THE INFLUENCE OF FOREIGN SUBSIDIARY TOP MANAGEMENT TEAM (TMT) COMPOSITION ON FIRM INNOVATION: THE CASE OF AMBIDEXTERITY.
Author - Pim Jouke Bonnema Student Number - 11291303
Submission Date - 22th of June 2020
Program Track - Management in the Digital Age Institution - University of Amsterdam Supervisor - Dr. E. Klijn.
This document is written by Student Pim Bonnema 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.
Table of Contents
1. Introduction……… 4
2. Literature Review……… 4
2.1. Innovation……….………… 4
2.2. Ambidexterity: Exploitation & Exploration……… 8
3. Hypotheses Development……… 11
3.1. TMT Composition……… 11
4. Methodology……… 14
4.1. Research Design………... 14
4.2. Data Collection & Sample……… 14
4.3. Variables………... 15
4.3.1. Dependent Variables………. 15
4.3.2. Independent Variables……….. 16
4.3.3. Control Variables……….. 17
5. Results……….. 20
5.1. Descriptive Statistics & Correlation Matrix………. 20
5.2. Regression………. 22
5.3. Robustness Results………... 27
6. Discussion & Conclusion………. 29
6.1. Contributions & Implications………... 29
6.2. Managerial Implications………... 30
6.3. Limitations & Future Research………. 31
6.4. Conclusion……… 32
1. Introduction
Internationalization (in the sense of a multinational corporation (MNC)) is the overpassing of national boundaries to sustain or to expand growth (Buckley & Ghauri, 1999). Innovation is the process of finding new ideas to the firm, which has an effect of increased performance, growth, and competitive advantage (Freeman, 1995; Lengnick-Hall, 1992). The internationalization of Research & Development (R&D) facilitates corporate innovation and stimulates the dispersion of innovations between foreign subsidiaries and its parent firm (Hsu, Lien, & Chen, 2015). Due to internationalization firms can reap the benefits from the innovative mindset of their subsidiary, and increase performance (Chiao, Yu, Li, & Chen, 2008).
To sustain performance firms need to balance exploitation and exploration (Gupta, Smith, & Shalley, 2006; March, 1991). Whereas exploitation implies the firm’s behavior defined by efficiency, refinement, production, and selection, exploration implies the firm’s behavior defined by experimentation, innovation, search, and discovery (He & Wong, 2004; Simsek, 2009). For a parent firm it is crucial to balance exploration with exploitation, while this is less crucial for a competence-creating subsidiary (Zhang, Jiang, & Cantwell, 2015). This is due to subsidiary characteristics. Subsidiary characteristics are entrepreneurial orientation, entrepreneurial MNC network management, and a global vision, which provide a basis for innovative ambidexterity (Boojihawon, Dimitratos, & Young, 2007).
The combination of both exploitation and exploration simultaneously is called ambidexterity (Raisch, Birkinshaw, Probst, & Tushman, 2009; Simsek, 2009). In the past two decades there has been a growing interest in ambidexterity as a research topic (O’Reilly & Tushman, 2013). According to multiple researches an organizations long-term success depends on its ability to exploit current capabilities (exploitation), and simultaneously explore new competencies (exploration) (Wei, Zhao, & Zhang, 2014; Hsu et al., 2013; Andriopoulos & Lewis, 2010). Next to long-term success, ambidexterity also results in adaptability, synergistic benefits, and management of dual demands (exploitation/exploration) (O’Reilly & Tushman, 2008; Cao, Gedajlovic, & Zhang, 2009; Chandrasekaran, Linderman, & Schroeder, 2011).
However, as described by March (1991) there is an inherent tension in balancing exploitation and exploration. According to Zimmermann, Raisch & Cardinal (2017) the two innovating activities namely have opposing organizational requirements. Whereas exploitation
activities for example profit from a mechanic organizational structure, exploration activities benefit from an organic organizational structure (Duncan & Gowing, 1976). This makes achieving ambidexterity challenging for many organizations.
Furthermore, both parent firm specific characteristics and foreign subsidiary specific characteristics influence innovative ambidexterity. Namely, the success of a MNC’s internationalization relies on its capability to transfer knowledge to foreign subsidiaries, and on the capability of the foreign subsidiaries to use this knowledge (Fang, Wade, Delios, & Beamish, 2013). In the parent firm, centralization negatively affects exploration, whereas formalization positively affects exploitation. Moreover, exploratory innovation works better in dynamic environments, while exploitative innovation works better in more competitive environments (Jansen et al., 2006; Jansen et al., 2009). As centralization and decentralization practices and business environments are set by an organizations top management team (TMT) it is crucial to research foreign subsidiaries TMTs and their innovation practices (SMITH, 2006).
Given that the TMT has such a pivotal role in setting the organizational direction many researchers have investigated the effect of TMT composition on ambidexterity (e.g. Lubatkin, Simsek, Ling, & Veiga, 2006; Nielsen & Nielsen, 2012). According to Li (2013) for example social capital among top executives, including shared vision, connectedness, and trust, can moderate the link between organizational ambidexterity and team diversity. Also, differences in demographics of the TMT and the top executives cognitive ability are linked to a teams’ propensity in strategy and innovation (Wiersema & Bantel, 1992; Bantel, 1993). According to (Nieslen & Nielsen, 2012) nationality diversity within a TMT has a positive relationship to firm performance, with a stronger effect in highly internationalized firms.
As mentioned in the previous paragraphs there are significant strategic benefits for a firm to pursue innovative ambidexterity. In addition, the importance of TMT diversity is stressed. For instance, where more expatriates in a TMT can result in more exploitation (Chang, Gong, & Peng, 2012), more locals can result in exploration (Thomas, Kaminska-Labbé, & McKelvey, 2005). Despite the extensiveness of the previous research in the fields of innovation and international business (IB), a gap in the literature persists. Whereas most research concerning ambidexterity and TMTs is set to investigate the parent firm (Vahlne & Jonsson, 2017; Wei et al., 2014, p. 143; Li, 2013), most innovation occurs at subsidiary level. Given the importance of foreign subsidiaries for the parent firm and the prominence of ambidexterity and TMTs, this
research is set to investigate how the composition of the foreign subsidiary’s TMT affects the innovative ambidexterity. Therefore the research question is “What will be the influence of TMT diversity in foreign subsidiaries on the ability to achieve innovation on the basis of simultaneous exploitation and exploration (ambidexterity)?
