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KNOWLEDGE FLOW PATTERNS, SUBSIDIARY STRATEGIC ROLES, AND STRATEGIC CONTROL WITHIN MNCs Anil K. Gupta, College of Business and Management, The University of Maryland at College Park, College Park, Maryland 20742 V. Govindarajan, Dartmouth College ABSTRACT Viewing the multinational corporation (MNC) as a network of knowledge flows, this paper (i) conceptualizes subsidiary strategic roles in terms of high/low levels of knowledge outflow and inflow, and (ii) uses data from 359 subsidiaries of major U.S., Japanese, and European MNCs to test propositions regarding linkages between subsidiary strategic roles and the presence of specific corporate control mechanisms. INTRODUCTION Despite the increasing globalization of most industries, research on MNCs has focused far more on the question of why a domestic company becomes an MNC (Caves, 1982; Hymer, 1976) than on how MNCs manage and control their widely disparate and dispersed subsidiaries. As Porter (1986: 17) observed, "we know more about the problems of becoming a multinational than about strategies for managing an established multinational." Our knowledge of how MNCs manage their subsidiaries is constrained also by the fact that, with limited exception (Ghoshal & Nohria, 1989; Egelhoff, 1988), research in this area has focused only on broad differences across entire MNCs (e.g., Franko, 1976; Fouraker & Stopford, 1968; Prahalad & Doz, 1987) and not on variations across subsidiaries performing different strategic roles within the same MNC. Thus, while past research provides some clues regarding how the global structure of IBM might differ from that of Fujitsu, it sheds little light on how, within an IBM or a Fujitsu, corporate control over one subsidiary might differ from that over another. Conceptualizing subsidiary strategic roles in terms of different patterns of knowledge transactions between a focal subsidiary and the rest of the corporation, this paper tests propositions linking a subsidiary's strategic role to the presence of specific key corporate control mechanisms. Data were obtained directly from the presidents of 359 foreign subsidiaries of a cross-section of major US, Japanese, and European corporations. Key measures were also cross-validated with data from the corporate superiors of 80 of these subsidiary presidents. KNOWLEDGE FLOW PATTERNS AND SUBSIDIARY STRATEGIC ROLES Building on Caves (1982) and Teece (1976), Gupta & Govindarajan (1991) have argued that the multinational corporation can be viewed as a network of three types of inter-subsidiary transactions: (i) capital flows e.g., investments into or dividend repatriations from various subsidiaries, (ii) product flows e.g., intracorporate exports to or imports from various subsidiaries, and (iii) knowledge flows e.g., technology and/or skill transfer to and from various subsidiaries. While all three types of transactions might well be important, this empirical study focuses only on inter-subsidiary variations in knowledge flow patterns. Among other factors, our decision reflects the widely accepted conclusion in the economics literature that both foreign direct investment (capital flows) as well as foreign vertical integration (product flows) occur predominantly because of a desire to internalize knowledge flows (Caves, 1982; Hymer, 1976; Teece, 1976). Focusing on variations in knowledge flow patterns, Gupta & Govindarajan (1991) have further proposed that all MNC subsidiaries could be located somewhere along the following two dimensional space: (i) the extent to which a subsidiary engages in knowledge inflows from the rest of the corporation, and (ii) the extent to which the subsidiary engages in knowledge outflows to the rest of the corporation. Thus, in terms of knowledge flow patterns, four generic subsidiary roles can be identified (see Figure 1): Global Innovator (high outflow, low inflow), F^IGURE 1 Alternative Subsidiary Strategic Roles: A Knowledge-Flows Based Framework 0) t4 o O 1) .H 111 Oj -U 3 .a M O 4-> 0) V.I HO U P h O O O 4-1 4J U .H X Low GLOBAL INNOVATOR (GI) LOCAL INNOVATOR (LI) INTEGRATED PLAYER (IP) IMPLE- MENTOR (IM) Low High INFLOW of Knowledge from the Rest of the Corporation to the Focal Subsidiary 21

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KNOWLEDGE FLOW PATTERNS, SUBSIDIARY STRATEGIC ROLES,AND STRATEGIC CONTROL WITHIN MNCs

Anil K. Gupta, College of Business and Management, The University of Maryland at College Park,College Park, Maryland 20742

V. Govindarajan, Dartmouth College

ABSTRACT

Viewing the multinational corporation (MNC) as anetwork of knowledge flows, this paper (i)conceptualizes subsidiary strategic roles interms of high/low levels of knowledge outflow andinflow, and (ii) uses data from 359 subsidiariesof major U.S., Japanese, and European MNCs totest propositions regarding linkages betweensubsidiary strategic roles and the presence ofspecific corporate control mechanisms.

