The collapse of the communist system in the late 1980s gave the Central Eastern European Countries (CEECs) the opportunity to move from centrally planned economies to market-oriented economies, and ultimately to join and gain access to the European Union. This process is unique and has no historical precedent. . . .

On a micro level, local firms were characterized by low productivity of workers, low quality of products and services, lack of accountancy and particularly cost analyses, and outdated production technology and qualifications. Moreover, the socialist way of industrialization based on a concentrated heavy industry without competition, information exchange, or incentive to innovation has deeply and negatively oriented the industrial structures and the workers' attitudes.

Thanks to privatization programs and the economic openness of the CEEC's economies, foreign firms entered rapidly in new markets by acquiring local assets through brownfield, greenfield FDI, or international joint ventures. . . .

"Foreign firms have to transfer not only their own corporate values and management rules, but also the Western conception of the firm."

In spite of a good initial skill level, workers are generally lacking in autonomy and responsibility. Foreign firms have to transfer not only their own corporate values and management rules, but also the Western conception of the firm. Knowing that the habits and behavior inherited from the communist period are still in evidence, we want to stress that foreign firms need to set up specific rules to make their affiliate work and perform rapidly. This point is of major importance in a context of globalization and a knowledge-based economy. . . .

Knowledge Transfer and Transition: a Phenomenon of Interest

. . . When a firm invests in a new host country through FDI, it needs to transfer part of its knowledge. Through knowledge transfer, the parent firm spreads its intangible assets and capabilities across borders. In the case of transitional host countries, this transfer becomes context specific. Partners are not symmetric, do not rely on the same technologies and techniques, and do not share the same business practices and organizational frameworks.

To maintain Western standards, the parent firm needs to set up a specific and costly learning process. In that way, knowledge transfer relies on an active involvement of the parent firm. The parent firm behaves like a knowledge maker and the affiliate like a knowledge taker.

Knowledge Transfer Within the Affiliate: General Considerations

Foreign firms, to maintain their competitive advantage internationally, must be able to quickly replicate their embedded resources within the affiliate through knowledge transfer. . . . Traditionally, knowledge transfer from one firm to another deals with the exchange of information, techniques, know-how, technology, and skills in order to improve the resource efficiency of the affiliate and thus its profitability and competitiveness.

Knowledge transfer is a complex set of techniques and social and organizational structures. . . . This is not a linear and static process, and knowledge has a tacit dimension, which is not easy to codify and communicate. . . .

"In addition to the lack of knowledge transferability...foreign firms have to cope with specific barriers to change inherited from the communist legacy."

Identification of Problems Faced by Foreign Investors in Transition Countries

In addition to the lack of knowledge transferability, which is a generic problem, foreign firms have to cope with specific barriers to change inherited from the communist legacy.

• Motivation-related barriers. Under communism, the tendency was to focus on routines and to upgrade traditional technologies, rather than develop new ones. To improve quality and modernize structures, foreign investors have to overcome the lack of incentive to change, learn, and adapt skills, and a strong bureaucratic and hierarchical structure. . . .


• Qualification-related barriers. Local skills, in spite of a high education level, do not always fit the foreign investor's requirements and needs. . . . For example, CEECs are dramatically lacking in medium- and top-level managers or technicians able to work on modern, complex, automated machines.


• Cultural-distance-related barriers. Among the other barriers we must evoke, cultural distance can lead to conflicts and misunderstanding between partners . . . and to a lack of information circulation. . . . For example, in transitional countries, workers lack good internal communication because the former management style was strictly hierarchical.

To make their affiliates work according to Western criteria, foreign investors have to overcome these barriers. The local firm's capacity to learn and the willingness of local workers to change skills and habits are two important factors that contribute to knowledge transfer. . . . The same technology or organization that has worked successfully in the parent country (or elsewhere) may completely fail in the new host environment unless the labor force possesses adequate prerequisites to adopt, use, and maintain the new technology and practices.

The result should be the transformation of former administrative production centers into modern and performing business units relying not only on networks and interpersonal relationships, but also on market mechanisms. To bring about such a transformation, foreign investors need to set up specific and costly knowledge management rules within affiliates. Most foreign investors underestimated this point before entering CEECs' markets.

