International Business

Learning by Doing

Turning Local “Experiential Knowledge” into Competitive Advantage

Fast Facts:

  • Violent conflict has increased around the world over the past decade, making the ability to operate in violence-affected regions a must for many MNCs.
  • "Experiential knowledge” gained from operating in countries suffering from violent conflict can be a valuable source of competitive advantage
  • Companies that use local experience to continue to operate or even expand operations in unstable environments not only benefit themselves, they also provide jobs and economic continuity for host-country residents caught in the line of fire.

Multinational corporations with operations around the world accumulate large amounts know-how as a result of conducting business in various locations. This is a kind of “experiential knowledge” – knowledge gained through experience, or learning by doing. Some experiential knowledge is “corporate-level,” gained from operating in multiple countries, while some is “country-specific,” gained from experience in a particular host country.

Country-specific knowledge includes understanding the host country’s institutions, culture, and ways of doing business. Such knowledge is obviously indispensable for operating in the host country. But is it only valuable in that country, or can it also be usefully applied to operations in other countries? This is the question that Chang Hoon Oh of SFU’s Beedie School of Business and Jennifer Oetzel of American University sought to answer in a research study of 379 multinational corporations from 29 home countries and their subsidiaries in 117 host countries over a 10-year period of time.

The type of experiential knowledge that Oh and Oetzel focused on is that gained by conducting business in an environment where violent conflict is taking place. It is an unfortunate fact of today’s world that violent conflict, including war, revolution, rebellion, insurgency, and terrorism, is found in many countries. According to the 2018 Global Peace Index of the Institute for Economics and Peace (IEP), global conflict has risen over the past decade. This is mainly due to conflicts in the Middle East and Africa, but even in Europe, according to the IEP, “23 of the countries classified as Europe deteriorated in peace in 2017.”

What should an MNC do when a country in which it has one or more subsidiaries exposed to violent conflict risk? Leave? Or batten down the hatches and stick it out? Violent conflict adds significantly to the cost of doing business, in the form of things like higher insurance premiums, security costs, and finding alternative suppliers. But divesting may be difficult as well, due to “ barriers to exit” such as sunk costs, immobile assets, market commitment, and the interconnectedness of supply chains.

The leave-or-stay decision, of course, depends on many things, including the importance to the MNC of its operations in the violence-afflicted region, and the nature of the conflict. Regarding the latter, Oh and Oetzel broke down violent conflicts into two types: those that involve the host-country government and those that don’t. They found that country-specific knowledge is especially useful in dealing with armed conflict that involves the host-country government. This is because such knowledge confers a greater understanding of the host-country government, its role in the conflict, and its capacity to contain violence and resolve the conflict. This knowledge allows the MNC to make more informed decisions regarding whether to leave or stay, and to cope more effectively in the violence-afflicted environment should it choose to stay.

The researchers found that more general corporate-level knowledge is less useful in such situations. A manager of a large Asian MNC who was in charge of land development projects in Africa and the Middle East commented as follows on the relative value of general versus experiential knowledge:

Employees in the international business division have several education opportunities such as seminars and workshops. The division invited university professors whose specialties were language, history, and culture of Middle East countries. This overall knowledge might help employees to understand the country and its culture, but it was not comparable to their direct experience in the country.

As for whether or not country-specific knowledge can be usefully applied in other countries and becomes corporate-level knwoledge, Oh and Oetzel found that it can be in the case of conflict that does not involve the host-country government, but that when the conflict involves the host-country government, its value is mainly limited to the host country.

An important message from this research is that the corporate headquarters should encourage and value learning at the subsidiary level. In the case of situations involving violent conflict, such learning can even be a potential source of competitive advantage: it allows an MNC operating in a conflict-affected country to better maintain its market position and to take advantage of new business or investment opportunities that may arise during or after resolution of the conflict. Such MNCs may also use their political and social ties to participate in local recovery projects, thus assisting the people of the host country while building a positive reputation.

In a world in which conflict shows few signs of increasing, firms that are able to use local experience to continue to operate or even expand operations in unstable environments not only benefit themselves, but also provide jobs and some degree of economic continuity for host-country residents who are literally caught in the line of fire.