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Diffusing 'best practice' in Chinese multinationals: the
motivation, facilitation and limitations
Miao Zhang; Christine Edwards

Online Publication Date: 01 December 2007

To cite this Article: Zhang, Miao and Edwards, Christine (2007) 'Diffusing 'best
practice' in Chinese multinationals: the motivation, facilitation and limitations', The
International Journal of Human Resource Management, 18:12, 2147 - 2165
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Int. J. of Human Resource Management 18:12 December 2007 2147– 2165

Diffusing ‘best practice’ in Chinese

multinationals: the motivation,
facilitation and limitations

Miao Zhang and Christine Edwards

Abstract With increasing global integration, the diffusion of ‘best practice’ is a critical
activity in MNCs, particularly for those from developing countries which have recently
joined global markets. Recent research has suggested that ‘reverse diffusion’ is an
important approach to the internationalization of management. However, there is little
empirical evidence in support of this argument. This paper draws on in-depth case studies
of the UK subsidiaries of Chinese MNCs to explore the nature and characteristics of
diffusion activities. It confirms that ‘reverse diffusion’ played a positive part in the
internationalization process of these companies, although the impact on the home firms is
limited. It also found that new forms of management transfer are emerging in these
Chinese MNCs. This suggests that the diffusion of ‘best practice’ in MNCs can be varied
with different national and organizational characteristics.

Keywords Multinational companies; transfer; HRM; China; UK.

Introduction
MNCs (multinational companies) are playing an innovative role in the globalization of
the world economy. In particular, they are seen as major vehicles for the dissemination or
transfer of ‘best’ management practice (Bartlett and Ghoshal, 1998; Edwards and Ferner,
2000; Ferner and Varul, 1999; Martin and Beaumont, 1998). Most research in this area
has concentrated on MNCs from developed countries and the extent to which their home
or HQ practices impact on management in their overseas operations. Their focus,
therefore, is on ‘forward diffusion’ of best practice from the home country to overseas
subsidiaries (Belanger et al., 1999; Ferner and Varul, 1999; Hamill, 1984; Smith and
Elger, 1994). Less attention has been paid to other forms of diffusion, such as ‘reverse
diffusion’ which is defined by Edwards (1998) as the transfer of practice from foreign
subsidiaries to operations in the country of origin. Edwards and Ferner (2004) suggest
that this form of diffusion may be particularly related to MNCs from countries that are
new entrants to international markets. However, empirical evidence in support of this
proposition is sparse. This paper therefore uses research data to explore the argument that
MNCs from newly industrialized countries, particularly from developing countries
locating in an ‘advanced’ economy, will use the opportunity to acquire the advanced

Miao Zhang, Senior Lecturer, Kingston Business School, Kingston University, Kingston Hill,
Surrey KT2 7LB, UK (tel: þ44 208 547 7573; fax: þ 44 208 547 7026; e-mail: miao.zhang@
kingston.ac.uk); Christine Edwards, Professor, Head of the School of Human Resource
Management, Kingston Business School, Kingston University, UK (tel: þ 44 208 547 7573;
fax: þ 44 208 547 7026).
The International Journal of Human Resource Management
ISSN 0958-5192 print/ISSN 1466-4399 online q 2007 Taylor & Francis
http://www.tandf.co.uk/journals
DOI: 10.1080/09585190701695291
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2148 The International Journal of Human Resource Management

management practice they need to compete in international markets. In this scenario,
subsidiaries may play a major role in organizational learning by absorbing ‘advanced’
local practice and diffusing it back to the home firm or other subsidiaries in order to speed
up their internationalization process. Thus ‘reverse diffusion’ is seen as a means of
acquisition of management practice for MNCs from countries entering the global
economy relatively late.

The transfer of ‘best practice’ and reverse diffusion

Most research on the transfer of ‘best’ management practice in MNCs is concerned with
‘forward diffusion’ in which diffusion flow is from parent companies or HQ to
subsidiaries (see Edwards, 1998, for a review of literature). A few authors have argued
that ‘best practice’ can be transferred through some other ways or forms (Edwards, 1998;
Edwards and Ferner, 2004; Rugman and Verbeke, 2001; Smith and Meiksins, 1995;
Zanfei, 2000). In particular, Edwards (1998) identified ‘reverse diffusion’ – the transfer
of practices from foreign subsidiaries to an MNC’s domestic operations and other
subsidiaries. Edwards and Ferner (2000) proposed that this is an important mechanism of
‘regime competition’, whereby the comparative advantages of national business systems
– and of the companies operating within them – may be captured within MNCs and
transferred to other national business systems. Reverse diffusion within MNCs may thus
be a factor in the internal transformation of national business systems. According to
Edwards and Ferner (2004) reverse diffusion is more likely to be found in two kinds of
MNCs: those with greater international integration which provides scope for the
diffusion of practices across sites, and MNCs attempting to improve their international
position. Thus the authors argue that global competition puts pressure on MNCs from
newly industrialized countries to transform their management systems by absorbing
advanced practices in order to derive competitive advantages.
This suggests that reverse diffusion is most likely to be used by MNCs whose
subsidiaries operate in a country with a dominant position within the hierarchy of
economies (Edwards, 2004; Smith and Meiksins, 1995). Subsidiaries learn from the host
environment, and then diffuse practice and experience back to the home firm. In this
manner, the subsidiary may play a ‘vanguard’ role in the process of change (Ferner and
Varul, 1999) and the practices of local organizations become a source of innovation for
these MNCs (Zhang, 2001, 2003). Furthermore, MNCs from newly industrialized
countries usually operate in co-coordinated market economies while ‘best practice’ in
international competition mostly derives from liberal market economies. Therefore,
Edwards and Ferner (2004) argue, while the impact of reverse diffusion within MNCs
from liberal market economies may be evolutionary in nature, in MNCs from
co-coordinated market economies it may be transformative. In the latter case it is also
assumed that diffusion will go beyond the MNCs to influence the national business
systems of the home firms. Reverse diffusion then becomes a mechanism for wider
economic development.
There are a few studies of reverse diffusion in MNCs. For instance, research has been
carried out on MNCs from Germany (Ferner and Varul, 1999), and Sweden (Hayden and
Edwards, 2001) in the UK. Edwards (1998) studied UK companies in Japan and Edwards
et al. (2005) examined reverse diffusion in US companies. Some reverse diffusion
activities were found in German and Swedish MNCs but little in those from the US.
The overall conclusion to be drawn from these few cases is that the incidence of reverse
diffusion is very limited. However, these arguments are based on a small number of
cases, and are exclusively MNCs from developed countries operating within a Western
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Zhang and Edwards: Diffusing ‘best practice’ in Chinese multinationals 2149

