This ‘speaking the same
language’ relates not just to the obvious linguistic dimension
but also to similarities in corporate governance systems and the
relative weakness of forms of employee representation. This leads
to a further proposition:

3a. Both the distinctiveness of host country institutions and their
compatibility with those in the home country shape whether a
subsidiary is well placed to be the source of RD.

3.3.2. Dominance effects

While the evidence on the compatibility of national institutions
is indicative, it is more conclusive in relation to the way that
corporate managers perceived each country. It will be recalled that
‘dominance effects’ shape how managers in American MNCs
perceive various countries. Arguably, this may draw U.S. MNCs to
the UK since, rightly or wrongly, it is widely perceived to be
performing more strongly and offer a more ‘flexible’ environment.
Accordingly, a common message emanating from our data was the
negative perception on the part of American managers of the
German system, which was clearly communicated.

This negative perception centered on the issues of inflexibility,
high labor costs and long decision-making time as shaped by
collective bargaining and codetermination. This was felt particu-
larly strongly in CPGco, where the negative perceptions of

T. Edwards, A. Tempel / Journal of World Business 45 (2010) 19–2826

American managers had been exacerbated by works council
resistance to ‘mandatory’ corporate policies, preventing corporate
models on teamwork and performance-related-pay from being
implemented in the German sites. Tellingly, HQ managers’ views
primarily reflected these constraining aspects of the institutions in
Germany, and largely ignored the more positive aspects of the
system. One argued that

‘many American managers are of the opinion that you can’t
locate production operations in Germany. In their view,
everything takes too long here, legal regulations are so much
stricter’ (HR Director, Germany).

In ITco senior managers exhibited negative perceptions of the
German sites. As the chair of the works council put it, ‘for years we
suffered from the stigma of having the highest wages and shortest
working hours’. Respondents outside Germany stressed the legal
constraints in introducing new practices into the country. For
example, the UK HR Director argued that ‘there are some things
from a legal perspective that we just cannot do in Germany’. The
difficulties in having to negotiate changes to payment systems
and the speed with which changes in employment levels can be
made were examples. Another Briton indicated that German
managers had used these constraints to block international HR
policies: ‘I’m sure it’s convenient from time to time to argue that
the works council would not agree’. In contrast, the British
operations appeared to be held in a more positive light, illustrated
by the fact that European HR posts were disproportionately
staffed by Britons. Even in Business Services, where the German
subsidiary had been the source of one case of RD, it seemed that
they were perceived in a less favorable light than the British. One
respondent complained that ‘it takes a lot before someone from
Continental Europe or Asia is promoted to a leadership position’
(Finance manager, Germany).

Therefore, while the actual impact of institutions shapes the
substance of RD from different subsidiaries, the way they are
perceived by American managers is a key part of the explanation of
variation between subsidiaries in the extent of RD. In essence,
corporate management had a negative view of the German system,
putting actors in these subsidiaries on the defensive in matters
relating to international HR policies and thereby heavily con-
straining their role as potential sources of RD. This presents a
further issue for future research, namely are these perceptions of
corporate managers specific to U.S. MNCs? It may be that what we
are picking up here is a distinctively American set of attitudes and
that in Swiss MNCs, say, German subsidiaries may be more
favorably placed to initiate RD than their British counterparts. This
leads to a further proposition:

4a. The perceptions of corporate managers that shape RD are not
governed solely by global norms but rather are also shaped by a
country of origin influence.

3.3.3. The micro-political dimension

Managers in the sites used a range of resources to exert
influence on the wider firm and sought to engage in RD or block it
in order to protect and advance their interests. The evidence from
the UK demonstrates the key role of the strategizing of local
managers. In ITco the downgrading of the role of national
subsidiaries in favor of stronger business divisions and regions
and British managers were well placed to exert influence outside
the UK because they held a disproportionately high number of
positions on the European axis of the company structure. The
success of British managers in pushing innovations in the appraisal
process should be seen in this light. In addition, the diffusion of the
outsourcing innovations in Business Services from the UK reflected

a belief amongst British managers that the benefits of sharing this
with other sites, especially the enhanced status within the
company that it entailed, would outweigh any potential risks. A
crucial factor in this respect was the very low likelihood of any
disinvestment from the UK since they were highly profitable and
had many key contacts with multinational clients.