INTRODUCTION

Despite the increasing globalization of mostindustries, research on MNCs has focused far moreon the question of why a domestic company becomesan MNC (Caves, 1982; Hymer, 1976) than on howMNCs manage and control their widely disparateand dispersed subsidiaries. As Porter (1986: 17)observed, "we know more about the problems ofbecoming a multinational than about strategiesfor managing an established multinational."

Our knowledge of how MNCs manage theirsubsidiaries is constrained also by the factthat, with limited exception (Ghoshal & Nohria,1989; Egelhoff, 1988), research in this area hasfocused only on broad differences across entireMNCs (e.g., Franko, 1976; Fouraker & Stopford,1968; Prahalad & Doz, 1987) and not on variationsacross subsidiaries performing differentstrategic roles within the same MNC. Thus, whilepast research provides some clues regarding howthe global structure of IBM might differ fromthat of Fujitsu, it sheds little light on how,within an IBM or a Fujitsu, corporate controlover one subsidiary might differ from that overanother. Conceptualizing subsidiary strategicroles in terms of different patterns of knowledgetransactions between a focal subsidiary and therest of the corporation, this paper testspropositions linking a subsidiary's strategicrole to the presence of specific key corporatecontrol mechanisms. Data were obtained directlyfrom the presidents of 359 foreign subsidiariesof a cross-section of major US, Japanese, andEuropean corporations. Key measures were alsocross-validated with data from the corporatesuperiors of 80 of these subsidiary presidents.

KNOWLEDGE FLOW PATTERNSAND SUBSIDIARY STRATEGIC ROLES

Building on Caves (1982) and Teece (1976), Gupta

& Govindarajan (1991) have argued that themultinational corporation can be viewed as anetwork of three types of inter-subsidiarytransactions: (i) capital flows e.g., investmentsinto or dividend repatriations from varioussubsidiaries, (ii) product flows e.g.,intracorporate exports to or imports from varioussubsidiaries, and (iii) knowledge flows e.g.,technology and/or skill transfer to and fromvarious subsidiaries. While all three types oftransactions might well be important, thisempirical study focuses only on inter-subsidiaryvariations in knowledge flow patterns. Amongother factors, our decision reflects the widelyaccepted conclusion in the economics literaturethat both foreign direct investment (capitalflows) as well as foreign vertical integration(product flows) occur predominantly because of adesire to internalize knowledge flows (Caves,1982; Hymer, 1976; Teece, 1976).

Focusing on variations in knowledge flowpatterns, Gupta & Govindarajan (1991) havefurther proposed that all MNC subsidiaries couldbe located somewhere along the following twodimensional space: (i) the extent to which asubsidiary engages in knowledge inflows from therest of the corporation, and (ii) the extent towhich the subsidiary engages in knowledgeoutflows to the rest of the corporation. Thus, interms of knowledge flow patterns, four genericsubsidiary roles can be identified (see Figure1): Global Innovator (high outflow, low inflow),

F̂ IGURE 1Alternative Subsidiary Strategic Roles:

A Knowledge-Flows Based Framework

0)

t4 oO 1) .H

111 Oj -U3 .a MO 4-> 0) V.I

HO UP h O OO 4-1 4J U

.HX

Low

GLOBALINNOVATOR(GI)

LOCALINNOVATOR(LI)

INTEGRATEDPLAYER(IP)

IMPLE-MENTOR(IM)

Low High

INFLOW of Knowledgefrom the Rest of theCorporation to the FocalSubsidiary

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Integrated Plaver (high outflow, high inflow),Implementor (low outflow, high inflow), and LocalInnovator (low outflow, low inflow).