context. The position of the increasing numbers of MNCs from emerging economies
striving to compete in world markets is very different: they clearly have the need to
engage in organizational learning and diffusion. They are using FDI to transfer
management practice into their organizations, and it can be supposed that outward
investment also has the potential for gaining international experience. This is especially
the case where their subsidiaries are located in an economically advanced country,
a context in which they will be under significant pressure to learn the operational
knowledge and experience from the local environment in order to compete. They are,
therefore, a rich potential source of innovation but have yet to be included in studies of
reverse diffusion. Furthermore, whereas the impact of reverse diffusion on the national
business systems of MNCs from advanced economies may be weak, the scope for change
in less developed countries is far greater. However, the proposition that MNC’s reverse
diffusion activities may have significant, even ‘transformational’ impact on the national
business systems of less developed economies has yet to be substantiated.
In their study of the factors promoting or impeding reverse diffusion Edwards and
Ferner (2004) conclude that it depends upon certain structural aspects of organizations
and national business systems, such as the importance of the relationship between HQ and
subsidiaries and their autonomy to innovate, production integration between the
subsidiary and MNC, and growth methods; they also point to national institutional
characteristics which decide the extent to which the MNC can absorb the practice from
other countries. However, as these observations relate to MNCs from developed
countries with considerable expertise and experience of international operation,
the research is naturally focused on how subsidiaries diffuse practice and the impact
on the home firm. The position of an MNC from developing countries operating in an
advanced economic context might be very different, and we would argue that several
aspects especially pertinent to understanding reverse diffusion in these MNCs have not
been explored. First, while there may appear to be a vital need for knowledge acquisition
and learning, the extent to which this is a strategic priority has to be established. Its
significance, moreover, may be expected to vary with different stages of
internationalization development (Hitt et al., 2006). Second, implementing such a
strategic objective may not be straightforward. Little is known about the learning
activities of subsidiaries and the processes by which they absorb best practice from a
local environment in the first place. This would be a key stage for late entrant MNCs
operating in international markets. Third, while national economic differences may
create competitive pressure for the transfer of ‘best practice’, disparity in national culture
(Düfle, 1990; Hofstede, 1997) and institutions (Dedoussis, 1995; Edwards and Ferner,
2004; Elger and Smith, 1994) may act as a constraint. Consideration of national
characteristics that might limit reverse diffusion of practice has largely been confined to
institutional barriers (Edwards and Ferner, 2004) and has not included differences in
national cultures between the country of origin and the host country that might have
implications for organizational learning, knowledge transmission and impact. We know,
for example, that wide differences in culture and institutions encourage localization in
MNCs’ subsidiary practice but these also may impede reverse diffusion and limit impact.
Finally, subsidiaries inexperienced in international business may not have the capability,
and its managers the competency, to acquire and apply innovative practice (Wei and Lau,
2005). These have been confirmed as very important factors influencing the transfer of
management practices between Western and Eastern countries and developed and
developing countries (Wasti, 1998).
Thus we would argue that current research into reverse diffusion is limited because it
has concentrated on MNCs from advanced economies. The potential for reverse diffusion
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2150 The International Journal of Human Resource Management

activity and impact is far greater and should have higher strategic priority for MNCs who
are new entrants into world markets and who are operating in advanced economic
environments. An agenda for research into reverse diffusion in developing countries
would include an examination of cross-organizational learning activities and impact,
structural and institutional factors, and political processes as in previous studies. However,
we would add analysis of subsidiary learning activities, and differences in culture and
competency as vital components. The components of a revised model for the analysis of
reverse diffusion in MNCs from developing economies are depicted in Figure 1.

Internationalization strategy and institutional and cultural context

MNCs from China are used as a test case for this theoretical framework. Until the 1970s,
Chinese MNCs operated in a domestic arena characterized by a centrally planned
economy with little experience of competing in world markets. China started to join
international markets about 30 years ago and has been changing its business system since
in order to compete. However, despite accelerating economic development, its
internationalization process is still at an early stage and large differences of national
culture and institutions from Western countries remain. In the l980s, the Chinese
government began to advocate using ‘international borrowings’ (jiejian) from Western
countries as a means of promoting the modernization of Chinese firms. The government
supported the process of knowledge acquisition in two ways. One was by attracting
foreign companies to invest in China in order to have access to their knowledge and
experience. The other, by encouraging Chinese companies to engage in outward
investment, is regarded as a more effective and direct way to learn international rules and
experience (Duan, 1995; Feng, 1996). Since the l980s, the stock of outward FDI has risen
from virtually nothing to $35 billion in 2002 (UN, 2003). There are over 7,000 non-
financial related companies operating internationally (Chinese People’s Daily, 2003),
opening up significant potential for learning from overseas subsidiaries.
Empirical research in China confirms that investment in outward FDI is being used as
a means of entering international markets and acquiring advanced technology and
management knowledge (Duan, 1995; Wang, 2004; Young et al., 1996; Zhang and Van
Den Bulcke, 1994). Chinese MNCs are playing a major role in this process, especially the
state-owned companies with a longer history of conducting international trade. These
Chinese MNCs’ business strategies have shifted from exporting or importing to investing
in developed countries. Moreover, Zhang and Van Den Bulcke’s (1994) survey of
Chinese MNCs, indicated that in contrast to other early Third World multinationals,