2. Literature Review
2.1. Innovation
The process of innovation has been a widely studied concept ever since Schumpeter (1932) wrote about it in his book “Capitalism, Socialism, and Democracy”. Especially the relationship between innovation and economic growth (e.g., Bilbao-Osorio & Rodriguez-Pose, 2004; Verspagen, 2006) and innovation and competitive advantage (e.g., Lengnick-Hall, 1992; Weerawardena & Mavondo, 2011) has been studied extensively. Moreover, innovation is a central mechanism for growth and strategic change whereby organizations explore, exploit, and reposition themselves in changing external and internal conditions (Dittrich & Duysters, 2007).
As stated by Dietzenbacher (2000) innovations in particular are important determinants for economic growth. This can be ascribed to innovations’ positive externalities and their direct impact on the production process (Smith, Collins, & Clark, 2005). In addition to this, the accumulation of technological advancements adds to the knowledge base and makes subsequent innovations possible (Stokey, 1995). Also, innovation adds to achieving a competitive advantage in several ways (Tidd, Bessant, & Pavitt, 2005). Reasons for this are that innovations can reduce production costs, increase the quality of products, capture or create new product markets and reduce the firm’s reliance upon unreliable factors of production (Webster, 2004). For firms that wish to grow and survive in today’s environment, they have to introduce an innovative approach and creativity (Urbancova, 2013). Furthermore, to sustain growth MNCs are exploring new sources of innovation (e.g., open-innovation and crowdsourcing) (Mirvis, Herrera, Googins, & Albareda, 2016). Whereas innovation creates many benefits, it also comes with drawbacks. According to Frenkel (2003) the most significant limitations of innovation are those that relate to the high risk involved. In Heher (2006) there is described that without a well-funded research system it is not possible for technology transfer to make any significant contribution to the economic development of the firm. This affects the return on investment. Also the lack of highly skilled workers is found to be a barrier (Frenkel, 2003).
Although the sufficient amount of research, the literature fails to deliver one agreed upon definition (Schaver, 2020). Innovation in its broadest view of term can be considered as a process that involves the generation, adoption, and implementation of new ideas or practices
within the organization (Wan, Ong, & Lee, 2005). Also, innovation can also be described as ‘the implementation of a new or significantly changed product or process.” (Gault, 2018,). In this research innovation is defined as proposed by Lala Popa, Preda & Boldea (2010). They state that innovation can be described as the ability to continuously transform knowledge and ideas into new products, processes and systems, to the benefit of the organization and the shareholders.
2.2. Ambidexterity: Exploitation & Exploration
Management studies show the importance of an organization’s capability to both explores new knowledge to enhance long-term innovation and exploit existing technologies and knowledge for short-term profits (Eriksson, 2013). Firms need to manage both exploration and exploitation explicitly, since both elements are critical for a sustainable competitive advantage (March, 1991; Gupta et al. 2006). Therefore the process of innovative ambidexterity is associated with short-term and long-short-term success (Rosing, Frese, & Bausch, 2011).
Exploitative innovation is defined as improving the materials or methods used to achieve the firm’s objectives of satisfying customer needs and profitability (Quintana-García & Benavides-Velasco, 2008). It includes things such as refinement, choice, production, selection, efficiency, and execution (March, 1991). Moreover, exploitation is efficiency orientated and variety reducing (Li, Vanhaverbeke, & Schoenmakers, 2008). Lastly, exploitation can be seen as to strengthen existing technology to serve existing customers (Danneels, 2002).
According to multiple studies exploitation is needed to survive in the short term (Gilsing & Nooteboom, 2006; Hoang & Rothaermel, 2010; Eriksson, 2013). In addition, exploitative activity helps to create reliability in experience (Levinthal & March, 1993). Exploitation can be practiced in several ways. As described by (Li et al., 2008) particularly in technological innovation exploitation exists out of local search that proceeds on a firm’s existing technological capabilities. This provides a firm with advantages in making incremental innovations (Nerkar & Roberts, 2004). Another way in which exploitation can be practiced is through alliances, which are then used to exploit existing competencies in order to leverage known opportunities (Hoang & Rothaermel, 2010). It is in a firm’s best interest to engage in sufficient exploitation to ensure its current viability however to also, simultaneously, devote sufficient energy to exploration to ensure its future viability (He & Wong, 2004).
Exploitative localized learning is positively associated with immediate innovation rates, however it often simultaneously reduces incentives for and competence with high-impact innovation (Kim et al., 2012). In addition to this, a one-sided focus on exploitation may enhance short-term performance however it can result in a competency trap because firms may not be able to respond competently to environmental changes (Raisch & Birkinshaw, 2008). Summarized these two points show that while exploitation increases efficiency, it drives out variation and therefore it makes organizations vulnerable to environmental change (Hannan & Freeman, 1977).
Whereas exploitation is interested in refining and extending existing capabilities and skills, exploration focuses on challenging existing ideas with entrepreneurial and innovative concepts (Auh & Menguc, 2005). It includes things captured by terms such as variation, risk-taking, search, experimentation, flexibility, discovery, and innovation (March, 1991). Consequently exploration involves new materials or methods that come from a recombination of parts of the firms’ established knowledge base with a new stream of knowledge or from a completely different knowledge base (Freeman and Soete, 1997; Quintana-García & Benavides-Velasco, 2008).
As stated by Karim & Mitchell (2000) a firm should change it resource structure and develop new technologies to adapt to new environmental opportunities. Exploration offers firms the opportunity to do this through experimentation, creativity, and a broad search of knowledge stocks beyond what is found in the firm’s existing competencies (Ireland & Webb, 2009). Exploring new markets also renews the firm’s market portfolio and creates variation (Lisboa, Skarmeas, & Lages, 2013. This ensures firms to survive in the long run (Gilsing & Nooteboom, 2006; Belderbos, Faems, Leten, & Looy, 2010). According to Anderson, Covin, & Slevin (2009) an exploration strategy creates new knowledge through exploratory and experimental actions that are inherent to entrepreneurial behavior. This learning process forces firms to integrate, distribute, and evaluate the knowledge in such a way that the whole organization can act and use it to achieve common organizational goals (Sirén, Kohtamäki, & Kuckertz, 2012).