In a Global Innovator (GI) role, the subsidiaryserves as the fountainhead of knowledge for otherunits. This role has traditionally been playedonly by the domestic units of export-orientedMNCs. However, as technological gaps amongcountries have declined, some foreignsubsidiaries have begun turning into majorknowledge creators for the entire corporation(Harrigan, 1984). The Integrated Player (IP) rolealso implies a responsibility for creatingknowledge that can be utilized by othersubsidiaries. However, the IP and the GI rolesdiffer in that an IP subsidiary is not self-sufficient in the fulfilment of its own knowledgeneeds. IBM's Japanese subsidiary represents agood example of a unit with an IP role. TheImplementor (IM) role is one where the subsidiaryengages in little knowledge creation of its ownand relies heavily on knowledge inflows fromsister subsidiaries. 3M Corporation's subsidiaryin a small country such as Finland wouldrepresent a good example of a foreign unit withan IM role. Finally, the Local Innovator (LI)role implies that the subsidiary has almostcomplete local responsibility for the creation ofrelevant know-how in all key functional areas;however, this knowledge is seen as tooideosyncratic to be of much competitive use inother countries. Traditional "multidomestic" MNCshave consisted almost entirely of subsidiarieswith Local Innovator roles.

The rest of this paper advances and providesempirical tests of theoretical propositionslinking these four strategic roles to six keycorporate control mechanisms. In order to mapadequately the richness and complexity of thetask facing managers in MNGs, we interpret theterm "control mechanisms" broadly and use it torepresent not just the formal control system butalso other powerful formal and informalorganizational mechanisms generally available tocorporate headquarters for shaping the decisionsand actions of subsidiaries.

HYPOTHESES

Our hypotheses linking subsidiary strategic rolesto intra-corporate control mechanisms are basedon the following core arguments: (1) Differentsubsidiary strategic roles imply systematicdifferences in the task environments facingsubsidiary managers. (2) Different taskenvironments require different behaviors on thepart of subsidiary managers. (3) Differentcontrol mechanisms induce and support differentkinds of managerial behaviors. (4) Therefore,assuming norms of administrative rationality(Thompson, 1967), we can expect systematicassociations between subsidiary strategiccontexts and the emergence of specific corporatecontrol mechanisms. In particular, in this study,we focus on differences in corporate controlmechanisms associated with differences in (i) theextent of lateral interdependence between a focaland peer subsidiaries and (ii) the need for

autonomous initiative on the part of theexecutives managing the subsidiaries.

Strategic Roles andLateral Interdependence

As Gupta & Govindarajan (1991) have suggested, ondefinitional grounds, the extent of lateralinterdependence between a focal and peersubsidiaries can be expected to a positivefunction of the extent of both knowledge inflowand knowledge outflow. In other words, Che extentof lateral interdependence with peer subsidiariescan be expected to be highest for IntegratedPlayers (high outflow-high inflow), intermediatefor Global Innovators (high outflow-low inflow)and Impletnentors (low outflow-high inflow), andlowest for Local Innovators (low outflow-lowinflow).

Though not in the context of managing foreignsubsidiaries, strategy and organizationalresearch has focused on the management ofinterdependence at a more general level. Based onan extensive review of this literature, thefollowing emerge as the some of the keyadministrative mechanisms that can be used toeffectively manage interdependence among peersubsidiaries within an MNC: (a) formalintegrative mechanisms (Galbraith, 1973; Nadler& Tushman, 1987); (b) communication linkages(Allen & Cohen, 1969; Tushman, 1979); and (c)intra-corporate socialization of subsidiarymanaers (Van Maanen & Schein, 1979; Edstrom &Galbraith, 1977). Based on direct one-to-onelinkages between these organizational variablesand the management of lateral interdependence,the following are some of the specific hypothesesadvanced by Gupta & Govindarajan (1991); thesehypotheses will be tested empirically in thepresent study:

Hypothesis 1: Under norms of administrativerationality, the use of lateral inter-subsidiaryintegrative mechanisms will vary acrosssubsidiary strategic contexts; specifically, thecomplexity of such mechanisms will be high forIntegrated Players, medium for Global Innovatorsand Implementors, and low for Local Innovators.

