The interplay of knowledge distance, linguistic distance, and industry relatedness in foreign divestment

This paper extends our understanding of the link between foreign divestment and knowledge distance between the home and host countries. We consider how knowledge distance affects the MNEs decision to divest their foreign operations. We theorize and find evidence that, given the embedded nature of knowledge in a given context, MNEs aiming to source knowledge in a foreign country characterised by a high level of knowledge distance will be less likely to divest their operations in these countries. Elaborating on a firm's ability to leverage knowledge distance, we also consider how linguistic distance positively moderates the relationship between knowledge distance and foreign divestment. Results from a comprehensive panel of 1,718 foreign subsidiaries made by 255 manufacturing Finnish MNEs operating in 70 host countries reveal robust support for these arguments.