Figure 1 A framework for investigating reverse diffusion in MNCs from developing countries
operating in advanced economic environments
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Zhang and Edwards: Diffusing ‘best practice’ in Chinese multinationals 2151

which generally invested in neighbouring, ‘downstream’ developing counties with lower
levels of industrialization and technological capabilities, Chinese multinationals tend to
invest more in ‘upstream’, higher income, industrialized countries. In some, a strategy of
‘total participation’ in international competition is emerging (Duan, 1995; Luo et al.,
1993; Wang, 2004). For these MNCs, outward investment is used not just to facilitate
exports, but also to fully participate in global competition by establishing extensive
overseas operations. These theoretical arguments and pieces of empirical evidence
suggest that the subsidiaries of Chinese MNCs operating in developed countries are
likely to play an important role in the internationalization process of Chinese enterprises
as a whole. The exact nature of this role and the extent to which they are effective
conduits for the transfer of management practice is, therefore, of considerable interest.
The UK has many advantages as a host country for MNCs, as shown by Ferner and
Varul (1999). Britain is one of the most internationalized developed economies and is
home to a disproportionate number of global corporations. As a member of the European
Union it is an ideal gateway to Europe for Chinese MNCs, and a starting point for doing
international business with other Western countries (Guest and Hoque, 1996). Thus, the
UK, as a developed country with leading-edge management practices, arising out of long
experience of international operations, provides an opportunity for Chinese MNCs to
access international markets and to absorb advanced management practices. The UK,
therefore, presents an ideal site from which to study the processes of the reverse diffusion
of international management practices.
The Chinese government advocates and supports the transfer of Western management
knowledge and practices into Chinese organizations, and Chinese MNCs are highly
motivated to learn from their overseas operations. Moreover, China has experienced
rapid institutional change in the past decade through its open-door policy, introduction of
a market economy, a degree of decentralization and privatization, and some reform of the
state-owned industries. Such change has reduced economic differences between China
and the advanced economies, and eroded some of the factors that have constrained the
adoption of innovative practice in the past (Child and Tse, 2001; Warner, 2004).
However, the difficulties experienced by foreign companies and joint venture’s attempts
to introduce Western practice in China are well documented and suggest that the transfer
of overseas experience may not be straightforward (Child, 1990, 1991; Gamble, 2003;
Warner, 2004). To some extent this can be attributed to the difficulty foreigners have in
penetrating the social networks (guanxi) that give access to people and resources that can
get things done (Ahlstrom et al., 2000). But a more important factor affecting both
foreign and Chinese companies is the significant barriers to change posed by the Chinese
economic, social and political systems (Child and Tse, 2001; Warner, 2000).
The particular resistance of the state-owned sector to modernization, to which the
largest MNCs belong, has been illustrated in a number of studies (Benson and Zhu, 1999;
Cooke, 2004; Ding and Warner, 1998).
In sum, we hypothesize that the transfer of ‘best practice’ will be a strategic priority of
Chinese MNCs operating in the UK and that this transfer will make a transformative
impact on the home firm. However, as there are huge differences in the Western and
Chinese national business systems, the reverse diffusion process from UK subsidiaries
will most probably start with a localizing process in order to access UK practice.
Furthermore, the extent to which these MNCs learn from the UK and diffuse their
practices to the home firms may be constrained by national and organizational
characteristics, especially, economic, political and cultural factors.
In the remaining sections of this paper we explain the methods used in the case study
research, and then our findings that analyse the process and scale of reverse diffusion
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2152 The International Journal of Human Resource Management

in these companies. Finally, we return to the question of what are the major characteristics
of reverse diffusion in these Chinese MNCs and conclude that while significant reverse
diffusion activities take place, the extent to which it brings about significant changes in
home practice is limited. We end by discussing the latest trends in ‘international
borrowing’ through which Chinese MNCs are seeking to transform their home firms.

Methods and sample characteristics

Six subsidiaries of the main Chinese MNCs operating in the UK were selected for
in-depth research into their diffusion activities. At the time of the study, there were 24
Chinese companies in the UK, exclusively in trading and finance, and all but eight of
these were small offices with limited activities. The eight largest were selected for study
and six agreed to participate. These six are therefore representative of the primary
activity of MNCs in the UK at that time. They are wholly-owned subsidiaries of four of
China’s leading and largest state-owned enterprises. Two are from the international trade
sector which took the lead in setting up MNCs because of long-term experience in
international markets and with foreign clientele. The other two are from the financial
sector, which is also developing rapidly overseas. These MNCs are playing a principal
role in China’s trade and economic development, and are representative of China’s
MNCs’ internationalization process. The six subsidiaries are located in the London area
which as an international financial and trading centre provides both the opportunity for
and pressure to learn and use ‘best practice’ in the UK.
The six subsidiaries have different organizational structural characteristics, methods
of growth, and integration of subsidiary and home markets and business (see Table 1).
For example, two operate in local UK markets, two at international level, and the other
two have close business relations with Chinese domestic markets. Two subsidiaries have
a long history of international business (90 years), three were established at the beginning
of China’s open-door policy in the 1980s, and one is a new firm with only two years
operational experience in the UK. The six organizations were established and expanded
using different methods. Of the six, the two largest expanded into new business areas,
and the smallest grew its operations; one was established by the takeover and merger of
two local firms and two are totally new set ups.
Data collection was two stage: the first, from 1998 to 2000, concentrated on learning
and diffusion activities in the UK subsidiaries. In the second stage, from 2002 to 2004,
the parent companies or HQs in China were studied to evaluate the impact of the UK
subsidiaries on the MNCs as a whole. The main sources of information were in-depth,
semi-structured interviews with top and middle managers, structured interviews with
some open-end questions with staff, and corporate performance data supplied by the HR