Opposite to exploitation, exploratory learning (by experimentation) is positively associated with high-impact innovation, but negatively associated with immediate innovation rates (Kim et al., 2012). Moreover, according to Levinthal & March (1993) relying solely on exploration might result in a reinforcing cycle in which failure leads to search and change, which in result will lead
to more failure and change. Also, too much focus on exploration results in high experimentation costs without sufficient benefits (Nielsen & Gudergan, 2012).
In conclusion, it is important for firms to realize the synergetic benefits they can achieve through pursuing the exploitation of old certainties and exploration of new possibilities simultaneously (Lisboa et al. 2013). However, having a well-balanced combination of both exploitation and exploration is a challenging task that requires trade-offs to be made (March, 1991).
3. Hypothesis Development
3.1. TMT Composition
According to Jansen et al. (2017) successful innovation can be achieved by pursuing exploitative and exploratory innovation simultaneously. This process is called organizational ambidexterity and is crucial to a firm’s survival and long-term performance (Smith, Lewis, Jarzabkowski, & Langley, 2017). Exploitation implies the firm’s behavior defined by efficiency, refinement, production, and selection. Exploration implies behavior defined by experimentation, innovation, search, and discovery (He & Wong, 2004; Simsek, 2009). The successful combination of exploitation and exploration is also highly associated with superior innovation (Smith et al., 2017). While ambidexterity may be beneficial, harmonizing exploitation and exploration is challenging (March, 1991; Sorensen & Stuart, 2000; Kim, Song, & Nerkar, 2012). This is because exploitation and exploration activities have contradictory organizational requirements regarding, contexts, structures, target systems, monitoring systems, and cultural foci (Zimmermann, Raisch, & Cardinal, 2017). According to Duncan & Gowing (1976) exploitation benefits from mechanic designs, while exploration benefits from organic design, increasing the tension between the two activities. Other factors contributing to the described tension between exploitation and exploration are that exploitation works best in established markets and technologies while exploration works best in emerging markets and technologies (He & Wong, 2004) and that both innovation activities often compete for the same limited firm resources (Kyriakopoulos & Moorman, 2004). These tensions between exploitation and exploration tend to intensify when they are found within the same domain (Karafyllia & Zucchella, 2017).
Whereas this tension between exploitation and exploration is widely studied in the parent firm (e.g., Raisch et al., 2009; Oshri, Pan, & Newell, 2005; Andriopoulos & Lewis, 2009), little is known on how this tension operates in foreign subsidiaries. As stated by Bartlett & Ghoshal (1986) foreign subsidiaries are considered as crucial sources of competitive advantage for the whole MNC. They seem to assimilate capabilities, competencies, and geographically dispersed resources and integrate those into the multinational enterprise (Schmid & Schurig, 2003). Exploration capabilities of the subsidiary tend to open new business opportunities for the MNC as a whole as subsidiary products and services develop (Birkinshaw, 1997). Exploitation
activities of the subsidiary on the other hand have a more traditional role as they adapt the MNCs products and technologies to local tastes and markets (Özsomer & Gençtürk, 2003). A recent study by Wang & Wang (2020) stated that in rapid-changing environments with discontinuous changes, subsidiaries that successfully carry out ambidextrous activities could best adapt to changes, thereby adding to the general competitiveness of MNCs. Given the importance of ambidexterity for organizations (Smith et al., 2017), the competitive advantage subsidiaries create (Bartlett & Ghoshal, 1986), and the importance of successfully ambidextrous activities by subsidiaries (Wang & Wang, 2020) it is crucial to study the tension between exploitation and exploration in the foreign subsidiary.
Within the subsidiary innovation strategies are shaped at the top management level (Talke et al., 2011). Therefore scholars link TMTs (e.g., Bantel & Jackson, 1989; Amason, Shrader, & Tompson, 2006; Daellenbach, McCarthy, & Schoenecker, 1999) to a firm’s ability to successfully innovate. More specifically TMT diversity is stated to be the main driver of innovativeness (Auh & Menguc, 2005). Reasons for this are that TMT diversity enhances constructive discussions through different perspectives, backgrounds, and cultures (Jansen et al., 2007; Hambrick, Cho, & Chen, 1996). As top managers tend to make decisions consistent with their cognitive frames, which are a function of their experience, functional background, education, and values (Talke et al., 2010), exploitation and exploration activities are indirectly affected by this. As researched by (Li, 2013), social capital among top management, including shared vision, trust, and connectedness can moderate the link between ambidexterity and team diversity. This implicates that cultural homogeneity (i.e. similar nationalities) in TMTs hinders the achievement of successful innovative ambidexterity. Other studies found that there is a positive relationship between TMT heterogeneity and cognitive conflict and that as the TMT size increases the level of heterogeneity in a team increases as well (Tihanyi et al., 2000; Amason & Sapienza, 1997). Findings by Li (2014) then show that intra-group conflicts foster the achievement of ambidexterity. Therefore there can be concluded that there is a positive impact of TMT size on ambidexterity as TMT heterogeneity increases.
It can be concluded that there is an apprehensible relationship between TMT diversity and the accomplishment of ambidexterity. Whereas most research concerning this relationship is directed towards the parent firm, a gap in the literature emerges to study this in the subsidiary. Given the strategic importance of innovative ambidexterity and the subsidiary, this research aims
to fill this gap by studying the influence of foreign subsidiary TMT composition on innovative ambidexterity. Therefore the following hypothesis is developed:
H1: foreign subsidiary top management team diversity has a positive effect on the ability to achieve innovation on the basis of simultaneous exploitation and exploration (ambidexterity).
