Structuring top management teams in foreign subsidiaries: The effect of parent firm and subsidiary characteristics

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Structuring top management teams in foreign

subsidiaries:

The effect of parent firm and subsidiary characteristics

Bachelor Thesis in Business Administration

University of Amsterdam School of Business and Economics

Student: Emma Årnell Student number: 11634251

E-mail: emma.arnell@student.uva.nl Supervisor: Elko Klijn

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Abstract

Despite significant advancement in international business (IB) on the determinants of entry mode choices, little is known on how firms structure their foreign subsidiaries. This study draws from existing literature on corporate governance as well as IB in order to investigate the composition of subsidiary boards. Doing so sheds extra light on an understudied topic in IB, namely the design of ex-post governance instruments. The study also contributes to the extensive literature in corporate governance by identifying potential domain translation issues on the applicability of existing theories in this literature. In addition to the vast literature, the primary data that will be used comes from a mail survey distributed in 2011, that resulted in a final sample of 200 multinational enterprises, that was based in Noord-Brabant, the Netherlands. Aforementioned generated support for two hypotheses, regarding the characteristics from the parent firm and the subsidiary have an effect on the size of the top management team (TMT) in a foreign subsidiary. Thus, providing an extended insight on how a board comes to be composed.

Statement of Originality

This document is written by Student Emma Årnell 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.

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Table of Content

3.2 Variables & Measurements ... 11

4. Results ... 14

4.1 Descriptive analysis ... 14

4.2 Regression analysis ... 17

5. Discussion and conclusion ... 21

5.1 Contributions and implications ... 21

5.2 Limitations and future research ... 22

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1. Introduction

Due to pressures of globalisation, multiple enterprises have expanded abroad, by establishing foreign subsidiaries. While corporate governance research has mainly focused on analysing costs decisions (Aguilera, Marano, & Haxhi, 2019) and entry mode decisions (Hennart, 2009) for these international expansions, the composition about the TMT has been overlooked. In the past, the majority of international business research focused on entry mode decisions through FDI. In the research about corporate

governance, the focal point has mainly been the corporate boards (Boone, Field, Karpoff, & Raheja, 2007; Dalton, Daily, Ellstrand, & Johnson, 1998). The boards of subsidiaries have been neglected as an important focal point when it comes to international business studies. Leksell and Lindgren (1982) argue that most studies regarding the board and its effectiveness is a product of the directors’ experience and expertise. In the research led by Kriger (1988), there is the idea that a parent company can benefit from subsidiary boards, as they have a better grasp of the environment of the host country. Particularly for foreign subsidiaries, as they encounter uncertain environments changes. These

environmental changes can be legal, political or economic developments, that demands local information.

The parent firm's corporate culture and its characteristics have the ability to affect the subsidiaries characteristics (Harzing, 2002). Nevertheless, the characteristics of the parent firm and the host country should be evaluated when considering an expansion in a foreign country (Kotlera, Manraib, Lascuc, & Manrai, 2019; Buckley & Casson, 2019). As there is certain characteristics of a parent firm that determine how it operates. Expansion of a parent firm into foreign markets need to adapt to the local market

(Forsgren & Hagström, 2007), and the composition of the TMT should be able to support the local environment (Chhabra & Popli, 2019). The focus on the composition of these boards in foreign subsidiaries should increase, as internationalization is becoming more dependent on the people inside the firm (Spencer-Oatey & Dauber, 2019).

Composition of boards at a parent firm level is shown to be important. Certain characteristics as age, education level, gender and size, will therefore influence the firm's activities (Asensio-López, Cabeza-García, & González-Álvarez, 2019; Tulung &

Ramdani, 2017; Aguilera et al., 2019). When translating these characteristics towards the board of the foreign subsidiaries, domain translation issues may arise. This is because the

5 host country’s legal requirement might differ, as well as uncertainties and issues that do not exist in the home country (Buckley & Casson, 2019).

Within international business studies, the aspect of the design of ex-post

governance instruments is an understudied angle, while a few former studies have shown the importance of board’s and their effects on the organisation as a whole (Leksell & Lindgren, 1982; Kriger, 1988). The theories and models of traditional corporate governance are being challenged by the globalisation of MNE. The MNE is becoming progressively more global, due to the rapid increase in expectations concerning the economic and social accountability (Aguilera et al., 2019).