Knowledge Transfer in Transition Economies: a Specific Alchemy

In transitional economies, knowledge transfer may be seen as a social capital construction. Knowledge transferred is embedded in machines, in processes and routines, in individuals, and also in the firm's organization. . . . It may concern intangible firm-specific assets, such as patents and trademarks, marketing and financial know-how, work organization, and product innovation.

It may also concern the mood of the Western firm looking for performance: i.e., productivity. Consequently, it involves cross-cultural adaptation, organizational distance reduction, and organizational learning within the affiliate.

Transition, seen from the point of view of the foreign firms, consists in getting rid of old habits and reshaping working attitudes. Knowing that knowledge transfer first depends on what people have already learned and experienced, the parent firm needs to take an active role in enhancing learning capacity within the affiliate. Learning capabilities must be developed at the individual level, at the group level, and at the organizational level. Local workers and managers need to learn new working attitudes such as sharing knowledge, taking initiative, being creative, and acting transparently.

In short, they need to be responsible and to become actors within firms. Knowledge transfer in a transitional context has a large dimension and includes dissemination of information, introduction of new technologies and new firm functions, providing training, and building competencies. The aim is for the affiliate to replicate the parent firm's capability. . . .

Making the affiliate a value-creating unit using the intangible assets of the parent firm is not a simple task. In the next section, we will discuss how setting up specific rules to facilitate knowledge transfer paves the way for the affiliate's further development.

"Western firms entering transition countries need to mobilize organizational resources to improve efficiency and competitiveness."

How to Run an Affiliate Successfully in Transition Countries

Western firms entering transition countries need to mobilize organizational resources to improve efficiency and competitiveness. They must build, often at high and unexpected costs, a capacity for action (i.e., develop organizational learning) and mobilize expatriate managers before making a profit. The specific involvement of the foreign investor is expected to improve short-term results, such as productivity and quality of output.

Building the capacity for action
The socialist period was characterized by few incentives for productivity within firms. To set up efficient production facilities and to increase the productivity level, foreign firms must improve the qualification and skills of local workers. Two solutions may be proposed: (1) changing the pattern of wage policies to influence wages and incentives for learning skills and upgrading qualifications; and (2) building a training program to qualify workers within the affiliate.

The changing pattern of wage policy
In the socialist system, wages were the result of a social choice. The wage policy was characterized by a distribution of low wages; social consumption funds provided for the basic needs of workers. This situation was clearly a disincentive for productivity within firms. The low wage differentiation was another disincentive to acquiring and improving skills and education. . . .

For example, in Hungary, most workers have a second job in the informal sector to avoid paying high income tax. If Western firms want to keep efficient and qualified workers, they have to pay higher wages to guarantee a relatively high standard of living even after income taxes for their workers. Many Western firms offer also significant nonwage benefits. . . .

In addition, Western firms have to keep the tradition and culture of workers' participation in most of these countries. Involving employees in the new wage system design and affiliate modernization is a key factor for success. . . .

Building a training program
In the former system, the lack of a strong relationship between wages and quality/quantity of work has caused among workers a lack of motivation to improve skills and acquire education. This phenomenon could severely hamper these countries' ability to upgrade in the context of an information-based economy.

"Overcoming the socialist values is not easy. Older workers do not want to share their experience with the youngest, and often try to set up a parallel hierarchy."

A wage system that guarantees differentiation may motivate workers. But it is very difficult to enforce such a policy when the hierarchy within firms is still based on age and conformity to the former system. Overcoming the socialist values is not easy. Older workers do not want to share their experience with the youngest, and often try to set up a parallel hierarchy. One solution for a Western firm is to adopt strict hierarchical control by expatriates, to dismiss the oldest employees, and to train the youngest. . . .

The training program is important, but it is not sufficient to transfer Western practices and knowledge. Workers' internalization of Western rules and best practices is a long process [that relies] on
experience. . . .

Conclusion

In a global, knowledge-based economy, transferring foreign investor's knowledge, values, and best practices across boundaries is a necessity to survive. . . . Knowledge transfer is a social capital construction. It implies a strong involvement of managers within the affiliate, cross-cultural adaptation, organizational distance reduction, and organizational learning. This involvement is an essential condition of a successful market penetration by enhancing the affiliate's productivity, quality, and global efficiency.