Bachelor Thesis:
The performance consequences of foreign subsidiaries top management team’s
composition
Bachelor of Science in Business Administration
Specialization: Management in the Digital Age
Universiteit van AmsterdamAuthor: Luuk Fokker
Student Number: 11685387
Email: fokkerluuk@hotmail.nl
Table of Contents
1. Introduction ... 3
2. Literature Review ... 6
2.1. Subsidiary ... 6
2.2. Top Management Team ... 7
3. Hypothese development ... 8
4. Methodology ... 11
4.1. Data collection ... 11
4.2. Variables and measurement ... 12
4.2.1. Dependent variable ... 12
4.2.2. Independent variables ... 12
4.2.3. Control variables ... 13
5. Results ... 16
5.1. Descriptive statistics and correlation matrix ... 16
5.2. Regression analysis ... 18
6. Discussion and conclusion ... 20
6.1. Contributions and implications ... 20
6.2. Limitations and future research ... 22
6.3. Conclusion ... 23
7. Literature list ... 24
Statement of Originality
This document is written by Student Luuk Fokker who declares to take full responsibility for the contents of
this document.
I declare that the text and the work presented in this document are original and that no sources other than
those mentioned in the text and its references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of completion of the work,
not for the contents.
Abstract
Over the last few decades significant research is made in understanding the relation of the performance consequence on entry mode choice. Little is known about the configuration of its top management team as a governance mechanism. The purpose of this study is to look at the performance consequence of the structure of subsidiary boards. By drawing from corporate governance research and applying it to the setting of foreign subsidiaries I am able to contribute to corporate governance research by identifying the main translation issues. I am also able to contribute to international business research by showing the value of subsidiary board structures in these types of organizational forms
1. Introduction
Over the last few decades global expansion by multinational enterprises have increasingly been prominent in the global landscape (Aulakh, 2007; Luo & Tung, 2007). This is been paralleled by the extension of research efforts in international business on what drives organisations to enter new foreign markets (London & Hart, 2004; Ramamurti & Singh, 2009). Expanding firm operations increases mobility, capital and goods. (Bairoch & Kozul-Wright, 1998). Another factor to go abroad is technology and knowledge. Firms are searching for new knowledge and new skills, as they constantly need to renew themselves to survive in the increasingly competitive markets (Jansen, Van den Bosch & Volberda, 2006). The liberalization of capital markets, the accelerating flow of information, the reduce in
transportation costs and a relative global regulatory harmonization are some of the factors that have influenced the internationalization strategies in the past few years (Dunning, 2001, 2002; Gatignon and Kimberly, 2004). Internationalization strategy refers to the production, sales, management, R&D and asset control outside the home country. It is an inevitable choice for enterprises to further enhance their overall strength after reaching a certain stage of
development. (Sun & Huang, 2014). It enables a firm to upgrade the domestic operation to transnational operation via the ‘geographical transfer’ of diversified operation (Duru & Reeb, 2002).
While the predominant literature focus on international business expansion strategy (FDI JV etc.), research today largely ignored composition of top management teams (subsidiary boards) in such organizational forms. Focus in the business literature is on the performance consequences of entry mode choices, around 100 empirical studies are published
operation firms use to enter foreign markets. Whether they should enter via contracts (with distributors, resource suppliers, franchisees and licensees) or by expanding the firm abroad (setting up manufacturing or sales subsidiaries) and in addition they should decide whether they will share the ownership of such subsidiaries (equity joint venture) or keep the full ownership (wholly owned subsidiary)(Brouthers & Hennart, 2007). Entry modes has long term consequences for the firm because most decisions are difficult to change or correct (Pedersen, Petersen, & Benito, 2002). International entry mode decisions therefore have significant performance implications (Brouthers, Brouthers, & Werner, 2003).
However limited research exists on the value of the way these types of organizations are structured. More specifically wholly or partially owned subsidiaries have a board in place that oversees the activities of the operations as well as provides service and advice to the managers and employees in these entities. Prior studies concluded that a company’s TMT influences the earnings management and the financial statements, whereby the quantity of such influence depends on the board characteristics (Cheng & Zang, 2014). Therefore, it is necessary to conduct research on the effect of TMT on the performance of the foreign subsidiary.
In order to understand the value of composition of top management teams it is possible to draw from corporate research. Corporate research been intensively investigating the performance governance boards of directors. For example, percentage of outside directors is identified as a positive relationship for the firm performance (Pearce and Zahra, 1992). This corresponds to some evidence of a U-shaped relationship between the insider-outsider ratio and performance, where boards with a very low (or high) percentage of insiders performing better than those with a more equal mix of insiders and outsiders (Wagner et al., 1998). Higher level of financial performance is associated with having more directors at the board, this became clear trough a meta-analysis of 27 studies that featured a board size variable (Dalton et al., 1999).