Foreign Subsidiary Top Management Team Composition:
- Expatriates vs. Locals - Size of the Top Management
Team
Balance: Ambidexterity. Subsidiary Innovation:
- Exploitation - Exploration
4. Methodology
4.1 Research Design
In the last few decades’ substantial research has been conducted in the fields of innovation (e.g., Heher, 2006; Urbancova, 2013; Verspagen, 2006), ambidexterity (e.g., Nielsen & Gudergan, 2012; Raisch et al., 2009; Siren et al., 2012), and TMT composition (e.g., Talke, Salomo & Kock, 2011; Talke, Salomo & Rost, 2010). Although the extensiveness of this research, certain gaps persist in the research investigating top management teams and their influence on firm ambidexterity. The objective of this research is to fill one these gaps and add knowledge to the uninvestigated relationship between TMT composition in MNCs foreign subsidiaries and the on the firms’ ability to achieve innovative ambidexterity. The conceptual model and hypothesis in this research are developed based on existing research and literature in the fields of innovation, ambidexterity, TMT composition, and subsidiary internationalization. The design of this research follows a deductive research approach. A deductive research approach is most appropriate for testing existing theories with the aim to test theoretical knowledge that has been developed prior to empirical research (Kovács & Spens, 2005; Spens & Kovács, 2006). To measure the characteristics of the population with statistical precision a large-scale survey is used (Sukamolson, 2007). According to Queiros, Faria, & Almeida (2017) quantitative research entitles certain benefits such as low development time, cost-effectiveness, high reachability, high representativeness, and good data collection and analysis using statistical methods. Furthermore quantitative findings involve a larger sample that is randomly selected. Therefore quantitative findings can be generalized to a whole population or a sub-population (Rahman, 2016).
4.2 Data Collection & Sample
To test the developed hypotheses this study utilizes secondary data from a research conducted by the Brabant Development Agency (BOM) in cooperation with the Erasmus University in 2010. The data was collected through a self-administrative survey. The focus of this survey was on foreign subsidiaries located in a province called North-Brabant located in the Southern part of the Netherlands. Given that North-Brabant is one of Europe’s leading, innovation, technology,
and industrial knowledge clusters (Huang & Fernández-Maldonado, 2016), it served well as a site for the research to be conducted. As many companies locate their foreign subsidiaries within this cluster a decent population size of 1051 could be established. As the survey reached out to such a large population the quantitative findings can be generalized to a whole population (Rahman, 2016). The participants had the opportunity to reply electronically or through paper. The number of respondents was 259 (BOM 2010), resulting in a response rate of 24.64%. According to Baruch & Holtom (2008) who researched response rates in organizational research the average response rate for studies that utilized data collected from organizations was 35.7%. Therefore there can be concluded that a response rate of 24.64% is rather low. The questionnaire consisted out of 178 questions, both open and multiple-choice. All of the multiple-choice questions made use of a 7-point Likert scale except six. The questions concerned subsidiary characteristics, parent corporation characteristics, economic conditions, innovation and outcomes, relationship between the subsidiary and the parent corporation, and the board of directors. Due to missing values the final sample consists of 211 observations.
4.3 Variables
4.3.1 Dependent Variables
Exploitation and exploration together make up ambidexterity Simsek (2009). As a crucial part of the ambidexterity equation, successful exploitation (in combination with exploration) results in superior performance, success, and survival (Andriopoulos & Lewis, 2010; Raisch et al., 2009). This measure describes the degree to which foreign subsidiaries exploit existing products to achieve incremental changes. To test for exploitation a 7-point Likert scale is used ranging from “fully disagree” to “fully agree”. Respondents who fully disagreed received the value 1 (lowest) and respondent who fully agreed received the value 7 (highest). Exploitation is tested on the basis of seven-items that is, in order to quantify the dependent variable properly, added up to form a scale. The Cronbach Alpha of this seven-item scale is 0.763, which is well above the threshold of 0.70 (Nunnally, 1978).
Exploration is the second crucial part of the ambidexterity equation (Andriopoulos & Lewis, 2010; Raisch et al., 2009). This measure describes the degree to which foreign subsidiaries explore new markers, products, and business models (O’Reiley & Tushman, 2008). Exploration consists out of seven items and was tested on a 7-point Likert scale ranging from “fully disagree” to “fully agree”. Respondent’s answers were coded with a 1 (lowest) for fully disagree and with a 7 (highest) for fully agree. To quantify the dependent variable properly all seven items were added up to form a scale. The Cronbach Alpha of this seven-item scale is 0.787, which is well above the threshold of 0.70 (Nunnally, 1978).
4.3.2 Independent variables
Board size measures the size of a foreign subsidiaries’ board. According to multiple researchers there is a relationship between board size and innovative ambidexterity. Jansen, George, Van den Bosch, & Volberda (2008) who investigated this relationship state that board size can affect TMT heterogeneity and therefore can impact the achievement of ambidexterity. This relationship is also acknowledged by Chouaibi, Boujelbene, & Affes (2009) who elaborate on these findings. They state that an increased size of the board can be seen as a necessary condition to enhance investments in the R&D of a firm and consequently all the innovation activities because a larger team increases expertise and strategic decision-making. Larger teams are also known for their ability to gather more information and gather it more quickly than smaller teams and larger teams offer greater resources in the form of increased diversification and skills (Wiersema & Bantel, 1992; Amason, Shrader, & Tompson, 2006). These factors can also impact the achievement of innovative ambidexterity (Jansen et al., 2008). To measure the impact of board size on innovation respondent in the BOM (2010) survey were asked what the total number of board members was. This measure considers both executive members and non-executive members.
% Dutch executives measure how many executives of a foreign subsidiaries’ board hold the Dutch nationality. As described in the hypothesis development section of this research, heterogeneity in the TMT enhances exploitation and exploration activities (Li, 2013), making it worthwhile to investigate this relationship in the subsidiary. Others that have researched TMT
composition (e.g., Barsade, Ward, Turner, & Sonnenfeld, 2000) also found that heterogeneity promotes group conflict, resulting is a broad perspective that increases the evaluation of criteria needed to make the best decision. To properly measure the % of Dutch executives a dummy was created assigning the value 1 to a board containing at least one Dutch executive and assigning the value 0 to a board containing none Dutch executives. In order to guarantee that the value 0 is used a logarithm of plus one is used. For the original variable respondents were asked to indicate how many Dutch executives are present in the board of the foreign subsidiary.