The optimal size for a foreign subsidiary TMT has been argued, concerning the effectiveness of a large vs small board. Lipton and Lorsch (1992); Jensen (1993), claims that a larger board can have a negative effect on the efficiency, as it may actually have the opposite of the desired outcome, including problems with free-riders and steep coordination costs. Contrary to this, there is researchers that are questioning this perspective. For firms that are facing complex environments, as they enter a number of different industries, can better benefit from a board with more participants (Coles, Daniel, & Naveen, 2008). Whereas larger boards can contribute to additional resources and expertise (Kim, Prescott, & Kim, 2005).

Concluding that the intention with this research, is to study the boards of the subsidiaries, and how the effect of the parent firm and subsidiary characteristics influence the composition of boards and more specifically the size of the boards. By investigating tangible and intangible assets such as; the size of the parent firm, the cultural distance, subsidiary size, and the geographic focus. With the hope to raise focus towards the gap present within international business. The research question of this study is, therefore:

How do parent firm characteristics and subsidiary characteristics affect the composition of top management teams in foreign intermediaries?

To contribute to the existing literature on corporate governance literature, several potential domain translation issues may arise from the theories that already exist in IB. Seeing as subsidiaries have moved away from being passive receivers of knowledge from the home country headquarters, towards receiving more support to be able to better gain knowledge from the host country (Dahms & Kingkaew, 2019). Considering the

aforementioned, displaying the importance of how these subsidiaries are being developed and effected by their parent firm, becomes a crucial part of expanding in a global sense.

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2. Literature review

2.1 Background theory

Foreign subsidiaries

A subsidiary is an entity that is separate from the MNE but that are integrated into the financial, strategic and structural parts of the parent firm (Leksell & Lindgren, 1982). At the same time, subsidiaries in an MNE have different roles to fulfil, this can therefore lead to various kinds of control and characteristics across subsidiaries (Harzing & Noorderhaven, 2006; Brinkshaw & Pedersen, 2009). Where the local environment is set to contribute to the ability to best perform the roles (Baraldi, Ciabuschi, Lindahl, Perna, & Gregori, 2018). The characteristics of a subsidiary can also limit their scope, seen by the different reactions taken by subsidiaries in the same industry, that is caused by the external environment (Essayed, 2006).

Internationalization with subsidiaries can be an effective strategy to be able to enter new markets while increasing its revenues and lowering the costs (Ellstrand, Tihanyi, & Johnson, 2002). With the use of a global network of subsidiaries across the world (Brinkshaw & Pedersen, 2009), it is possible to obtain and create knowledge that is locally specific, and this valuable information can then be transferred to the parent firm (Mu, Gnyawali, & Hatfield, 2007; Lin, 2014), or another subsidiary in the MNE network (Harzing &

Noorderhaven, 2006). Parent firms also provide the subsidiary with a transfer of knowledge, but the impact it has on subsidiaries differs when they are located in different countries (Berry, 2015). Leading to a rising complexity for organizations to manage the scattered geographical and cultural remote subsidiaries (Du, Deloof, & Jorissen, 2011), within the context of international business, resulting in a decentralization of the firm's activities (Kriger, 1988).

Considering the previously stated, that it is claimed that the subsidiaries in a foreign location will be confronted by a disadvantage relative to subsidiaries based in their home countries (Miller & Eden, 2006). Such include higher complexity and costs (Reimann, Rauer, & Kaufmann, 2015). These faced disadvantages differ depending on the country and require cooperation with both the host country and the parent firm to achieve success (Gong, 2016), in order to overcome the legitimacy dilemma that is present in a foreign country. As of this, the subsidiary has been becoming a more prominent and influential part of an organization. As subsidiaries are no longer only seen as passive receivers of knowledge from the home

7 country headquarters but are also receiving more support to be able to better gain local

knowledge from the host country where it resides (Dahms & Kingkaew, 2019). Making foreign subsidiaries more autonomous then before (Baraldi et al., 2018). Placing greater emphasis on understanding what is essential for subsidiaries to thrive, as well as how and why these factors affect them. The organizational environment of industries is rapidly changing, and these changes can happen on an economic, political or social level. Which has an effect on how the boards in subsidiaries are structured, in response to be able to handle changes and growth (Leksell & Lindgren, 1982; Boone et al., 2007).

Top management teams

The responsibilities that a subsidiary board has to manage is dependent on the host countries environment. Which is consisting of its legal, political, a constantly evolving environment and an ability to govern the rapid changes that need to be taken as a reaction to these factors (Kriger, 1988). How the subsidiaries evolve can be explained by looking at the activities that are driven by the TMT in the foreign subsidiary, and how opportunities are handled

(Brinkshaw & Pedersen, 2009).