However, subsidiary governance can be different from corporate governance. This because certain domain translation issues might exist by applying these theories to the subsidiaries.
TMT’s of the subsidiary have to justify decisions to the parent company because the parent company is responsible for “loss prevention” and “value creation” of the subsidiary (Nohria & Ghoshal, 1994). Decision-making centralization means that the subsidiary TMT ask for permission in the strategic formulation stage (Anthony & Govindarajan, 1980). Therefore, the way the subsidiary is structured will have impact on the efficiency of the subsidiary board.
Another issue is motivating the TMT of the subsidiary (the agent) to act in the best interest of the parent company (the principal). This is caused by the characteristics of the relationship between the parent and the subsidiary firm. The risk of self-interested behaviours can influence the performance of the subsidiary (Bradley et al., 2011). Given this aspect the research done by corporate governance about TMT composition on performance outcome is not automatically applicable to foreign subsidiaries TMT. Hence, the following research question is developed:
‘What is the effect of foreign subsidiaries’ TMT composition on subsidiary performance outcomes?’
The intended contribution of this research is two-fold. First of all, predominant focus been on entry mode choices (Brouthers & Hennart, 2007). Entry mode research is about the form of operation firms use to enter foreign markets. Whether they should enter via contracts (with distributors, resource suppliers, franchisees and licensees) or by expanding the firm abroad (setting up manufacturing or sales subsidiaries) (Brouthers & Hennart, 2007). In addition they should decide whether they will share the ownership of such subsidiaries (equity joint
venture) or keep the full ownership (wholly owned subsidiary) (Brouthers & Hennart, 2007). This study addresses calls for future research to look at the performance consequences of subsidiary top management teams. Outcome of this research can help for future parent organisations in the composition of a foreign subsidiary TMT.
Furthermore, this research tries to fill the gap of domain translation issues to corporate governance. While corporate governance research has been extensive in identifying the performance consequences of corporate boards (Wagner et al., 1998; Dalton et al., 1999), prior studies concluded that a company’s TMT influences the earnings management and the financial statements, whereby the quantity of such influence depends on the board
characteristics (Cheng & Zang, 2014). The objective of my research is to shed light on the domain translation issues that might arise by applying these theories to this type of
organizational forms for instance in the context of subsidiary boards. The value of these top management teams is affected not only by firm specific characteristics but also by subsidiary characteristics as such it would be useful to investigate the extend, we can derive from existing literature in this domain.
2. Literature review 2.1 Subsidiary
A firm seeking to enter a foreign market must make an important strategic decision on which entry mode to use. The most common modes of foreign market entry are exporting, licensing, joint venture and wholly owned subsidiary (Agarwal & Ramaswami, 1992). An entry mode is appropriate when it can efficiently coordinate and combine knowledge transfer activities between the company/companies or improve capability building and upgrading in new product domains or geographic territories (Kogut, 1989). A company is expected to choose the entry mode with the highest risk-adjusted return on investment. Therefore, entry mode choice is an economic decision (Williamson, 1985). If the cost of adaption, safeguarding against opportunistic behaviour and performance monitoring are too high, the company will preferably choose an internal governance structure such as a joint venture or wholly owned subsidiary (Hill, Hwang and Kim, 1990). A subsidiary is a company that is owned or controlled by another company, which is called the holding company or parent company (Drucker, 1997). Subsidiaries serve as important sources of new knowledge, by developing new capabilities and transfer them to other subsidiaries or the parent firm (Andersson et al., 2007; Birkinshaw and Hood, 1998; Almeida and Phene, 2008). It is become increasingly important for subsidiaries to provide strategically assets to the headquarters to receive recognition and gain mandate from the parent firm (Gupta and Govindarajan, 2000).
However, it can also be in the interest of the subsidiary not to engage in transferring or developing the knowledge for the parent firm in order to maintain its position. (Birkinshaw and Hood, 1998). National differences and cultural distances between subsidiary and parent firm decrease trust and therefore ease of working together (Barkema and Vermeulen, 1998). Stockholders (the principals) have legal control of the firm, it is TMT (the agents) who has the facto control (Tosi & Gomez-Mejia, 1989). The agency theory stated that humans being risk averse and self-interested by nature (Eisenhardt, 1989). Therefore, there is a high potential to differ in outcome preference for agents and principals (Fama, 1980; Jensen & Meckling, 1976). Agents make decisions that reduce own risk at the expense of the principal risk. This agency problem also occurs with subsidiary - parent firm relationship. Subsidiaries try to improve their own performance at the expense of the firm performance. Information is distributed asymmetrically through the multinational corporation (Eisenhardt, 1989). Thus, the interest of the subsidiary TMT can differ from the interest of the parent firm.
