Language barriers in multinational companies and knowledge transfers

Many countries routinely offer subsidies to attract multinational companies (MNCs), hoping to generate positive spillovers. A distinctive feature of MNC affiliates’ organizational structure is a three-tier hierarchy: foreign managers (FMs) supervise domestic middle managers (DMs) who supervise domestic production workers. Language barriers between FMs and DMs could impede transfers of management knowledge and reduce beneficial spillovers from foreign investment. We develop a model in which DMs learn management skills by communicating with FMs.