The scope for managers in the German operations of Business
Services to push their innovations to the rest of the firm was also
significant, partly because German management had avoided
collective bargaining and codetermination. This meant that
workflow planning and working time, two key factors in the
competitiveness of consulting firms, are shaped unilaterally by
management without the restrictions of the Works Constitution
Act and can be managed in line with global policies. This influenced
its success in transferring practices in the area of leadership
development. Of course, while the initiatives of subsidiary
management were a key part of the process of RD, the agency
they possess was exercised within constraints. Thus the strategiz-
ing of local actors in ITco and CPGco was primarily concerned with
redefining the perceptions that those at the HQ had of their
operations. Subsidiary management in both cases had been seen by
the HQ as orchestrating resistance to mandatory policies and were
anxious to shed this image by conforming to corporate HR polices
even where this involved some departure from local norms. This
preoccupation with being seen to be ‘good corporate players’ was
much more of a concern than attempting to promote themselves to
HQ management as suppliers of new practices. This leads to a
further proposition:

5a. The power of subsidiary managers to exert an influence on RD
is shaped by the resources they deploy and this varies from country
to country.

3.3.4. Subsidiary roles

This leads us to the final factor, the size of the sites and their
function within the firms, particularly the ways in which
subsidiary roles are differentiated. As the summary in Table 1
indicates, the UK subsidiaries had more influence within the wider
company than those in Germany. This was true in ITco even though
the UK and German operations fulfilled apparently similar roles,
with the operations in both countries mainly serving customers in
their respective national markets. Employment in both countries
had increased and both were major bases for the firm in Europe.
The position of the national subsidiaries differed, however, in that
the UK operations had grown faster in the ‘IT services’ market. In
Business Services there were five divisions and four of these had a
European HQ. While these were ‘virtual’ in some senses – they did
not have support staff, for example – there was a management
group that had a geographical location and in three of the four
cases this was London. This was ascribed partly to the ‘strong ties
of the British subsidiary with the American operations’ (HR
manager, Germany) and to the size and maturity of the UK
operations. With 7000 staff in the UK as against 4000 in Germany,
the UK was seen as being ‘about five years ahead of the German
location in its development, client basis and headcount’ (Finance
manager, Germany). The differential role of the subsidiaries was
clearer still in CPGco. Significant changes in Germany arose from
the selling off of production sites:

‘Things changed dramatically here when we lost the production
operations. It was a question of image. We used to be an ‘‘A’’
subsidiary and suddenly we were degraded to a mere trading
company. That was a real blow for us. The largest subsidiaries in
Europe now are the UK and France with about 4,000 employees
each. We now belong to the second grade subsidiaries in
Europe’ (HR Director for Germany).

T. Edwards, A. Tempel / Journal of World Business 45 (2010) 19–28 27

This ‘second grade’ status had severely curtailed the influence of
German managers, limiting their ability to initiate RD.

This analysis raises two further issues for further research. First,
the size, and particularly the growth, of each subsidiary seems to
be linked to the prevalence of RD, leading to the following
proposition:

6a. RD more commonly arises in subsidiaries that are relatively
large and have recently grown.

The evidence provides some support for the expectation
that subsidiary roles matter, but the impact may not be
straightforward. That is, if the role is so specialized that the
functions performed and technologies deployed in the sites
are markedly different then the scope for diffusion to quite
different sites is limited; equally, performing a function that is
identical to other sites may also reduce it. In contrast, a role
that is distinct in some ways but has some commonalities
with other sites may be the most conducive to RD. A final
proposition follows:

6b. There is a curvilinear relationship between the distinctiveness
of subsidiary roles and RD.