Table 1 The characteristics of six Chinese subsidiaries

*Organization Finc1 Finc2 Finc3 Finc4 Trad1 Trad2
Size** , 200 , 50 ,100 , 50 , 200 ,50
Ex/Es time 1980 1990 1990 1980 1990 1980
Business Expansion New area New area New area Expansion New area
diversity
Development Greenfield Greenfield Acquisition Greenfield Acquisition Greenfield
methods

Notes: * All the names of the companies are anonymous, ** Size by average numbers of the employees in 1997 –9.
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Zhang and Edwards: Diffusing ‘best practice’ in Chinese multinationals 2153

managers. In the UK subsidiaries, interviews were conducted as part of a wider study of
HRM strategy (see Zhang, 2001). The interviewees included all top managers, most
middle managers, and some senior staff who were involved in diffusion activities,
both expatriates and locals. In the parent companies, interviews were conducted with
the top managers in charge of international business, and branch and departmental
managers who had work or training experience in the UK subsidiaries. In total, some 200
interviews were carried out (see Tables 2 and 3).

Chinese MNCs in the UK: motivation and context

The data confirmed that learning and the diffusion of management practice was an
important part of the internationalization strategy of these Chinese MNCs (see Table 4).
As state-owned enterprises, they had to comply with the Chinese government’s
internationalization policy, and they desperately needed the knowledge and experience
of operating in a market-oriented economy in order to compete with international
companies at home and abroad. Thus all six were expected to acquire market economy
experience and to assist in the modernization of traditional Chinese management systems
at home.
Edwards and Ferner (2000) have suggested that the reverse diffusion of practice is
more likely to occur if subsidiaries are given considerable autonomy from the centre, be
subject to behavioural rather than outcome control and be evaluated ‘flexibly’ against
budgetary targets. All three features were apparent in the Chinese MNCs studied.
The MNCs had lessened their traditional highly centralized control and the subsidiaries
had far more autonomy in doing business internationally than subsidiaries at home. They
were given unprecedented latitude in the development of their management systems and
allowed to adopt UK organizational structures and management practices. For example,
one company (Finc4), based on the merger of two UK companies, retained local systems
and practice, while others adopted UK systems and structures to a greater or lesser extent.
There was strong financial support for the UK subsidiaries, most notably in the early
1990s. At that time, the parent companies still dominated domestic markets and
possessed huge financial resources. The subsidiaries set up at the beginning of the 1990,
such as Finc4 and Trad2, enjoyed considerable support and autonomy. Those established
later, for example Finc2, had less support as the parent companies started to struggle with
domestic competition but they still had lower financial targets compared to the home
firms. Thus, under less pressure to make short-term profits, the subsidiaries were able to
devote time and resources to acquire knowledge of UK practices and engage in diffusion
activities. The UK subsidiaries were seen as the primary source of knowledge on
advanced management practice and systems for the MNCs, and they reported directly

Table 2 Interviews in the subsidiaries of Chinese MNCs in the UK

Top managers Middle managers Staff
Finc1 3 17 11
Finc2 4 8 25
Finc3 3 13 9
Finc4 4 7 15
Trad1 3 16 14
Trad2 3 8 18
Total 20 69 92
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2154 The International Journal of Human Resource Management

Table 3 Interviews in the HQs and parent companies in China

Top managers Middle managers Staff
Finc1 1 3 0
Finc2 2 2 0
Finc3 1 5 0
Trad1 1 3 0
Trad2 2 0 0
Total 7 13 0

to their parent companies, unlike subsidiaries in other countries that reported to the
regional HQ. Therefore, there was a direct channel for diffusion to the parent company.
It appears that the subsidiaries have both pressures and support to put learning and
diffusion in a priority position. The extent to which they realized this potential and how
they engaged in diffusion activities are the questions to which we now turn. The diffusion
activities identified in the course of the research involved two aspects. The first was to
adopt UK management practice in the subsidiaries. The other was diffusion from the
subsidiaries to the home firm and other subsidiaries.

The characteristics of subsidiaries’ learning activities

The study found that localization was the main mechanism for learning, although there
are some variations between the six. There were two main approaches to localization.
One was to acquire UK firms and was used by Trad1 and Finc3. The chief executive of
Finc3 explained that acquiring two UK companies was ‘directly to gain advanced
business and management expertise’ and ‘jump a graduate learning process and put
Chinese MNCs in the same position as UK companies in the competition’. The other
approach was to employ local managers, regarded by all the companies as the most

Table 4 The reasons for learning and diffusion of UK management practices

Organization Reasons for learning and diffusion of UK management practices
Finc1 Move from domestic-related business to international business, need to access
the UK markets, reform of parent companies which were losing their
monopoly position and move to marketed-oriented business.
Finc2 The requirement of set up new international business, nation-wide reform in
this area and need of new knowledge in this area. Strong financial support
from the parent company at the beginning.
Finc3 Access to UK markets and also to provide the experience for the parent
companies for this area. No short-term profit targets.
Finc4 Manage local organization is a new task for this company and has to learn for
the parent company, strong financial support form the parent company, a lot
of autonomy in management and business.
Trad1 Both the subsidiaries and home firms face the competitive pressure from both
home and international market since lose the monopoly position in this area
and need to know the rule of game in this area.
Trad2 Start a new business, no experience in this area and need experience from the
UK. Long-term financial support from home firm.
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Zhang and Edwards: Diffusing ‘best practice’ in Chinese multinationals 2155