2.2 Top management teams
Top management teams are groups at the strategic apex of a firm, which are responsible for the organization’s strategic decision making and overall firm structure, strategy and
performance. TMT and its members are important powerful factors of organizational outcomes as they are the boundary between environment and organization (Knight et al. 1999). Therefore, their actions and choices are likely to have an impact on the organization. (Cannella & Hambrick, 1993). Knight et al. (1999) believe that TMT demographics influence strategies and other outcomes. Top management teams’ compositions have been investigated in earlier studies. Child (1974) and Norburn & Birley (1988) indicate that younger TMTs show superior performance. Age is expected to be inversely related to risk taking and to the value placed on risk. The younger TMTs are more likely to pursue risky strategies
(Hambrick/Mason 1984). Carter, Simkins and Simpsons (2003) found a positive relationship between gender diversity and firm performance. Adams and Ferreira (2008) stated that female directors positively affect the attendance of male directors in the TMT, male directors take their role more seriously and better prepare for meetings (Izraeli, 2000). They also tend to ask more questions and became more vocal if there are female directors in the TMT (Konrad, Kramer and Erkut, 2008). Carpenter et al. (2001) reported that TMT size has a positive association with multinational firm performance. Longer tenure often is associated with greater commitment to status quo. This may lead to less scanning of the environment and a limited search for alternative solutions which can cause poorer quality decisions (Bantel & Jackson 1989). Top management teams with higher level of education and business degrees are more likely to generate more creative solutions when they face complex problems. Therefore, level of education is linked to performance. (Norburn & Birley, 1988).
Furtermore, Hambrick et al. (1996) found that TMTs that were diverse had an overall positive effect on subsidiary performance. Heterogeneity of the TMT can influence
performance (Wagner et al., 1984). Group heterogeneity, is related to greater creativity and innovation (Bantel & Jackson 1989). Heterogeneity is expected to bring a diversity of viewpoints to the decision-making process as individual group members have different interpretations and perspectives (Bantel & Wiersema, 1992).
3. Hypotheses development Governance bodies involvement
Existing research has found that monitoring the subsidiary by organizational governance bodies has a negative effect on subsidiary performance for a couple of reasons (Reuer et al., 2013).
First, Reuer et al. (2013) found that the cultural distance between subsidiary and parent-firm countries has a negative effect on the level of board involvement in subsidiaries. Thus, an increase in cultural distance between countries causes a decrease in board
involvement. Cultural differences imply that countries differ in business routines and ways of working this decreases board involvement. Knowledge of the local culture is required to overcome the cultural gap. The local TMT’s are coping better with the reigning culture in the subsidiary compared to the board of directors.
Second, high levels of board involvement could lead to unnecessary high costs and inefficiencies (Reuer et al., 2013). If the authorities and responsibilities are delegated to the local TMT the subsidiary can adapt better to the local culture, this eventually leads to better performance (Reuer et al., 2013; Kogut & Singh, 1988).
In conclusion, involvement of board of directors is less applicable to enhance subsidiary performance. This leads to the following hypotheses:
Hypothesis 1: Monitoring the subsidiary by organizational governance bodies has a negative effect on performance.
Ethnocentric design of subsidiary
Existing research has found that an ethnocentric design of the subsidiary negatively affect the performance of the subsidiary (Hambrick et al., 1996).
An ethnocentric design of the subsidiary is one in which all key management positions are filled by parent-country nationals. Parent country nationals who hold top positions or key positions of the subsidiary are usually called expatriates (Harzing, 2001). Expatriates are individual knowledge carriers who help to improve subsidiary performance by distributing personal experience and individual knowledge, which is lacking in the subsidiary. (Gaur et al., 2007). Expatriates also contribute by transferring organizational knowledge through their influence on communication and control mechanisms within MNEs (Hocking et al., 2004).
Fang et al. (2010) indicates that the percentage of expatriates in relation to the number of total subsidiary employees strengthened the effect on subsidiary performance in the short
term, with low location specificity. But the study also indicates that the percentage of expatriates in relation to the number of total subsidiary employees weakened the effect on subsidiary performance in the long term, with high location specificity.
Another study showed that group heterogeneity is related to greater innovation and creativity (Bantel & Jackson 1989, Murray 1989). Individual group members have different interpretations and perspectives, therefore heterogeneity is expected to bring a diversity of viewpoints to the decision-making process (Wiersema & Bantel 1992).
Furthermore, Hambrick et al. (1996) found that TMTs that were diverse had an overall positive effect on subsidiary performance. As stated before, an ethnocentric design is one where all key positions are filled by parent-country nationals. Therefore, we can speak about group homogeneity in the TMT. This leads to the following hypotheses:
Hypothesis 2: Ethnocentric design of the subsidiary negatively affect the performance of the subsidiary.
Size of the TMT
Haleblian and Finklestein (1993) found that having a larger top management team is positively related to firm performance especially for firms operating in more turbulent environments.
