Tacit knowledge in management roles: Evidence from the use of expatriates in South Korean MNCs

Abstract

We study the use of tacit knowledge in management roles for a MNC through the lens of a knowledge hierarchy model. We use data on labor mobility of MNCs headquartered in South Korea. Given that South Korea is one of the least diverse countries in terms of ethnicity, culture, and language, and that Korean is an uncommon language isolated from other language families, the use of expatriates instead of locals serves as a means of transferring tacit knowledge from headquarters to foreign affiliates. We investigate how the use of expatriates changes for executive and manager layers as foreign affiliates expand or contract. In particular, we analyze foreign affiliates that expand with and without changing their organization of hierarchical layers. When affiliates expand by adding an organizational layer, we find that the new layer mostly comprises expatriates, while the need for expatriates in the layer immediately below declines. Similarly, when affiliates contract by dropping a layer, the need for expatriates in the layer immediately below increases. When foreign affiliates expand (contract) without reorganizing, they require more (fewer) Korean expatriates at the management layers as well. These results are robust to accounting for sectoral complexity and monitoring intensity, suggesting that expatriate use is not influenced by R&D intensity or monitoring duties, and that the need for tacit knowledge in management is stable across sectors. Moreover, expatriate usage in management does not change with affiliate age, suggesting no evidence that expatriates’ tacit knowledge is converted into explicit knowledge at the foreign affiliate level.