% Dutch non-executives measures how many non-executives of a foreign subsidiaries’ board hold the Dutch nationality. This is tested for the same purposes as the % Dutch executives. In addition to the theory explained at % Dutch executives, Amason, Shrader, & Tompson, (2006) state that the degree of diversity within a TMT on characteristics such as functional background, age, and education may influence a TMT’s actions. To properly measure the % of Dutch non-executives a dummy was created assigning the value 1 to a board containing at least one Dutch non-executive and assigning the value 0 to a board containing none Dutch non-executives. In order to guarantee that the value 0 is used a logarithm of plus one is used. For the original variable respondents were asked to indicate how many Dutch non-executives are present in the board of the foreign subsidiary.
4.3.3 Control variables
Age has, as studied by several scholars such as Aziz & Samad (2016) and Hansen (1992), a significant effect on the achievement of innovative ambidexterity. One reason for this can be that older firms have a larger network of suppliers, buyers, and customers. All of which can trigger innovative ideas. Given that larger older firms have a larger network achieving effective innovative ambidexterity should be easier for them (Hui et al., 2013). This allows larger firms to more effectively pursue ambidexterity. Another reason can be that to achieve proper innovation firms require the entrepreneurial capabilities of opportunity exploitation and recognition. These capabilities are argued to accrue over time from a firm’s cumulative experience and learning (Withers, Drnevich, & Marino, 2011). In addition to previously mentioned reasons, multiple scholars like Cao, Simsek, & Zhang (2009) and Chang, Hughes, & Hotho (2011) also controlled
for firm age in their studies. In the BOM (2010) survey respondents were asked to write down the year of establishment of the foreign subsidiary. However after testing for normality the measure came out skewed. To solve the issues concerning normality the variable was transformed using a natural logarithm (lage). By doing so skewness improved to 0.739, which is well in between the threshold of (-/-) 1.950.
Size is a variable controlled for in this research. According to Nooteboom (1994) the literature states that small and large firms pursue different kinds of innovation. Especially that small firms tend to focus more on exploitation instead of exploration (Blumentritt, 2004). The reasons given for this are that small firms have less available resources and willingness to invest time. (Gassmann & Keupp, 2007). Whereas small firms tend to focus more on exploitation, larger firms tend to invest more in R&D and therefore have the availability to pursue exploration more (Schefer &Frenkel, 2005). Respondents in the BOM (2010) survey were asked to indicate the number of employees in the foreign subsidiary. However after testing for normality the measure came out skewed. To solve the issues concerning normality the variable was transformed using a natural logarithm (lnsize). By doing so skewness improved to 0.536, which is well in between the threshold of (-/-) 1.950.
Geographical focus is another variable controlled for in this research. According to Criscuolo, Narula, & Verspagen (2005) in the last decade there has been proof of growing overseas activities by MNCs in order to expand their existing assets and to absorb and acquire (technological) spillovers from the local knowledge base and specific firms. In addition, the literature shows that within the agglomeration of a group of firms geographical proximity has a positive influence on innovative activities (Silvestre & Dalcol, 2009). This indicates that firms focused in geographically strategic places (i.e., Silicon Valley) might be able to achieve innovative ambidexterity more successfully. To retrieve information about the geographical focus of foreign subsidiaries respondents were asked to indicate their foreign subsidiaries geographical focus by crossing the following boxes which were assigned the following values: 1) Netherlands, 2) Benelux, 3) Western Europe, 4) Europe, 5) EMEA, and 6) World.
Subsidiary activity is controlled for in terms of possible confounding effect. It is argued that a subsidiary’s activities can lead to more successful innovation. According to Venaik, Midgley, & Devinney (2005) subsidiaries that engage actively in learning activities see increased innovation and performance. To control for subsidiary activity all items were computed into a subjective scale. The measurement of each of the ten items was based on a 7-point Likert scale. Respondents who fully disagree received the value 1 (lowest) and respondent who fully agree received the value 7 (highest). The Cronbach’s alpha of these combined items is 0.702. As this is just above the threshold of 0.70 (Nunally, 1978), it enough to ensure validity in this subjective scale.
% R&D subsidiary ’10 is the last variable that is controlled for. The percentages spend by firms and subsidiaries on R&D is significantly associated with more successful forms of innovative ambidexterity (Wakelin, 2001; Lucena & Roper, 2016). Also, the more resources are invested in R&D, the higher the positive effect is on innovation (Thornhill, 2006). In the BOM (2010) survey respondents were asked to indicate the percentage of annual sales that the foreign subsidiary spends on R&D activities in 2010. To ensure that the value ‘0’ was taken into account during the regression the variable was transformed using a logarithm plus one.
5. Results
5.1. Descriptive Statistics & Correlation Matrix
Table 1 shows the descriptive statistics (Mean & SD) and a correlation matrix of the dependent variables, independent variables, and control variables, which are included in the statistical model. Within the correlation matrix certain correlations are notable. First there is a significant positive correlation between the independent variable board size and the dependent variable exploitation (0.176) p<0.01. In addition to this board size correlates positive with the second dependent variable exploration (0.126) p<0.10. Furthermore % of Dutch executives correlates significantly positive with exploitation (0.161) p>0.05, while % Dutch non-executives has a significant positive correlation with board size (0.210) p<0.01. In contrast to exploitation, which correlates significantly with six of the ten variables, exploration only correlates significantly with the variable subsidiary activity (0.258) p<0.01. Second, the control variable subsidiary activity has a significant positive correlation with five of the variables: exploitation (0.213) p<0.01, exploration, % Dutch executives (0.189) p<0.01, % Dutch non-executives (0.168) p<0.05, and size (0.185) p<0.01. Another variable that has significant correlation with multiple other variables is size which correlates positively both with exploitation (0.326) p<0.01, age (0.271) p<0.01, subsidiary activity, and % R&D subsidiary ‘10 (0.149) p<0.05. Third, the variables age, geographical focus and % R&D subsidiary ’10 have less significant correlation with the other variables. Only age correlates significantly positive with size, and also % R&D percentage ’10 correlates significantly with size.