First, increasing complexities because of the international activity is forcing
organizations to find a TMT with the capability and flexibility to develop adaptive strategies (Miller, 1992). Large groups are superior to small ones because larger groups have more capabilities and resources thus, they are better in solving group tasks (Hill, 1982). Large groups can enhance problem-solving and information processing capabilities by (1) increasing the number of items of information that can be absorbed and recalled, (2) increasing the number of critical judgements available to correct errors in inference and analysis, (3) increasing the number of potential solution strategies, and (4) increasing the range of
perspectives brought to hear on a problem (Harrison, 1975; Hoffman & Maier, 1961). Large groups therefore, reported higher-quality decisions (Ziller, 1957).
Second, a groups performance is indicated of its members abilities (Hoffman, 1979; Shaw, 1976), with increases in team size expanding the resources available to solve a problem (Hare, 1976). Hambrick and D’Aveni’s (1992) argument that “at a basic level, the resources available on a team results from how many people are on it”. Hence, large top management
teams have greater information-processing and decision-making capabilities than small teams. This leads to the following hypotheses:
Hypothesis 3: the size of the subsidiary TMT positively affects the performance of the subsidiary.
4. Research methods 4.1 Data collection
Secondary data will be utilized by means of a large-scale self-administered survey conducted by the Brabant Development Agency (BOM) in cooperation with the Erasmus University Rotterdam in 2011. Therefore, we can ensure that the questionnaire was checked to ensure face validity (Reuer et al., 2013). Holden (2010) stated that face validity is the extent to which a test is subjectively viewed as covering the concept it purports to measure. It refers to the transparency or relevance of a test as it appears to test participants. Research design is chosen to be quantitative for the following reason. A quantitative approach gives the opportunity to generalize findings and conclusions due to the standardization of the data obtained through the survey, because of the diverse data source and a high number in sample sizes. In this way it ensures external validity (Chandy et al, 2004; Echambadi et al., 2006). External validity is the validity of applying the conclusions of a scientific study outside the context of that study (Mitchell & Jolley, 2001). Quantitative data collection through surveys is an appropriate method to measure the relationship between dependent and independent variables (Edmonson &McManus, 2017).
The survey is namely focused on foreign subsidiaries who are located in the Dutch province named North-Brabant. The BOM database is composed of foreign MNEs with one or more subsidiaries in North-Brabant. The database provides a sufficient population size of 1051 subsidiaries. The density of foreign subsidiaries in this area makes the investigation of firms from different countries with multiple institutional backgrounds possible. In accordance with the key informant theory, this survey was addressed to the subsidiaries’ general
managers, which are suitable for providing thorough information regarding the questions (Kumar. Stern & Anderson., 1993). The participants were able to respond on paper or electronically. The questionnaire was built upon 181 questions, both open questions and multiple-choice
The internal reliability and consistency of the results is ensured by examining the Cronbach Alpha values for the subjective measurement items. All incorporated scales should have a minimal value of above 0.70, Clark & Watson (1995) stated in that case internal reliability and consistency of the scales can be confirmed. Additionally, the normality of the data has been tested by looking at the descriptive statistics of the variables. Acceptable values of skewness and kurtosis should be within the acceptable range from –1.950 to +1.950 (Hair et al., 2010). With reference to subsidiary size and subsidiary age that did not meet the criteria, a
Furthermore, in order to prevent multicollinearity, it is tested for by performing a regression analysis and checking the VIF scores. According to Kleinbaum et al. (1988), the VIF scores should not exceed 10 and tolerance levels should be at least 0.10 or higher, as otherwise issues from multicollinearity is given.
4.2 Variables and measurement 4.2.1 Dependent variable
Performance is the dependent variable in this study. Performance tend to be difficult to measure; not always financial results are leading but also qualitative outcomes which are harder to assess (Andersson, 1990). However, Klijn et al. (2013) conducted research on the performance, proofing that performance can be measured in a comprehensive manner. Consequently, in the present study the performance is measured by applying the method of Mjoen and Tallman (1997). The variable is measured based on 9 items, respondents were asked to indicate the degree of agreement or disagreement through seven items on a 7-point Likert scale, ranging from “fully disagree” to “fully agree”. In order to quantify the construct of interest, the items are added up to form a scale (Spector, 1992). The Cronbach Alpha of the scale is 0.902, which is higher than the threshold of 0.70 (Nunnaly,1978).