The inter-linkages between these various factors have
become even more apparent than was evident from a review
of the literature. For example, we have argued that perceptions
of host country contexts affect the way that subsidiaries are
perceived and that this may vary by the nationality of the parent
firm. In turn, subsidiary roles are shaped by the host country
context and how this is perceived. Moreover, the resources that
subsidiaries control affect, and are affected by, the roles that
they take on. These inter-linkages should be a key element of
further research.

4. Managerial relevance

A key implication for practitioners concerns corporate
performance. As much of the literature argues, tapping into
the diversity of practices within a multinational has the
potential to enhance firm performance by strengthening the
resource base of the firm. However, the logic of this analysis is
that it is difficult for firms to realize RD: some are too
centralized while others are too decentralized; some lack the
mechanisms capable of transferring knowledge across borders;
and the perceptions of senior managers can lead them to
overlook pockets of expertise within the firm. Moreover, even
where MNCs do engage in RD, if the process occurs in a way that
is insensitive to practices being dependent on contextual
supports then they may operate in a markedly different way
to that which was envisaged. If managers are to use RD to
beneficially augment the knowledge base of the firm then they
must be sensitive to these factors.

A second implication for managers concerns relations
within the firm. As we have argued, reverse diffusion should
be seen as a political as well as a technical issue, a key part of
the way in which managers strategize. Some managers engage
in the process of RD partly to try to raise their status and
claim on resources, or at least to establish themselves as good
citizens within the company. In contrast, though, other
subsidiary managers see RD as a threat since it entails sharing
distinctive expertise with other units with which they compete
and in these circumstances they may look to conceal their
expertise by not engaging in it. Consequently, the strategies
that subsidiary managers pursue in this respect not only affects
the specific issue of whether RD occurs successfully but also
shapes the power and influence of their respective subsidiaries
more generally.

5. Conclusion

This paper has charted and explained variation in the extent
and nature of RD between MNCs and subsidiaries. We have done
this by exploring and developing various types of explanation,
showing inter-relationships between the sources of variation and
extending our understanding of the phenomena by identifying
new ones. For example, we have shown how a partnership
structure (or at least the legacy of one) is conducive to RD and how
the way that national systems are perceived by corporate
managers constrains the role of actors at subsidiary level. In
short, we have enhanced our understanding of both inter-firm
variation in the incidence of RD and inter-subsidiary variation
concerning where it originates and generated a set of questions
that can be addressed in future research.

The paper has limitations, of course. In particular, the six
strands of explanation are not necessarily exhaustive. They were
derived from the literature on RD in particular and on MNCs in
general and these factors were used to structure the collection and
analysis of the data. While the interviews were semi-structured
and so provided some scope for unanticipated factors to emerge,
this scope would have been greater with an unstructured
approach. Moreover, the use of three case studies means that it
is almost certainly the case that had other firms in other sectors
been analyzed then different types of explanation might have
emerged. In addition, this approach meant that empirical
regularities across all types of MNCs could not be established.
Despite these limitations, the research design has many strengths
and is novel in important ways.

As the research questions in the previous section demon-
strate, this is far from the final world on RD. A part of the
research agenda for academics in the field of international HRM,
therefore, is in the further development of the ideas advanced
here. For example, can the propositions of the two types of
curvilinear relationships – between RD and the extent of
centralization of the multinational and between RD and the
distinctiveness of the role of a particular subsidiary – be
validated or further refined? Moreover, many of the research
questions relate to the need to test the generalizability of the
findings that emerged from the case study data and this points
to the need for rigorous survey data.

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• Explaining variation in reverse diffusion of HR practices: Evidence from the German and British subsidiaries of American multinationals

Key themes in the literature
Knowledge transmission perspective
Corporate structure
National business systems
Dominance effects
Micro-political dimension
Subsidiary role
Linkages between factors
Method
The case study findings
Evidence of reverse diffusion
Explaining variation between firms
Knowledge transmission perspective
Corporate structures
Explaining variation between subsidiaries
National business systems
Dominance effects
The micro-political dimension
Subsidiary roles

Managerial relevance
Conclusion
References