efficient way to bring UK practice into the subsidiaries. The subsidiaries (Finc1 and
Trad1) with a long history in the UK who had previously exclusively employed Chinese
managers were permitted to place locals in managerial positions. The newly formed
subsidiaries (Finc2, Finc4 and Trad2) recruited local managers when they set up, and
Finc2 and Finc4 appointed UK CEOs. The use of UK managers is extensive: in four of
the six subsidiaries all middle managers are locals and 70 per cent in the remaining two
with UK managers at the top levels in four subsidiaries (see Table 5 for the details).
The top expatriate managers all claimed that local managers were very important to
the internationalization process of the companies. They were dependent on their
expertise to do business, and to train and mentor Chinese managers As a result, most
local UK managers have significant responsibilities within the companies: over 90 per
cent of the those interviewed said that they have higher and more important positions
than in the UK companies they worked before, and 85 per cent felt that they have more
responsibility than those at a similar level in UK companies. The use of local managers,
therefore, was central to the localization process.
Localization was also assisted by the activities of Finc1 and Trad1, which had a longer
experience of operating in the UK. They took on a mentoring role in relation to the newly
established subsidiaries (Finc2, Finc3, Trad2 and Trad3), providing models of
management and advice on local practice. External consultants were also used by four
of the six (Finc2, Finc3, Trad1 and Trad2) to assist in their transfer of UK practice,
especially in the area of HRM. Their expertise was heavily used in the set up stages.
The author’s access to one company (Finc2) was on the condition that she should provide
expert advice on UK HRM practice. The author not only helped them to evaluate their
appraisal system, but also provided training courses for the managers and staff. Two
companies (Trad1 and Finc1) also invested substantially in external management
training programmes. In this way the transfer of local practice into the subsidiaries was
progressed (see Table 6 for the summary).

The impact at the subsidiary’s level

The evidence above shows that the six companies have a clear motivation to learn UK
practices and that they had taken a number of measures that would facilitate learning in
the subsidiaries. What, then, is the outcome of these processes: to what extent has UK
practice been adopted? Senior general and HR managers were asked about company
policy in relation to management systems and practice. UK middle managers and key
staff were asked for their opinion on the extent to which the subsidiaries’ practices are
similar or different to that of local companies, and Chinese expatriates were also asked to
assess the extent to which the subsidiaries’ practice is similar or different to that of the
parent company.
Responses from all levels of management and the key members of staff interviewed
confirmed that there had been a significant degree of transfer of UK practice into these
subsidiaries. The senior managers all indicated that UK policies and practices are
extensively used in their subsidiary. The majority of middle managers (80 per cent) also
think UK HRM practice is widely applied. In response to the question ‘Is your company
similar or different from your previous company in terms of management practice?’, 75
per cent of local managers said their subsidiary was similar to a UK company, while all
the expatriates said that their subsidiary was not like a firm at home. The findings,
therefore, revealed a significant implementation of UK practice in the six subsidiaries
(see Table 7 for the summary).
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2156 The International Journal of Human Resource Management

Table 5 The proportions of local staff employed at the top/middle management level
Proportions of local managers Finc1 (%) Finc2 Finc3 Finc4 Trad1 Trad2
(%) (%) (%) (%) (%)
Top 0 25 0 0 65 25
Middle 70 100 100 100 100 70
Total numbers 57 11 22 7 9 7

It can be seen that a market-led managerial structure has been established in all six
subsidiaries. Business is no longer centrally planned by the parent companies and
subsidiary managers have some autonomy. Three of the six are able to undertake their
own business planning without interference from the parent company. Moreover, the
chief executive is responsible for both business and personnel in all six subsidiaries, with
a single line of management control replacing the traditional Chinese collective decision-
making system. All have moved towards flatter organizational structures with some
delegation to line managers, and there are clear descriptions of jobs and responsibilities.
The HR function has expanded beyond the very limited role typically found in Chinese
companies, and was developing from purely personnel administration to take on some
strategic aspects. Line managers are also involved in some HR activities. Market-led
recruitment, labour contracts and remuneration systems are emerging. The traditional
Chinese ‘job for life’ and ‘egalitarianism’ payment system is no longer dominant. Five
(except Finc1) of the six subsidiaries recruited largely from the local labour market and
used employment contracts for all local employees. The subsidiaries have also adopted
local remuneration systems and criteria for the salary and benefits of local staff.
Moreover, formal systems of appraisal have been introduced in all but one. Three of them

Table 6 Transfer mechanisms in the six companies

Organization Approaches to transfer UK practices
Finc1 Using local managers at the middle level
Training by external expertise
Using external consultants
Finc2 Using local managers at both top and middle level
Training by external expertise
Formal training programmes
UK consultants
Learning from other UK subsidiaries
Finc3 Using local managers at top and middle level
Learning from training programmes and from UK expertise
Learning from other UK subsidiaries
Finc4 Retaining local organizational structure and process
Using local staff at all levels
Learning by working with local managers
Trad1 Using local managers at middle level
Training and assessment by external expertise
External and internal training programmes
Trad2 Using local managers at the middle level
Learning by competition
Learning from professional conference and meetings
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Table 7 The responses to overall characteristics of HRM system in the six companies (%)
Finc1 Finc2 Trad1 Trad2 Finc3 Finc4 Mean