Whereas the current goals are different by the TMT in the subsidiary and the

corporate board, leading to greater difficulties to monitor the subsidiary board. Consequently, a more active board is needed (Du et al., 2011). Deriving from such, a significant amount of responsibility is given to the board of the subsidiary (Strikwerda, 2003), to be able to

cultivate the local demands and use the knowledge that has been obtained in the most

efficient way (Mu et al., 2007). Following this increase of responsibility, the decision making tasks performed by the subsidiary board is argued to be more complex. Due to the fact that it has to satisfy the host country demands, as well as the demands of the MNE (Gong, 2006). The reaction to the environment may also have an impact on how the structure of the board as it evolves through time (Linck, Netter, & Yang, 2008). When a firm more thoroughly

evaluates decisions regarding the top management team, they can also enhance the internal coordination between the parent firm and the foreign subsidiary (Kriger, 1988). Contrary to the crucial role of a foreign subsidiary, Gillies and Dickinson (1999), argue that the role of a subsidiary is only to meet the legal requirements of the host country.

While the composition of parental boards has been studied in international business literature (Linck et al., 2008; Dalton et al., 1998), the boards in subsidiaries and their size has not received that much attention. How the board is composed is a vital determinant when assessing the overall effectiveness of the firm, as is it seen to have a direct relation with each

8 other (Ellstrand et al., 2002). In prior research, there have been contradictory arguments regarding the size of the board and its implications on the subsidiary. While one side claims that the larger a board is worse of and increases risks of ineffective behaviour (Lipton & Lorsch, 1992; Jensen, 1993), and the other side states that environments with a higher complexity level require larger boards (Coles et al., 2008). As a greater capability to create external connections is needed in a complex environment to survive (Dalton et al., 1998).

While there is limited research about the composition of top management teams in foreign subsidiaries, especially regarding the focus of on how the size of boards can be effected by certain characteristics from the parent firm or subsidiary, have been largely overlooked.

2.2 Hypotheses development

Parent firm characteristics

The characteristics of a parent firm consist of the experience they possess in international business and the strategies regarding expansion and growth, including their current assets and resources (Kotlera et al., 2019). Drawn from studies concerning corporate boards, that argue that the size of a parent firm has a direct effect on the corporate board size (Lehn, Patro, & Zhao, 2009; Linck et al., 2008). A comparison is made from the corporate board to the subsidiary board, to understand the effects that a larger MNE might have on the board in a foreign subsidiary. Reimann et al., (2015) argue that the availability of resources and capability to process the environmental information increases with a larger firm. Meaning that in the process of parent firm growth, the operations performed becomes more complex, due to the added amount of information. This in turn leads to a greater need of a board that is sufficient in size to handle the operations. This consequently results in a direct relationship between the board size and the size of the parent firm (Boone et al., 2007), demonstrating that a larger number of board members enhances the effectiveness when facing new complex environments, that arise when a firm increase in size. Whereas the environmental complexity is also related to the cultural background of the parent firm, that arises from entering

countries where culture differs.

The cultural distance can be seen as the degree values, norms and behavioural rules differ between countries. Hofstede’s dimensions are four cultural dimensions: power distance, uncertainty avoidance, individualism and masculinity. Power distance is based on the level of acceptance towards the unequal power distribution between employees.

9 Uncertainty avoidance is how employees perceive the level of threat when facing an

uncertain situation. Individualism is the degree to which people feel the need for

independence and a lower need for a group to identify with. Masculinity is measured with regards to the traditional gender roles in society, by which masculinity is can, for example, be performance goal-oriented, competition and ambition (Lopez-Duarte & Vidal-Suárez, 2013). When the cultural distance is large between the parent firm and a subsidiary located in a foreign country, the parent firm will encounter knowledge gaps, as they have limited information about the characteristics of the host country (Kogut & Singh, 1988). Several diverse difficulties can arise due to the lack of the aforementioned information and control (Du et al., 2011), and by increasing the size of the board, these problems can be more efficiently tackled.

As a direct result of the arguments mentioned above, it is expected that the

characteristics of the parent firm will have an explicit positive effect on the total size of the subsidiary board. Thus, it is hypothesized that:

H1: The characteristics of the parent firm have an effect on the size of the board size in foreign intermedia.