4.2.2 Independent variables
Subsidiary board monitoring function has been used in studies by Kriger (1988) which investigates the extent to which organizational governance bodies are involved in monitoring and controlling the subsidiary. Current literature stated that decision making centralization from the parent company can cause inefficiency of the top managers at the subsidiary. (Anthony & Govindarajan, 1980). An eight-part scale measures the level of monitoring; 1) approving operating plans, capital expenditures and budgets, 2) reviewing and approving significant actions of the subsidiary, 3) reviewing subsidiary management’s plans for business resiliency, 4) reviewing & monitoring the implementation of strategic plans, 5) monitoring overall subsidiary performance, 6) overseeing legal and ethical compliance of the subsidiary, 7) focusing on the integrity and clarity of financial reports, 8) participating in the
development of strategic plans. Whereby, a seven-point Likert scale offers answers ranging from “not at all” to “to a very large extent”. The Cronbach Alpha of the combined scale is 0.944, meeting the requirements of Nunnaly (1978).
Percentage of expatriates is measured in the year 2010. The current literature has found that percentage of outsiders TMT members is identified as a positive relationship for the firm performance (Pearce and Zahra, 1992). This mean when percentage of expatriates increases the performance increases as well. For the present study a similar measure will be used. The respondents were asked how many of the top managers are expatriates (non-Dutch) in percentage. Answers ranging from 0 to 100, 0 means no expatriates in the TMT and 100 means only expatriates in the TMT.
Number of executive directors is measured in the year 2010. Number of executive directors is also one of the characteristics mentioned by Chen & Zang (2014). Definition of executive director in this research is the role to design, develop and implement strategic plans for the organization in a manner that is both cost and time-efficient, often called CEO. They are part of the TMT and therefore can influence the earnings management and financial statements (Cheng & Zang, 2014). It is measured on a nominal scale, the answers from the survey ranging from 0 (meaning no executive directors in the subsidiary) to 15 (meaning 15 executive directors in the subsidiary).
4.2.3 Control variables
Multiple control variables were included in this empirical study in order to overcome the possibility of excluding factors that also have an effect on the performance of the subsidiary.
First, Subsidiary age is included in the statistical model. More mature organizations account for more confidence due to their experience, whereas younger organizations are more preoccupied and concerned with securing enough financing and fully understanding their target market (Choo & Mazzarol, 2001). Stinchcombe (1965) explained that new ventures must learn working with new social networks. While grappling with this difficulty new ventures must also establish relationships with suppliers and customers, a process made difficult by the companies’ youth and unfamiliarity. The result is often confusion, inefficiency and misunderstanding. The control variable can be measured due to the fact, that the BOM survey entailed a question, in which the year of establishment of the subsidiary was asked for.
Second, Subsidiary size is also included in the statistical model. Scholars like
Haleblian, Devers, McNamara, Carpenter and Davison (2009) and Haleblian and Finkelstein (1993) have used firm size as a control variable in previously conducted studies. Compared to smaller firms, larger organizations have larger amounts of resources in terms of assets,
2006; Kuo, Kao, Chang & Chiu, 2012). On the other hand, scholars like Knoben (2009) argue, that smaller organizations have the ability to recognize opportunities in a quicker way and therefore capitalize earlier on these opportunities. Therefore, the size of an organization affects the pursuit of opportunities and indirectly of performance (Chang & Hughes, 2012). In this research, the proxy used for subsidiary size is the number of full-time employees in 2010.
Third, Number of Dutch subsidiaries is used as control variable in combination with the size of the subsidiary. It is another indication of the size of the firm. Therefore, the size of an organization affects the pursuit of opportunities and indirectly of performance (Chang & Hughes, 2012). The control variable can be measured due to the fact, that the BOM survey entailed a question, in which the number of the subsidiaries in the Netherlands was asked for. Second and third, IJV size and IJV scope are also included in the statistical model
Fourth and fifth, Proportion of internal board members and Proportion of Dutch directors’ are also included as control variables. Wagner et al. (1984) suggests that
heterogeneity of the TMT can also influence performance. Group heterogeneity, is related to greater creativity and innovation (Bantel & Jackson 1989). Heterogeneity is expected to bring a diversity of viewpoints to the decision-making process as individual group members have different interpretations and perspectives (Bantel & Wiersema, 1992). Therefore,
heterogeneity of the TMT is test in the survey via the following questions: What is the total number of internal board members (from the parent firm)? & What is the total number of Dutch directors?
Sixth, Subsidiary exploitation was taken as a control variable. It has been used in studies by March (1991). Exploitation includes such things as refinement, choice, production, efficiency, selection, implementation, execution (March, 1991). The general expectation is that businesses tend to converge on existing routines (exploitation) where the previous performance of the subsidiary is successful (Van Deusen & Mueller, 1999). The measure describes how the subsidiary execute the routines located in organizational knowledge base (March, 1991).
The variable is based on the item: frequently refine the provision of existing products and services. Respondents were asked to indicate the degree of agreement or disagreement in terms of exploration in their subsidiary through seven items on a 7-point Likert scale, ranging from “fully disagree” to “fully agree”.
