The Effects of Trust and Control on Local Knowledge Acquisition of Foreign Firms in China

This paper investigates mechanisms that govern foreign firms’ acquisition of knowledge from local partners in China. Specifically, the authors examine how both trust and formal control mechanisms influence foreign firms’ acquisition of technical and managerial knowledge from local suppliers in China. The authors propose that trust has a positive effect on the acquisition of both technical and managerial knowledge, while formal control mechanisms have a positive effect on technical knowledge acquisition but not on managerial knowledge acquisition. Data collected from manufacturers in China supports most of the proposed hypotheses. While trust and formal control have positive effect on technical knowledge acquisition, trust has a stronger effect on the acquisition of technical knowledge than formal control. Moreover, the effects of trust and formal control on knowledge acquisition are moderated by foreign firms’ physical resource. Interestingly, the interaction of trust and control is negatively related to technical knowledge acquisition but not related to managerial knowledge acquisition. The findings have important implications for managers concerning the use of formal control and informal relationship building (i.e., trust). Foreign companies doing business in China must acquire and exchange knowledge with local partners in order to gain competitive advantages.