Hvpothesis 2: Under norms of administrativerationality, the intensity of communicationbetween a focal subsidiary and the rest of thecorporation will vary across subsidiary strategiccontexts; specifically, it will be high forIntegrated Players, medium for Global Innovatorsand Implementors, and low for Local Innovators.

Hvpothesis 3: Under norms of administrativerationality, the global corporate socializationof a subsidiary's top managers will vary acrosssubsidiary strategic contexts; specifically, itwill be high for Integrated Players, medium forGlobal Innovators and Implementors and low forLocal Innovators.

Strategic Roles andNeed for Autonomous Initiative

The greater the magnitude and scope of knowledgecreation expected from a subsidiary, the greatershould be the need for the exercise of autonomous

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initiative by the subsidiary. Thus, ondefinitional grounds, expected differences in theneed for autonomous initiative can be premised asfollows: The need for autonomous initiative willbe highest for Global Innovators, intermediatefor Integrated Players and Local Innovators, andlowest for Implementors.

Gupta & Govindarajan (1991) have further arguedthat, from a corporate control perspective,relevant control mechanisms would be those whichallow for a differentiation in the extent towhich subsidiary managers are intrinsicallypredisposed to taking initiative, are given thelattitude for the exercise of initiative, and arerewarded for doing so. In this context, anexamination of the organization theory literatureyields the following as the variables ofparticular interest: (a) the subsidiary head'slocus of control (Rotter, 1955) - a determinantof predisposition to taking initiative, (b)corporate-subsidiary decentralization (Ford &Slocum, 1977) - a determinant of the availablelattitude for autonomous action, and (c) size ofbonus relative to salary (Galbraith & Nathanson,1978; Salter, 1973) - a determinant of thepotential reward associated with the exercise ofinitiative. Based on a theory-based one-to-onelinkage between these organizational mechanismsand the fostering of autonomous initiative, thefollowing are some of the hypotheses advanced byGupta & Govindarajan (1991) which will beempirically tested in the present study:

Hypothesis 4: Under norms of administrativerationality, managers' locus of control will varyacross subsidiary strategic contexts;specifically, managers in charge of GlobalInnovators will be high internals, those incharge of Integrated Players and Local Innovatorswill be medium internals, and those in charge ofImplementors will be low internals.

Hypothesis 5: Under norms of administrativerationality, the degree of corporate-subsidiarydecentralization will vary across subsidiarystrategic contexts; specifically, it will be highfor Global Innovators, medium for IntegratedPlayers and Local Innovators, and low forImplementors.

Hypothesis 5: Under norms of administrativerationality, the size of bonus relative to salarywill vary across subsidiary strategic contexts;specifically, it will be high for GlobalInnovators, medium for Integrated Players andLocal Innovators, and low for Implementors.

METHOD

Data were collected through a pilot-testedquestionnaire survey of the -heads (variouslytitled presidents, managing directors, or generalmanagers) of 359 foreign subsidiaries of majormultinational firms headquartered in the U.S. (19MNCs), Japan (45 MNCs), and Europe (15 Britishand Scandinavian MNCs). The number ofsubsidiaries from each of these three regionalgroups of MNCs in the total sample is 105, 111,

and 143 respectively. Every MNC in the sample hadsales exceeding U.S. $1 billion and the number ofemployees per subsidairy averaged 959. In overallterms, participation in this study was soughtfrom the presidents of 997 subsidiaries. Thus,the final sample of 359 represents a responserate of 35%. By geographical region, the responserates were 25% for subsidiaries of U.S.headquartered MNCs, 41% for Japanese MNCs, and46% for European MNCs.

Measures

Details pertaining to how the organizationalvariables (lateral integrative mechanisms,intensity of communication, corporatesocialization, locus of control,decentralization, and size of bonus relative tosalary) were measured are available from theauthors. Note that intensity of communication wasmeasured separately for corporate-subsidiary andinter-subsidiary communication. In all cases, weused standard well-established instruments withminor changes in wording to adapt the instrumentto the multinational context. Given below aredetails pertaining to how the key variable -i.e., classification of subsidiaries in terms ofstrategic roles based on patterns of knowledgeinflow and outflow - was measured.