Given that the highest significant correlation is (0.484) p<0.01 there should be no multicollinearity issues (Grewal, Cote, & Baumgartner, 2004, p. 520). However, according to Paul (2006) one can additionally observe the value influence factor (VIF) and eigenvalues of the correlation matrix to detect multicollinearity. Therefore, to double check for multicollinearity an additional statistical test was performed, the VIF. The highest VIF value that occurs is 1.155. This is significantly lower than the value of >10 for which multicollinearity occurs. There are also no tolerance levels <0.10 which, similarly to VIF, indicates that in this statistical model multicollinearity is not an issue.
TABLE 1
Descriptive Statistics and Correlation Matrixa
Variable Mean SD 1 2 3 4 5 6 7 8 9 10 1.Exploitation 35.593 6.500 1.000 2.Exploration 31.369 8.001 0.484** 1.000 3.Board size 3.08 3.068 0.176** 0.126† 1.000 4.% Dutch executives 0.448 0.498 0.161* 0.066 0.107 1.000 5.%Dutch non-executives 0.186 0.390 -0.101 -0.039 0.210** 0.098 1.000 6.Age 2.762 1.120 0.180* .0057 0.089 -0.007 0.132† 1.000 7.Size 3.374 2.002 0.326** 0.115† 0.070 0.133† 0.087 0.271** 1.000 8.Geographical focus 3.12 1.698 0.049 0.132† 0.005 -0.118† -0.061 -0.059 0.098 1.000 9.Subsidiary activity 41.009 11.786 0.213** 0.258** -0.010 0.189** 0.168* 0.107 0.185** 0.107 1.000 10.% R&D subsidiary ‘10 29.54 25.318 0.120† 0.030 0.040 0.038 -0.001 0.118† 0.149* -0.115† 0.102 1.000 a N =214 (Size → N = 211). † p<0.10; * p<0.05; ** p<0.01; ***p<0.001
5.2 Regression
To test the effect of foreign subsidiary TMT composition on a firm’s ability to achieve innovative ambidexterity an ordinary least squares (OLS) regression is performed. According to (Lubatin et al., 2006) a subsidiary’s TMT is a crucial bridge between itself and the parent firm for the successful transfer and usage of knowledge. Consequently foreign subsidiaries are seen as sources of competitive advantage for the MNC (Foss & Pedersen, 2002). As many scholars (e.g., Eriksson, 2013; Li et al., 2008) stress the importance of ambidexterity in organizations and many others recognize the effect of TMT composition on ambidexterity (e.g., Cao et al., 2009; Chouabi et al., 2009) it is important to study this relationship in the foreign subsidiary. The OLS regression is one of the most used regression analyses and can be defined as a generalized linear modelling technique that may be used to model a single response variable which has been recoded on at least an interval scale (Hutcheson, 1999; Moutinho & Hutcheson, 2011).
The results of the OLS regression are given in the two tables below. Table 2 shows the results on the dependent variable exploitation while Table 3 shows this on the dependent variable exploration. Both dependent variables are tested against five models. Model I shows the effect of the control variables only on the dependent variables. This model serves as ground model for model II, III, IV, and V. In model II the direct effect of the independent variable board size is tested against the dependent variables. Model III tests the direct effect of the independent variable % Dutch executives against the dependent variables. Model IV tests the direct effect of the indirect variable % Dutch non-executives against exploitation and exploration. Lastly, model V tests the direct effect of all independent variables (board size, % Dutch executives, % Dutch non-executives) on the two dependent variables.
In Table 2 all p-values are p<0.001 which indicates that all models are highly significant. In Table 3 all p-values are p<0.01 which indicates that all five models are slightly less significant than those in table 2. However this still indicates a decent level of significance. The R2 is a goodness of fit measure that statistically indicates how much the independent variables collectively explain the percentage of variance in the dependent variable (Figueiredo Filho, Silva Júnior, & Rocha, 2011). For example, in model 1 Table 2 the R2 is 0.135. This indicates that 13.5% of the variance in the dependent variable can be explained by the independent variable.
Hypothesis 0 (H0) states that foreign subsidiary top management team diversity does not have a positive effect on the ability to achieve innovation on the basis of simultaneous exploitation and exploration (ambidexterity). In Table 2 a significant effect is found of board size and the % of Dutch executives as in model II, model IV, and model V the p-value is below 0.001. In table 3 a significant effect is found of board size as in model II the p-value is below 0.1 (model V) and in model V the p-value is below 0.01. Given that board size has a significant effect on exploitation and exploration and that the % of Dutch executives has a significant effect on exploitation it is proven that foreign subsidiary TMT composition has a significant effect on innovative ambidexterity. Therefore H0 is rejected.
Opposite to H0, hypothesis 1 (H1) states that foreign subsidiary top management team diversity has a positive effect on the ability to achieve innovation on the basis of simultaneous exploitation and exploration (ambidexterity). To test this in a more concrete manner this study examines the effect of the independent variables on the dependent variables both individually and collectively.
First, the individual effect of the independent variable board size is tested against the dependent variables. This effect is tested in model II in Table 2 and Table 3. In both cases board size tests significant as it has a significant p-value lower than 0.001 (Table 2) and 0.1 (Table 3). To examine the nature of the effect the Beta-coefficients are evaluated. Board size has a positive effect on exploitation as it has a positive Beta-coefficient. This demonstrates that if board size increases by 1, exploitation will increase by 0.304 and that respectively exploration will increase by 0.324. Therefore there can be concluded that there is a significant positive relationship between board size and the dependent variables.
Second, the individual effect of the independent variable % of Dutch executives is tested against the dependent variables. This effect can be examined in model III in Table 2 and Table 3. Model III in both tables does not test significant showing an insignificant effect of the % of Dutch executives on exploitation and exploration. Therefore there can be concluded that the % of Dutch executives does not influence the achievement of exploitation nor exploration.