Finally, Subsidiary manufacturing is integrated in the statistical model as well. Youndt et al. (1996) stated that there is a direct relationship between manufacturing strategy and performance of the firm. The three primary manufacturing strategies are cost, quality and
flexibility (Garvin,1993; Leong, Snyder & Ward, 1990). Cost manufacturing strategies tend to focus on internal effectiveness. Quality and flexibility manufacturing strategies tend to focus on upskilling of employees (Youndt et al., 1996). The control variable can be measured due to the fact, that the BOM survey entailed a question, where the involvement in manufacturing of the subsidiary was asked for. Whereby, a seven-point Likert scale offers answers ranging from “not at all” to “to a very large extent”
5. Results
In order to statistically answer the three hypotheses of the research framework, a linear
regression analysis has been performed. The results of the regression analysis are presented in table number 2. To observe the interaction, a total of five models were statistically tested. The squared R score and F-score of each model are reported. Furthermore, the unstandardized Beta coefficient (β), the standard error as well as the significance level of each variable are also reported. In addition to the regression the correlation matrix has been applied in table number 1 together with the descriptive statistics of the variables.
5.1 Descriptive statistics and correlation matrix
Table 1 illustrates the correlation matrix of the theoretical variables and control variables on the dependent variable performance. The correlation between the included variables in the model can be obtained from the correlation matrix. The highest significant correlation is between subsidiary size and subsidiary manufacturing (0.288) with p < 0.001. Myers (1990) stated that multicollinearity can be ruled out if the correlations between the variables are below 0.750. Nevertheless, a collinearity analysis was performed and the highest VIF value is 2.4, which is significantly lower than the threshold of 10. Therefore, multicollinearity is not an issue in the statistic model (Kleinbaum et al., 1988).
Prior to the analysis, the variables used in the research framework were tested in order to determine whether there are any issues concerning skewness and kurtosis. After detecting issues in terms of normality, a natural logarithm transformation of the variables subsidiary size and subsidiary age was executed.
Several correlations between variables in the model stand out. The dependent variable subsidiary performance correlated significantly positive with subsidiary exploitation (p < 0.01), subsidiary size (p < 0.05) and negatively significant with percentage of expatriates (p < 0.05). The independent variables subsidiary size and subsidiary exploitation correlate
significantly positive with subsidiary age (p < 0.01). Furthermore, the two variables subsidiary board monitoring function and number of executive directors correlate significantly positive (p < 0.01) with number of Dutch subsidiaries. Number of Dutch subsidiaries also have a positive significant correlation with subsidiary size (p < 0.01).
Besides subsidiary size, subsidiary exploitation is also positively significant correlated with subsidiary performance (p < 0.01). Moreover, subsidiary size is significantly negative correlated with percentage of expatriates (p < 0.01).
Table 1: Correlation matrix
Variable Mean SD 1 2 3 4 5 6 7 8 9 10 11 1. Subsidiary performance 43.624 10.658 1.000
2. Subsidiary board monitoring function 32.502 16.213 0.129 1.000
3. Percentage of expatriates 19.097 38.183 -0.152* 0.037 1.000
4. Number of executive directors 1.530 2.008 0.000 0.109 0.067 1.000
5. Subsidiary age 2.811 1.084 -0.056 -0.036 -0.107 0.005 1.000
6. Subsidiary size 4.047 1.956 0.140* 0.108 -0.236** 0.059 0.259** 1.000
7. Number of Dutch subsidiaries 1.600 4.113 -0.076 0.180** 0.061 0.184** 0.061 0.172** 1.000
8. Proportion of internal board members 0.395 0.771 0.011 -0.144 -0.018 -0.034 -0.018 0.120 0.023 1.000 9. Proportion of Dutch directors 0.542 0.796 0.148 0.065 -0.166 -0.219* 0.096 0.199* 0.134 0.041 1.000
10. Subsidiary exploitation 4.550 1.482 0.273** 0.000 -0.109 -0.048 0.177** 0.177** -0.016 0.005 0.098 1.000 11. Subsidiary manufacturing 2.900 2.493 -0.085 0.055 -0.066 -0.022 0.062 0.288** 0.026 -0.064 0.148 0.004 1.000
5.2. Regression analysis
According to Hair et al. (2014), the correlation matrix only shows the relationship between two variables, which does not allow a causal interpretation of the relationship between the variables in a research model. Thus, multiple linear regression analysis was performed. This type of regression is used when we want to predict the value of a variable based on the value
of two or more other variables. Table number 2 displays the results of multiple linear
regression analysis performed on the dependent variable performance.
Model 1, as the base-model, shows the regression analysis, performed only with the control variables. Model I have a R2 of 0.195, which means that the control variables can explain 19,5 percent of the variance of the subsidiary performance. In model II subsidiary board monitoring function is added, model II explained 26,2 percent of the variance of the subsidiary performance. Model III added percentage of expatriates for explaining 24,3 percent of the variance in subsidiary performance. Model IV incorporates the effect of number of executive directors. Finally, Model V, displays the entire model, containing all variables including all the interactions. Model V have a R2 of 0.324, which means that the complete model can explain 32,4% of the variance of the performance of the subsidiary.