Each subsidiary head was asked to complete anine-item instrument for each of four knowledgeflow contexts: (1) outflow of knowledge andskills from the focal subsidiary to the parentcorporation, (2) outflow of knowledge and skillsfrom the focal to peer subsidiaries, (3) inflowof knowledge and skills from the parentcorporation to the focal subsidiary, and (4)inflow of knowledge and skills from peersubsidiaries to the focal one. The nine itemspertained to the following different types ofknowledge and skills that might be exchangedamong various units: (1) market data oncustomers, (2) market data on competitors, (3)product designs, (4) process designs, (5)marketing know-how, (6) distribution know-how,(7) packaging design/technology, (8) purchasingknow-how, and (9) management systems andpractices. For each of the 35 items, therespondents were asked to indicate on a Likert-type 7-point scale (ranging from "not at all" to"a very great deal") the extent of knowledge flowin which the focal subsidiary is engaged.

Responses were first averaged across the nineitems for each type of knowledge flow context(Cronbach alphas equalled or exceeded .90 in allfour cases). Then, the two types of knowledgeoutflow measures (to the parent and to peersubsidiaries) were combined to yield a compositemeasure of knowledge outflow from the subsidiary.Similarly, the two types of knowledge inflowmeasures (from the parent and from peersubsidiaries) were combined to yield a compositemeasure of knowledge inflow into the subsidiary.Finally, median splits along these two compositemeasures were used to identify the knowledge-flowbased strategic role that a particular subsidiarycan be said to be playing within its parent MNCsglobal network of subsidiaries.

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To test for construct validity, the respondentswere also asked to indicate, on a separatequestion, which one of four mini-paragraph lengthstatements best described their subsidiary'sstrategic context over the recent past. The fourstatements were titled: "primarily a provider ofknowledge and skills," "primarily a receiver ofknowledge and skills," "neither a provider nor areceiver of knowledge and skills," and "both aprovider and a receiver of knowledge and skills."A Chi-square test across the two classificationschemes rejected, at p<.0001, the possibilitythat the two classification approaches weredifferent. As an additional check for validity,for 80 subsidiaries in the sample, we were alsoable to get data on subsidiary knowledge flowsfrom the immediate corporate superiors of theresponding subsidiary presidents. For eachsubsidiary, these superiors completed an 18-itemmeasure (9 pertaining to knowledge outflows fromand 9 pertaining to knowledge inflows into thesubsidiary). For these 80 subsidiaries, thecomposite knowledge outflow and inflow measuresfrom corporate superiors correlate positively (atp<.05) with the corresponding outflow and inflowmeasures provided by the subsidiary presidents.

For the total sample, the final distribution ofsubsidiaries across the four strategic roles wasas follows: 64 Global Innovators, 114 IntegratedPlayers, 63 Implementors, and 111 LocalInnovators. It should be noted that the mediansplit approach adopted by us to attribute variousstrategic roles to specific subsidiaries forcesus to recognize 50% of all subsidiaries as eitherGlobal Innovators or Integrated Players. We wouldspeculate that, in reality, the proportion of"true" Global Innovators and "true" IntegratedPlayers is likely to be lower; thus, to theextent that our approach might have treated some

TABLE 1Zero-Order Correlation Coefficients

"true" Local Innovators and/or "true"Implementors as Global Innovators or IntegratedPlayers, there is likely to be some "noise" inthe results. Since this would reduce thelikelihood of finding significant differencesacross cells, it should render the tests reportedin this paper as somewhat conservative.

RESULTS

All variables were standardized prior to testingthe hypotheses. Table 1 gives zero ordercorrelations among the seven organizationalvariables of interest (note that, as discussedearlier, intensity of communication was measuredseparately for corporate-subsidiary communicationand inter-subsidiary communication). As can beseen, none of the correlations is so high as tosuggest redundancy among the selectedorganizational variables.

Table 2 contains the results of ANOVA testsconducted to check for differences in the meanvalues of the organizational variables across thefour subgroups of subsidiaries, each subgrouppursuing a different st:rategic role within theMNC context. Overall, it should be noted that,for six of the seven organizational variables,there are significant inter-group differences;significant inter-group differences were not

1.

2.

3.

4.

5.

6.

7.

(N

LateralIntegn.

Corp-SubsCommun.

