Knowledge transfer from reverse innovation in global value chains: A signaling theory perspective

Abstract

Reverse innovation, originating in developing countries, is critical to global value chains (GVCs) of multinational corporations (MNCs). However, the impact of knowledge transfer from reverse innovation (KTRI) on MNC returns in the GVCs receives scant attention. Using survey data from 121 subsidiaries in China and applying signaling theory, we examine how knowledge transfer through reverse innovation creates value for the MNCs while inducing perceived adaptation risk, which in turn affects parent company's benefits. We find that KTRI has a positive effect on the perceived value and perceived adaptation risk of reverse innovation. Perceived value increases the benefits to the parent company, while perceived adaptation risk has no significant effect on these benefits. Our study also finds parent company involvement and subsidiary heterogeneity moderate knowledge transfer mechanisms.