Hypothesis 1 proposed, that monitoring the subsidiary by organizational governance bodies (board, management and corporate hq) has a negative effect on performance. This hypothesis is rejected via Model II. Model II and V shows with unstandardized B-values of 0.164 (II) and 0.182 (V) and p-values < 0.01 that there is a positive effect of organizational governance bodies monitoring the subsidiary on the performance of the subsidiary.
Second, hypotheses 2, which proposes that ethnocentric design of the subsidiary (i.e. percentage of expats) negatively affect performance of the subsidiary, is supported. Model III and V show significant relationships with p-values (p < 0.1), which shows that large
involvement of foreign managers have a significantly negatively effect in terms of performance.
Model IV with hypothesis 3, arguing that the size of the subsidiary TMT positively affects the performance of the subsidiary, is not supported. The effect is not significant in model IV and V. As a result, no statistically support is found in order to support hypotheses 3.
Table 2: Regression results
a N = 226. Linear regression results. † p <0,1 ; * p <0,05 ; ** p <0,01 ; *** p <0,001 (two-tailed). Robust
standard errors appear in parentheses. b X2 values for joint significant test.
I II III IV V Subsidiary performance 37.497*** (3.950) 30.126*** (4.461) 39.395*** (4.338) 36.278*** (4.320) 30.024*** (5.200) Subsidiary age -2.691** (1.009) -2.559* (0.984) -2.958** (1.071) -2.702** (1.012) -2.753* (1.043) Subsidiary size 1.655** (0.503) (0.489) 1.595** (0.564) 1.377* (0.506) 1.619** (0.556) 1.331* Number of Dutch subsidiaries -0.188
(0.183) -0.268 (0.179) -0.401 (0.401) -0.215 (0.187) -0.544 (0.399) Proportion of internal board members -0.663
(1.070) -0.105 (1.052) -0.748 (1.083) -0.577 (1.079) -0.156 (1.063) Proportion of Dutch directors 1.598
(1.132) (1.101) 1.559 (1.288) 1.952 (1.168) 1.793 (1.314) 2.126 Subsidiary exploitation 1.850**
(0.674) (0.674) 2.234** (0.723) 1.959** (0.684) 1.927** (0.730) 2.472** Subsidiary manufacturing -0.666†
(0.364) -0.729* (0.356) -0.602 (0.384) -0.636† (0.368) -0.712† (0.375) Subsidiary board monitoring function 0.164**
(0.060)
0.182** (0.062)
Percentage of expatriates -0.057†
(0.030) -0.051† (0.029)
Number of executive directors 0.328
(0.466) (0.609) 0.155
R-square 0.195 0.262 0.243 0.198 0.324
6. Discussion and conclusion 6.1 Contributions and implications
In the past, a great amount of research has been done on international business expansion strategy (e.g. Bairoch & Kozul-Wright, 1998; Oladottir et al., 2012; Rondinelli et al., 2001), in contrary to the research on composition of top management teams in such organizational forms. Recently, the scholarly attention for composition of top management teams in such organizational forms has grown (e.g. Cheng & Zang, 2014; Pearce & Zahra, 1992; Wagner et al., 1998). Previous studies have found a relationship between the composition of the TMT and the firm performance (Cheng & Zang, 2014). Accordingly, percentage of outside directors, board size and board characteristics affect the relationship (Cheng & Zang, 2014; Pearce & Zahra, 1992; Wagner et al., 1998).
However, subsidiary governance is barely touched upon in the existing literature. Prior research stated that the risk of self-interested behaviours can influence the performance of the subsidiary (Bradley et al., 2011).
The present study builds further on the found relationship between the composition of the TMT and the firm performance (Cheng & Zang, 2014). The found relationship forms the starting point of the present study. In order to empirically test the relationship, this study examines factors that can affect the performance implications of TMT composition. The scope of this study is focused specifically on the subsidiary Top Management Team
composition. Whereas, the influence of governance bodies involvement, ethnocentric design of TMT and size of TMT on the performance is examined. As a result, this study answers the call for further examination of TMT composition on performance, applicable to foreign subsidiaries TMT.
The findings of this study contribute to the existing body of academic literature regarding TMT composition and subsidiary performance. The study will strengthen the generalizability of future studies focusing on these concepts. Moreover, it shows which determinants have an impact on the investigated relationship. The results of this research contribute to theories stating, that subsidiary TMT composition do have a significant influence on the performance of the subsidiary.