Third, this research examines the isolated effect of % of Dutch non-executives on de dependent variables. The results of this regression can be found in model IV in Table 2 and Table 3. In Table 2 the independent variable tests significant showing a p-value lower than 0.01 whereas in Table 3 it tested insignificant showing a p-value higher than 0.1. The Beta-coefficient
of the independent variable in model IV Table 2 is -2.859. This shows a significant negative relationship between the % of Dutch non-executives and exploitation indicating that when the % of Dutch non-executives increases by 1, exploitation decreases by 2.859. Therefore there can be concluded that the % of Dutch non-executives negatively influences the achievement of exploitation, nut not exploration.
Fourth, the effects of all independent variables collectively are tested against the dependent variables. These results can be found in model V in Table 2 and Table 3. When tested collectively the independent variables indicate a similar effect as described by model II, III, and IV when tested individually. First, a positive effect is found between board size and the dependent variables proven by their significant p-values and positive Beta-coefficients. Second, a negative relationship is found between the % of Dutch non-executives and the dependent variable exploitation.
In conclusion, H1 states that foreign subsidiary top management team composition has an effect on the ability to achieve innovation on the basis of simultaneous exploitation and exploration (ambidexterity). To test this an OLS regression was performed with exploitation and exploration as dependent variables, and board size, % of Dutch executives, and % of Dutch non-executives as independent variables. The results indicate a positive effect of board size on exploitation and exploration, but a negative effect of % of Dutch non-executives on exploitation. However, as both exploitation and exploration make up ambidexterity board size is the only variable affecting both dependent variables simultaneously. Therefore H1 is supported and one can assume that TMT diversity in a foreign subsidiary positively influences the degree to which innovative ambidexterity is achieved.
TABLE 2 Exploitationa I II III IV V % R&D subsidiary ‘10 .015 (.017) .014 (.017) .016 (.017) .013 (.017) .012 (.016) Subsidiary activity .084* (.036) .087* (.036) .074* (.037) .100** (.036) .097** (.036) Geographical focus .149 (.253) .135 (.250) .209 (.255) .096 (.250) .120 (.248) Size .785** (.226) .761** (.244) .747** (.227) .804*** (.223) .744** (.220) Age .538 (.391) .474 (.389) .577 (.391) .644* (.388) .627 (.381) Board size --- .304** (.136) --- --- .377** (.136) % Dutch executives --- --- 1.310 (.865) --- 1.187 (.844) % Dutch non-executives --- --- --- -2.859** (1.076) -3.573** (1.079) F-value 6.401 [.000] 6.277 [.000] 5.750 [.000] 6.669 [.000] 6.539 [.000] R2 .135 .156 .145 .164 .206
a N =211. OLS regression results. Robust standard errors appear in parentheses. P-values appear in squared brackets. † p<0.10; * p<0.05; ** p<0.01; ***p<0.001.
TABLE 3 Explorationa I II III IV V % R&D subsidiary ‘10 .002 (.022) .001 (.022) .002 (.022) .001 (.022) .000 (.022) Subsidiary activity .158** (.047) .160** (.046) .153** (.048) .167** (.047) .107*** (.048) Geographical focus .470 (.325) .456 (.323) .497 (.330) .440 (.326) .429 (.328) Size .294 (.291) .268 (.289) .277 (.293) .305 (.291) .267 (.290) Age .129 (.503) .061 (.502) .146 (.505) .189 (.506) .147 (.504) Board size --- .324† (.175) --- --- .377** (.180) % Dutch executives --- --- .580 (1.118) --- .402 (1.116) % Dutch non-executives --- --- --- -1.634 (1.403) -2.294 (1.426) F-value 3.734 [.003] 3.719 [.002] 3.146 [.006] 3.343 [.004] 3.134 [.002] R2 .083 .099 .085 .090 .110
a N =211. OLS regression results. Robust standard errors appear in parentheses. P-values appear in squared brackets. † p<0.10; * p<0.05; ** p<0.01; ***p<0.001.
5.3 Robustness Results
Table 4 exhibits a robustness analysis. As described by Weisberg (2007) a robustness analysis shows whether a result depends on the fundamentals of the model or the details of the clarifying assumptions. Weisberg (2007) also described that the aim of a robustness analysis is to split the scientifically significant predictions and parts of the models from the illusionary ones that are representations or accidents. To perform the robustness analysis the variables exploitation and exploration were transformed using the following formula: 1 – (Abs (exploration / exploitation)). Subsequently a similar OLS regression, using the same independent- and control variables as in Table 2 and Table 3, was performed.
Although this analysis would be beneficiary to the research in terms of its exploratory power, the models test insignificant. Therefore the models are included, however not elaborated on.
TABLE 4 Robustness Results a I II III IV V % R&D subsidiary ‘10 .003 (.015) .002 (.015) .003 (.015) .003 (.015) .002 (.015) Subsidiary activity .072* (.033) .073* (.033) .079* (.033) .073† (.031) .083* (.034) Geographical focus -.109 (.229) -.114 (.229) -.153 (.232) -.112 (.230) -.170 (.233) Size -.402† (.205) -.412* (.205) -.374† (.206) -.401† (.205) -.381† (.206) Age .286 (.355) .261 (.356) .257 (.355) .292 (.357) .236 (.358) Board size --- .120 (.124) --- --- .149 (.128) % Dutch executives --- --- -.968 (.785) --- -1.063 (.792) % Non-executives Dutch --- --- --- -.161 (.992) -.339 (1.013) F-value 1.638 [.152] 1.521 [.173] 1.621 [.143] 1.363 [.231] 1.383 [.206] R2 .038 .043 .046 .039 .052
a N =211. OLS regression results. Robust standard errors appear in parentheses. P-values appear in squared brackets. † p<0.10; * p<0.05; ** p<0.01; ***p<0.001.
6. Discussion & Conclusion
6.1. Contributions & Implications
Previous research has investigated the concept of innovation thoroughly (e.g., Criscuolo et al., 2005; Dittrich & Duysters, 2007; Andriopoulos & Lewis, 2009; Gault, 2018). Apart from the field of innovation, there has also been voluminous research in the fields of subsidiaries (e.g., He & Wong, 2004, Ireland & Webb, 2009; Lucena & Roper, 2016) and TMT composition (e.g., Wiersema & Bantel, 1992; Tihanyi et al., 2000; Daellenbach et al., 2009). Whereas most of the research conducted in these fields’ covers the relationship between TMT composition and innovative ambidexterity in the parent firm, this research investigates this relationship in the subsidiary.