Zhang and Edwards: Diffusing ‘best practice’ in Chinese multinationals 2157

E L E L E L E L E L E L
The extent to which market-led management system has been established
Totally 0 0 0 0 0 0 0 0 0 0 0 0 0
Largely 60 40 100 90 100 70 100 90 100 95 100 80 76
Partly 40 60 0 10 0 30 0 10 0 5 0 20 24
None 0 0 0 0 0 0 0 0 0 0 0 0 0
Total no. 12 19 5 31 6 27 10 19 2 24 5 21 181
Which process has been followed in decision making
Dual-line 0 0 0 0 0 0 0 0 0 0 0 0 0
Single-line 0 0 0 35 0 20 80 76 0 87 0 25 26
Mix 100 100 100 65 100 80 20 24 100 13 100 75 74
Total no. 12 19 5 31 6 27 10 19 2 24 5 21 181
Compare to local or parent company, decision making is Em Lm
Faster 100 0 100 0 100 0 100 26 100 0 100 0 100 5
Similar 0 30 0 55 0 41 0 64 0 50 100 43 0 45
Slower 0 70 0 45 0 59 0 10 0 50 0 57 0 50
Total no. 12 19 5 31 6 27 10 19 2 24 5 21 40 141
Compared to local or home, manager responsibility in your company is Em Lm
More 100 32 100 31 100 35 100 40 100 10 100 24 100 28
Similar 0 48 0 59 0 46 0 50 0 90 0 76 0 64
Less 0 20 0 10 0 19 0 10 0 0 0 0 0 8
Total no. 12 19 5 31 6 27 10 19 2 24 5 21 40 141
Main HRM function in your company is
Strategic 0 0 20 10 33 5 0 30 0 0 0 0 6
Personnel 100 100 80 90 67 95 100 70 100 100 100 100 94
Control 0 0 0 0 0 0 0 0 0 0 0 0 0
Total no. 12 19 5 31 6 27 10 19 2 24 5 21 181

Notes: * Em: the mean of expatriates who compare to the home firm, *Lm: the mean of local respondents who compare to the local firm.
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(Trad1, Trad2 and Finc2) use the system for performance improvement, two (Trad1 and
Finc2) for training purposes, and one (Trad2) for performance-related pay. The majority
of local respondents interviewed think that work organization and employee relations are
similar to other UK organizations, and the expatriates feel overwhelmingly that it is
substantially different from Chinese practice.
While there is a significant degree of localization, this varied across the subsidiaries
and over time. The most heavily localized in terms of managers and practice, notably
those with a UK chief executive (Finc2 and Trad2) found that large differences in
organizational structure, culture and managerial values made communication and
understanding between HQ and subsidiaries near impossible, particularly when the
business met some crisis. Eventually, the UK chief executives had to resign. Moreover,
there were limitations in the extent to which practice was localized. Some UK practices
conflict with the Chinese culture of egalitarianism, such as performance related pay, and
were not used in Finc1 and Trad1. There was also a degree of innovation in terms of the
emergence of hybrid systems. Of particular interest is the ‘UK management system
mixed with Chinese management style’ developed in Trad1, which constitutes UK
performance and objective-led work organization combined with Chinese ‘harmonious
relations’.

Cross-organizational learning activities: characteristics and mechanisms

It has been hypothesized that Chinese MNCs would diffuse UK practice to home firms or
other subsidiaries as a way of speeding up their internationalization process. The study
found that a wide range of cross-organizational learning activities with this purpose were
taking place in the six (see Table 8).
All six take home firm managers as trainees, with UK managers acting as supervisors
and mentors, passing on knowledge and experience. In four companies (Finc1, Finc2,
Trad1 and Trad2), the home firm trainees are also sent on external training courses, and
given support for study to gain professional and educational qualifications such as the
MBA, and Doctorates in Business Administration. Four subsidiaries also provide formal
training programmes for home managers. One (Finc1) has its own training centre and
uses UK experts to run training courses lasting from one month to a year, and over 800
managers from the parent company and other subsidiaries have been trained so far. Most
trainees are in senior managerial positions in the home firm, and 80 per cent of the
top managers of the parent company and main branches have been trained at the centre.
The training courses are being extended to the departmental heads of main subsidiaries
and branches.
The subsidiaries send UK managers to the parent companies to introduce new practice
and train staff in their implementation. To help them to establish new systems and to
share their experience and expertise, 90 per cent of departmental managers in Trad1 have
visited equivalent departments in the parent company and other subsidiaries. Several
times a year, the UK manager in charge of the programme visits the parent company to
train branch managers. The success of the exercise is such that his role has changed from
one of helping them to set up the system and training the Chinese staff, to making regular
checks to ensure they work correctly. These companies also send information about UK
management practices to other international subsidiaries, as the managerial structure and
system of work organization in the UK subsidiaries are regarded as models for new
subsidiaries. For example, details of the training courses run for the subsidiary managers
in Finc2 were reported to the HQ and then disseminated to the other subsidiaries.
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Zhang and Edwards: Diffusing ‘best practice’ in Chinese multinationals 2159

Table 8 Cross-organizational learning activities in the six companies

Finc1 Finc2 Finc3 Finc4 Trad1 Trad2
Training in the subsidiary Y Y Y Y Y Y
Formal training courses Y N N N Y N
Sending local staff to home firm N N N N Y N
Sending managers or information to other Y Y N N Y Y
subsidiaries
Formal management meetings Y Y N N Y N
Management conferences Y N N N N Y
Informal visits/meetings Y Y Y Y Y Y

Notes: Y: yes; N: no.