Inter-SubsCommun.

CorporateSocializn.

Locus ofControl

Decen-tralizn.

Bonus toSalarv Ratio

=1,

.07

***.24

**.13

.01

.04

.07

359 subsidiaries)2

***.35

-.06

***.29

**.13

**-.13

3

-.08

**.12

.00

-.07

4

***-.28

.01

**.14

5

*.09

**-.23

6

-.03

* one-tail p < .05** one-tail p < .01*** one-tail p < .001

found only in the case of corporate-subsidiarydecentralization. These results provide strongreinforcement to the emerging notion of MNCs asnetworks of differentiated subsidiaries (Bartlett

TABLE 2Differentiation in Control Mechanisms

Across Strategic Roles

GI

Mean values AcrossSubsidiary Role.s'

Cell N •=IP114

IM63

LI-LU.

ANOVA:F-Value

1. Lateral -.07 .40 .00 -.40 13.36Integn.

****2. Corp-Subs .19 .29 -.13 -.27 7.65

Commun.****

3. Inter-Subs .06 .32 -.03 -.34 9.05Commun.

**4. Corporate -.35 .08 .27 -.04 4.60

Socializn.*

5. Locus of .07 .19 -.27 .00 3.12Control

6. Decen- .04 -.03 -.10 .08 .54tralizn.

**7. Bonus to -.21 -.17 .13 .28 4.43

Salarv Ratio'Legend: GI=Global Innovator; IP=Integrated

Player; IM-Iiiplementor; LI=Local Innovator.Note: All variables were standardized (mean-0,

sd=l) before conducting these tests* p < .05** p < .01

*** p < .001

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& Ghoshal, 1989; Ghoshal & Nohria, 1989). REFERENCES

In terms of the directionality of differences,the results pertaining to lateral integration andintensity of corporate-subsidiary as well asinter-subsidiary communication correspond fullywith the predictions of HI and H2. However, theresults pertaining to corporate socialization arequite different from the predictions in H3. Asper H3, Integrated Players and Local Innovatorsdo have an intermediate level of corporatesocialization. However, Implementors have thehighest and Global Innovators the lowest levelsof corporate socialization - exactly the oppositeof our predictions. One interpretation of thesefindings would be that the presidents of GlobalInnovators are mavericks within the corporatesystem who push for and adopt such a strategicrole for their subsidiaries largely on their ownand not because of a close social and/or valueintegration with corporate executives; in fact,our results suggest that a high degree ofcorporate socialization is associated with theImplementor role i.e., one requiring the leastdegree of new knowledge creation within the SBU.Thus, just as the heads of Global Innovatorsappear to be corporate "mavericks," the heads ofImplementors appear to be corporate "clones."

Results pertaining to locus of control aregenerally consistent with Hypothesis 4. However,as indicated earlier. Hypothesis 5 pertaining todecentralization is not supported at all. Oneinterpretation would be that, because GlobalInnovators affect the performance of severalsubsidiaries, corporate executives deem itessential that they get involved in the decisionsand actions of such subsidiaries, even thoughhigh decentralization, in general, fostersgreater initiative-taking on the part of thesubsidiary management. If true, thisinterpretation would also suggest the possibleexistence of considerable ambivalence on the partof corporate executives over the question ofexactly how Global Innovators might be managedwithin the global network. The case for thisspeculated ambivalence is supported also by theresults pertaining to H6. Once again, contrary topredictions, Global Innovators have the leastamount of potential bonus relative to basicsalary. We interpret this finding as suggestingthat corporate executives seem to believe thatthe Global Innovator role needs to be shared andperformed by a subsidiary jointly with corporateheadquarters rather than on the subsidiary's ownautonomous initiative. If true, this speculationalso suggests that there possibly exists a highdegree of conflict between the presidents ofGlobal Innovators and their corporate superiors.

CONCLUSIONS

Data from the presidents of 359 foreignsubsidiaries of leading U.S., Japanese, andEuropean MNCs strongly reinforce the notion ofdifferentiated subsidiary strategic roles anddifferentiated control systems within MNCs. Theresults also suggest that some subsidiarystrategic roles - notably, the Global Innovatorrole - pose major organizational and controldilemmas for the executives involved.

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