More specifically, this research aims to fill the existing literature gap concerning TMT composition, in terms of board size and the number of expatriates vs. the number of locals in a subsidiaries board. Whereas board heterogeneity positively influences innovative ambidexterity it is assumed that board size and the number of expatriates versus the number of locals in a subsidiaries board influence the firms’ ability to achieve innovative ambidexterity (Amason & Sapienza, 1997). These assumptions are based on the existing literature in the fields of innovation, ambidexterity, and international business (IB).
Consequently, this research contributes to the literature on innovation by investigating the effects of subsidiary TMTs on such processes as well as the literature in IB by studying an unexplored facet of foreign subsidiary, namely the board of directors of such intermediaries.
This present research has led to the following insights. First, it demonstrates the significant positive relationship between the size of a foreign subsidiaries’ board and the firms’ ability to pursue exploitative and explorative activities. This outcome is in line with the previous research of Jansen et al. (2008) who found that board size, due to increases levels of board heterogeneity, contributes to the achievement of successfully balancing exploitation and exploration simultaneously. Furthermore, the outcome also follows the reasoning of Chouaibi et al. (2009), who state that an increased size of the board can be seen as a necessary condition to enhance investments in the R&D of a firm and consequently all the innovation activities because a larger team increases expertise and strategic decision-making.
Second, it successfully investigates the effect of a managers’ cultural background on a TMT’s ability to achieve exploitation and exploration simultaneously. This is done by looking at the dispersion of local managers versus expatriate managers in a foreign subsidiary TMT. As the BOM (2010) survey differentiates between Dutch executives and Dutch non-executives this research follows that reasoning. The results imply that when looking at the number Dutch executives in the board of a foreign subsidiary this does not significantly affect the achievement of neither exploitation nor exploration. However, when looking at the number Dutch non-executives in the board this does significantly affect the achievement of exploitation. These results partially contradict with the existing literature that states that board heterogeneity should enhance the successful balancing of exploitive and explorative activities. However, the negative relationship between the numbers of Dutch non-executives in a foreign subsidiary’s board implies that the number of local board members impacts the exploitative activities of the subsidiary. Therefore it can be stated that board heterogeneity in terms of nationality enhances a foreign subsidiary’s ability to achieve innovative ambidexterity.
Lastly, it adds to the literature by elaborating on the inherent tension between exploitative activities and explorative activities. Although many scholars already researched this tension (e.g., March, 1991; Sorensen & Stuart, 2000; Kim et al., 2012) this research adds to the literature in terms of investigating this inherent tension in the subsidiary.
6.2. Managerial Implications
In addition to its contribution to the fields of innovation and IB, this research also provides several managerial implications. First it provides guidance for the MNC on how to compose the board of their subsidiary. With the knowledge provided in this research MNCs can strategically compile their foreign subsidiary’s top management team based on the subsidiaries goal. For example when the goal of the foreign subsidiary is to pursue exploitative activities it should decrease the number of Dutch non-executives in the board and increase the size of the board. Second, this research adds knowledge on how to successfully manage a firms exploitation and exploration activities. For example foreign subsidiaries that want to follow the path of successful innovative ambidexterity should consider increasing their board size as it enhances exploitative and exploratory activities. In general the findings of this research add to the knowledge base of
MNCs on how to orchestrate their subsidiaries top management teams and achieve their desired outcomes.
6.3. Limitations & Future Research
Although the theoretical contributions and managerial implications of this research, it also demonstrates some limitation and opportunities for further research.
A limitation of this research is generalizability of the results. The research only tests for TMT size and the dispersion of expatriate board members versus local board members. As TMTs can differ in multiple aspects such as demographics (e.g., age, gender, race) or psychographics (e.g., personality, values, attitudes) TMT diversity can be affected in multiple ways. This limits the impact of the results as only two out of the many diversity aspects were tested. Future research could investigate other diversity aspects such as gender to increase the generalizability of the results. Furthermore, by testing other aspects of diversity novel ways of achieving innovative ambidexterity could be discovered.
Another limitation of this research concerns the outcomes of the OLS regression. Whereas board size tested highly significant, the % of Dutch executives tested insignificant for both exploitation and exploration. This indicates that the heterogeneity assumption concerning expatriate board members versus local board members in foreign subsidiary TMTs is incomplete and should be tested more thoroughly. According to multiple studies in the parent firm TMT heterogeneity should increase ambidexterity, as there is an increased friction due to differing personalities. Future research could further investigate this relationship within the subsidiary and add to the knowledge in IB.
Lastly, this research assumes that ambidexterity is the desired outcome for all organizations. Although ambidexterity is associated with competitive advantage and increased long-term performance it might not be in the strategic benefit of the subsidiary to pursue this goal. Some firms might set up an foreign subsidiary solely to manufacture products at a cheaper rate than in the home country. For these subsidiaries exploitation is the desired outcome, not ambidexterity. Future research could investigate the characteristics of foreign subsidiaries and their desired outcomes in terms of exploitation, exploration, or ambidexterity. For example what
the desired outcomes are of offshore manufacturing foreign subsidiaries? Or those of a lead foreign subsidiary?
6.4. Conclusion
In conclusion, this thesis focuses on foreign subsidiary top management team composition and its effect on the firms’ ability to achieve innovation on the basis of simultaneous exploitation and exploration (ambidexterity). The implications of this study show that foreign subsidiary top management composition in terms of board size and the amount of expatriate board members versus the amount of local board members has a significant positive effect on the ability to achieve innovative ambidexterity. Furthermore, the findings provide important insights in the effects of board size and the amount of expatriate board members versus the amount of local board members solely on exploitation and exploration. Despite its limitations, the results provide several meaningful implications for future research as it advises to increase the generalizability of the results and it advises to investigate the desired outcomes per foreign subsidiary. Therefore, this study provides insights for MNCs trying to establish a foreign subsidiary consistent with their own organizational goals, trying to balance between exploitation and exploration to achieve innovative ambidexterity, and in the end leading to sustained innovation and a competitive advantage.
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