There is significant direct lateral diffusion in addition to that channelled via the centre.
Such diffusion activity takes place through a network of expatriates within the UK
subsidiaries. As the six companies are state-owned, the expatriates meet at events
arranged by the Chinese government in the UK. A network of all the top expatriates has
developed from this regular contact. The network is informal, but they share a common
interest in the fact that they are government officials and their performance is assessed in
comparison with each other. The network provides a channel to obtain information,
including that on ‘best practice’ in their sector. For example, when the appraisal systems
were revised and training carried out for one company, its details were passed to all the
executives of other companies in the network.
A major difference between the Chinese MNCs and those from Western countries is
that their dissemination activities are not confined to the company and they play an
educational role in the home country. In addition to hosting managers from their own
companies, all six regularly accepted visitors from the Chinese government and
managers of Chinese firms, and they provide an introduction to UK management practice
and experience, as well as explaining the operation of the subsidiary. Even the company
(Finc2) with the shortest operating experience in the UK engages in diffusion activities
which reach beyond the MNC to the wider Chinese business community. They organized
and contributed to a series of conferences on financial business and management for the
Chinese financial sector. These were not only used to disseminate practice developed in
the subsidiaries but also UK ‘best practice’ in general.
As a whole, it can be seen that the transfer of information between the parent
companies and subsidiaries involves a range of activities, often facilitated by personnel
mobility. In contrast to the activities found in Western firms there was a very strong
emphasis on management training and development. Furthermore, local managers
employed by the subsidiaries are key actors in these diffusion activities. They are vital
sources of information and are used as trainers, mentors and supervisors. They attend
and speak at the conferences to share information and knowledge about UK business and
management with Chinese colleagues. The MNC head office is also critical to
the diffusion activities. Their central position and control of subsidiaries assist the
acquisition and transfer of knowledge. In addition to organizing and supporting
the activities described above, they arrange visits to the UK subsidiaries and meetings of
their subsidiary and domestic managers in order to diffuse the ‘best practices’ they have
captured from the UK. For example, details of Trad1’s innovative Western/Chinese
management model were introduced by its parent company through management
meetings with accounts in Chinese newspapers supplied by HQ spreading their
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2160 The International Journal of Human Resource Management

experience nationally. Thus there is significant evidence of diffusion using a range of
methods. The direct beneficiaries are primarily the parent company and the other
subsidiaries, but there are also indications of a wider diffusion process spreading beyond
the home firm to the government and other state-owned companies as well as to the
Chinese business community at large.

The impact at MNCs’ level

Despite substantial reverse diffusion activity, the extent to which it impacts on
management practice in the MNCs as a whole is not as great as had been expected.
The research found some instances where UK practice has been adopted, and the home
firm managers interviewed acknowledged the subsidiaries’ role in assisting with the
introduction of market-oriented management systems, especially at the earlier stage of
internationalization. For example, HRM practices such as competency-selection
processes, performance related pay, performance appraisal, training and development
have been adopted in the HQs of Trad1 and Finc2. The parent company of Trad1
introduced the ISO 9000 quality control system to over 600 subsidiaries with the
assistance of UK managers, and is the first Chinese company to be awarded this
international quality standard. The parent company of Finc1 and Finc3 also introduced
UK work organization systems and methods of performance management. The new
overseas subsidiaries, set up by the HQ of Finc2, have copied the business structure and
system of work organization from the UK subsidiary, especially that relating to
customer-orientation, performance assessment and work organization. These practices
were also applied in two branches of the home firm by the managing directors who
trained in Finc3 and who had been promoted on the basis of their UK experience.
However, there is less impact on the home firms in other areas. For instance, recruitment
and selection techniques used in the UK have been adopted by most companies, but only
as a developmental exercise. Recruitment and selection in these companies is still carried
out in the traditional way based on guanxi. There have been some changes in the
management of staff overseas – expatriates’ remuneration now takes into account
international market competition in Finc2 and Finc3. There are also cross-culture
training programmes designed for Chinese expatriates in the subsidiaries of Trad1and
Finc4, but these are not run in the parent company. Generally, however, the management
of international staff still follows the traditional centrally controlled system.
Despite the amount and extent of reverse diffusion, and its strategic priority as part of
the Chinese State’s internationalization policy, this initial research suggests that it has
made a variable impact on the home firms. While some influence was apparent in the
firms primarily oriented towards international markets, those operating mainly at home
were less receptive. Moreover, the MNCs studied are typical of the large state-owned
enterprises in which the ‘organizational inertia’ noted by Warner (2000, 2004) and Ding
and Akhtar (2001) persists. Entrenched power positions at the top make them particularly
difficult to change. Changes in practice at the home firm are mostly limited to lower level
staff. It was also the case that the specialist expertise in the management of expatriate
staff found in the UK was not employed, confirming the findings of Shen and Edwards’
(2004) and Shen’s (2006) studies of recruitment and selection in Chinese MNCs.
As there is a number of constraints on the transfer of UK management practice, the
companies are considering a different approach to international learning. One is to
replace home managers at the top level with foreign managers. Two of the parent
companies (of Finc2 and Finc3) have recruited managers from overseas with the
intention of eradicating the current management system and networks, and developing
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Zhang and Edwards: Diffusing ‘best practice’ in Chinese multinationals 2161

a new system from the top. Another method avoids the problems of changing established
companies by allowing overseas subsidiaries to set up new branches in China. The UK
subsidiaries Finc1 and Trad2 have set up their own subsidiaries back in China. The HQ of
Finc2 is planning to exploit the Chinese government’s special policies for foreign
investment and to establish foreign branches unconstrained by the heritage of the parent
company and eventually replace the home firm in the Chinese market. In this way, the
sources of knowledge have widened to include channels other than the UK subsidiaries.
Thus while the need for ‘international borrowing’ remains, the methods for acquiring
such knowledge are expanding and changing.