The present study has led to the following findings. First, the subsidiary monitoring by organizational governance bodies do not have a negative effect on the subsidiary
performance. In fact, statistical evidence found that there is a positive relationship between the subsidiary monitoring by organizational governance bodies and subsidiary performance. This means that the performance of the subsidiary increases as the level of monitoring by
organizational governance bodies (corporate hq) increases as well. As a result, hypotheses 1 of this study is not supported. This finding contradicts the existing literature and would not be expected following the reasoning of Reuer et al. (2013) and Kogut & Singh (1988). A
possible explanation for this surprising finding could be that monitoring may be understood more broadly, namely as a command that takes the form of a goal constrained, a principle to be applied or a result to be produced, so that only the end goal has been supplied by the command, and not the method of reaching it (Simon, 1951). In this way the subsidiary managers are not subjected to excessive monitoring and therefore will not lose their
identification with the firm and its goals (Frey,1998). Ararat et al. (2010) found evidence that an increase in monitoring enhance the effectiveness of the TMT.
Second, statistical evidence is found that there is a negative relationship between ethnocentric design of the subsidiary (i.e. percentage of expatriates) and subsidiary
performance. As such, this finding confirms the outcome of an earlier study of Wiersema & Bantel (1992) and Hambrick et al. (1996) on the aforementioned relationship. This means that the performance of the subsidiary decreases as the percentage of expats in the TMT increases. Consequently hypothesis 2 of the study is supported.
Finally, there is no statistically evidence found that the size of the TMT positively affects the performance of the subsidiary. These findings are in contrast to the existing literature and would not be expected following the reasoning of Haleblian and Finklestein (1993). However, this study showed a positive relationship between size of the subsidiary TMT and the
performance of the subsidiary but this relationship was not significant.
Consequently, it remains inconclusive whether or not the subsidiary performance is positively influenced by the size of the subsidiary TMT because only partial evidence is found. As a result, hypothesis 3 of this study is partially supported.
Additionally, this study provides some managerial implications. These findings could help to improve the subsidiary performance. When parent firm face challenging issues regarding the composition of the subsidiary Top Management Team the level of board
characteristics could be used in order to influence the performance of the subsidiary. First, our research suggests that corporate firms monitoring their subsidiary may be desirable for the performance of the subsidiary. Second, this study suggests managers that having a high percentage of expatriates in the TMT will not contribute to enhancing the performance of the subsidiary. However, the research delineates the effect of TMT size, managers need to keep in mind that this effect is not significant. Overall, the findings of the present study can be used to
make guidelines on the level of subsidiary board composition in the case of improving the subsidiary performance.
6.2 Limitations and future research
The present study presents several findings, however this study involves some limitations and potential for future research.
The generalizability of the results is a limitation of this research. The size of the sample is adequate but around half of the samples collected as data through the survey are subsidiaries with parent firms from the United States of America, the United Kingdom, Germany and France. Therefore, the results yielded by this study are mostly generalizable to subsidiaries with parent firms from these countries. As this study does not distinguish between different industries and North Brabant is a cluster focused on technological knowledge, future research could extend on this factor.
Furthermore, the research setting which is represented by the cluster of North Brabant, may as well affect the generalizability of the results. Firms that locate in different clusters might experience different influences on TMT composition. Future research could make use of an even more diverse and wider distributed sample in terms of country origin and location, this is in order to enhance the generalizability of the results (Maxwell, 1992).
A quantitative research design is adopted to generalize findings. In order to generate more in-depth understanding on the Top Management Team composition a qualitative research design could be valuable. Through in-depth interviews and case studies with TMT managers more detailed findings could be generated.
Another limitation of the study might be the use of managers as single informants, which is in line with the key informant theory according to Kumar et al. (1993). It might be the case that not every manager has the full amount of information needed to objectively complete the survey.
Nonetheless, this study offers opportunities for future research. The fact that only a limited number of TMT characteristics was used as independent variables creates an
opportunity for future research as other studies could investigate the influence of other TMT characteristics on subsidiary performance. Thus, other TMT characteristics, like for example cultural differences and age of the TMT members might yield new findings.
6.3 Conclusion
The purpose of this study is to determine the extent and direction of the subsidiary TMT composition on the performance of the subsidiary. The results of this study show that subsidiary board monitoring function and percentage of expatriates have a significant effect on subsidiary performance, which should be considered by MNEs who compose the TMT of their subsidiaries. Nevertheless, the study shows no significant evidence that number of executive directors in the TMT influences the performance of the subsidiary. Despite its limitations, the results make some important implications for future research, as it considers subsidiary board monitoring function has a positive effect on the performance contradicting the existing literature by Reuer et al. (2013) and Kogut & Singh (1988), as well as other TMT characteristics that can influence the effect on performance can be considered to extend the current literature. This study provides insights for organizations operating on an international level, who want to compose their subsidiary Top Management Team, leading to the
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