Discussion and conclusion

There is a growing body of evidence demonstrating that MNCs can engage in ‘reverse
diffusion’; the transfer of practices from foreign subsidiaries back to domestic plants
(Edwards, 1998; Edwards and Ferner, 2004; Ferner and Varul, 1999), but it is not widely
used and its impact is limited. However, these conclusions are based on studies confined
to MNCs from developed countries and, at the start of this paper, we hypothesized that
the case of MNCs from less advanced economies might be different, especially when
operating in an advanced economic environment. The Chinese MNCs investigated in this
study confirm this view: engagement in reverse diffusion is a strategic priority, and UK
management practice is regarded as a source of ‘best practice’ to be absorbed and
diffused within the company. Also as hypothesized, because these companies had little
experience and expertise in international business, localization was the primary
mechanism for absorption and transfer. In addition the study reveals far greater
complexity in the process and nature of reverse diffusion in MNCs from developing
countries operating in developed countries than previous analyses have suggested. It is,
for example, much more complicated than that found in German and Swedish companies
(Ferner and Varul, 1999; Hayden and Edwards, 2001). Reverse diffusion in these
Chinese MNCs not only involves a major localization process but also wider and more
various cross-organizational activities with a heavy emphasis on management training
and competency development. In this sense, this study has supported and developed the
concept of ‘reverse diffusion’.
Nonetheless, despite significant activity, the impact of reverse diffusion on the home
firm is not as large as expected and is evolutionary in nature, rather than transformative.
Therefore, the case does not support Edwards and Ferner’s (2004) suggestion that reverse
diffusion within MNCs from co-coordinated market economies may be transformative.
Our contention that national cultures and institutions, organizational structures and
political processes both promote and limit localization and transfer but diminish impact,
are indeed borne out. The factors can be summarized at three levels in terms of the
framework we developed.

National factors
The Chinese national economic system is at an early stage in the transition process to a
market economy and managers in the subsidiaries are not seeking to diffuse practices
from their home base to the host country. In contrast, they are attempting to find and
adopt new practice from the local (UK) organizations. As earlier studies of Western
MNCs have noted, large differences in national culture and institutions act as a deterrent
to transferring home practice to foreign subsidiaries and prompt subsidiaries to localize.
These differences, however, also appear to constrain the ability to learn and the scope for
the diffusion of best practice from the local environment into subsidiaries and back to the
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2162 The International Journal of Human Resource Management

home firm. In the case of Chinese MNCs, substantial economic and cultural differences
with the UK not only hinder the adoption of local practice and but also hinder progress in
reverse diffusion. Similarly, attempts to diffuse knowledge to the wider business
community are inhibited by the lack of ‘fit’ between UK practice and the Chinese
context.

Structural factors
It has been argued by Edwards (1998) and Edwards and Ferner (2004), that particular
corporate characteristics promote reverse diffusion; such factors as integrated operations
across borders, international management structures, maturity at the international level
and a high degree of global spread create conditions in which reverse diffusion is most
likely to occur. The study found that some of these were not the major factors in this case.
A high degree of business integration and maturity at international level are not prevalent
in these Chinese firms, rather diffusion activities are mainly related to the demands and
support of the Chinese government as the owner of the firm. The highly centralized
nature of these MNCs combined with the high priority given to organizational learning
created strong channels and significant resources for the dissemination of knowledge.
Thus, with less business integration and a low degree of internationalization, diffusion
activities do still take place in most of these companies. However, the nature of the
market and business integration still play some part. More diffusion activities and greater
impact are found where the subsidiary business is similar to that of the home firm.
The degree of maturity is also a factor in some cases in that those companies that are
relatively new are more likely to concentrate on localization than on diffusion activities.

Political and competency factors

Strong financial support from the government as owner strengthened the subsidiaries’
ability to engage in the absorption of local practice, but lack of international managerial
experience and the traditional ‘guanxi’ mechanism both in HQ and the subsidiary retard
the scope of absorption. Vested interest in the status quo was difficult to overcome.
Moreover as we have seen, while there was commitment to the introduction of new
practice at HQ, the ability to implement change was severely limited. The localization
of practice in subsidiaries was heavily dependent on the employment of UK managers
and while these played a central role in the training and development of Chinese
managers, the numbers of those competent in UK practice was very small in relation to
the large SOEs. Thus these organizations lack the capability to implement the ‘best
practice’ acquired overseas. On the other hand, business success and managers’
competence were found to reduce the intervention of the parent company in subsidiary
business to a certain extent, allowing more autonomy to localize practice. Thus, there is
an interaction between structural factors and managerial factors. The importance of
agency-political processes and actors is underlined here.
There is a number of specific implications arising from this study. As far as our
knowledge of China is concerned, further research involving a larger number of
organizations in different sectors would be valuable in order to test the conclusions
drawn from this study. In particular, more fieldwork in private companies in order to
establish whether they are similar to or different from state-owned MNCs, in terms of the
national business system influences on their HRM strategic choice and practice.
The research was confined to state-owned MNCs and considerable expansion is
occurring in non-state owned companies (Hassard et al., 2004) that may be pursuing
different strategies for organizational learning.
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Zhang and Edwards: Diffusing ‘best practice’ in Chinese multinationals 2163

There are also some practical implications. The study has demonstrated the value of
reverse diffusion as a means of learning ‘best practice’ and speeding up the
internationalization of firms from less developed economies. It has also clearly identified
the factors that can promote or impede this process. These include the national
institutions and culture, managerial competency and, in particular, the stage of economic
development. MNCs from developing countries wishing to increase the potential for
reverse diffusion need to take account of these. Some aspects of organizational structural
factors, such as the nature of product markets and organizational growth methods can
also influence the incidence and extent of the transfer. Increasing the proportion of local
product markets or expanding from local brownfield sites promotes the incidence and the
extent of using local practices. Business integration with the home firm or other
subsidiaries increases the need for standardization, which can in turn promote diffusion.
Thus, if a subsidiary wants to engage in reverse diffusion, they should focus their
business on local markets. If they want to diffuse local practice throughout the company
they should increase the integration of the business with the home firm or other
subsidiaries. Furthermore, the study suggests that strong financial support and a
deliberate localization strategy can speed up the learning processes. However, in the long
term, increasing participation in local and international markets and strength in the cross-
cultural competency will promote diffusion activities more naturally and effectively.
Finally, we may conclude that this study of Chinese MNCs illustrates once again the
limitations to the spread of ‘global’ best practice.

Acknowledgements
We would like to thank Tony Edwards, Stephen Gourlay and the journal referees for
helpful comments on an earlier draft of this paper.

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