Subsidiary characteristics

When the certain activities performed by a subsidiary expands, the complexity of these activities also grows resulting in an increase in size, as well as the responsibility given to the board members (Reuer, Klijn, & Lioukas, 2014). This is also reliant on the increasing ability and access of information that the managers can collect about the host country, as the TMT then need more resources to complete these tasks (Reimann et al., 2015). Leading to the need of the board to be more actively involved in its operations (Du et al., 2011). The previous research done by Boone et al. (2007) displays how corporate boards and their size becomes larger to better manage the performance when the firm as a whole gets larger. This reaction is used to better understand the effect that the size of a subsidiary may have on the subsidiary board size.

The increase in external environmental factors that comes from an entity being present in a country other than the home country, requires the subsidiary to take several measures to adapt (Harzing, 2002). This can be done by evaluating the attractiveness of the environment, to be able to understand the substantial risks and opportunities that is connected

10 to the country (Kotlera et al., 2019). This includes the economic and legal institution of a host country, another factor that is also contributing can be a present language barrier between the countries (Lopez-Duarte & Vidal-Suárez, 2013). Aforementioned can then drive the

subsidiary to cultivate the certain characteristics of the local environment (Rosenzweig & Singh, 1991), or the structure of the board can also be seen as an environmental reaction (Du et al., 2011). Highlighted by Kim et al. (2005), the complexity of tasks that the board in foreign subsidiaries have to face is one of the reasons why a larger board be better suited for a subsidiary that is located in foreign countries. In order to tackle the lack of information that is present for MNE. Research done prior to this study, show that there is a direct effect on the overall size of the board, when a firm decides to expand the subsidiary into a new geographic location (Lehn et al., 2009).

From this, I draw the connection that if the firms that decide to place the subsidiary in a foreign location, and as the subsidiary grows in size to better handle these complex

environmental factors, then these two subsidiary characteristics together positively impact the size of the top management team in a subsidiary. This leads us to the second hypothesis

H2: The characteristics of the subsidiary has an effect on the size of the board size in foreign intermedia.

3. Research methods

3.1 Data collection

This study has been developed in a deductive nature, from where the two hypotheses arise. Secondary data will be collected through a self-administered survey distributed by mail, to the executive managers of an MNE that have a subsidiary that is located in Noord-Brabant. It was conducted in 2011 through a collaboration between Brabantse Ontwikkelings Maatschappij (BOM), and the Erasmus University Rotterdam, and mainly focused on the foreign-owned subsidiaries located in the Netherlands. The surveys were distributed to a total of 1051 parent firm and their subsidiaries, we received a sample back of 200, which correspond to a response rate of 19.03%. Which could be considered a low rate, but as the average response rate is 10-20% (Saunders & Thornhill, 2009), the response rate is seen as sufficient. The total number of surveys used in the regression model was 143. The content of this sample was four page survey with multiple choice

11 and open-ended questions concerning the firm’s top management team, including certain parent firm characteristics and subsidiary characteristics. Results collected contains key information about the TMTs structure in the subsidiaries, firm size, and measurements about the geographic distance.

The data collected was performed with a random selection, inclusive of diversified industries and geographical backgrounds. This process allowed for a great generalizable in the sample size and to ensure the external validity. Surveys that are provided by an

acknowledged organisation’s such as BOM and the World Bank and is frequently used in numerous studies and can, therefore, offer a higher level of credibility. The use of mail surveys is argued to be a very effective way of collecting data (Rookey, Le, Littlejohn, & Dillman, 2012), and can create a large population representative collection (Chisnall, 2007). To ensure the internal validity it is essential that the chosen variables are obtained from prior research to support the accuracy of the measures, providing a strong theoretical foundation (Carmines & Zeller, 1979; Hinkin, 1995). Doing so highlights the fact that the variables used was based on previous research and have demonstrated to be suitable for this study. As a result, this can therefore create strong internal and external validity, for this conducted study.

3.2 Variables & Measurements

Dependent variable

The dependant variable used for this study is Board size, which is the number of people in the top management team in a foreign subsidiary. Prior research argues that due to the

complexity of the surroundings of a foreign subsidiary (Coles et al., 2008; Gong, 2006), and their ability to contribute to the success of the firm. The size of the board should be composed in an effective way, as it has a direct outcome for the parent firm (Boone et al., 2007). In the survey, we asked how many executive and non-executive directors are appointed to the subsidiary board, and thereafter summated the score of these two variables together. In the tables presented below, we presented them as the count of the board size as well as the logarithmic transformation (log) of board size.

Independent variables

Parent firm characteristics

The first important parent firm characteristic that will be investigated is the size of the parent firm. This is used because it is argued to be an influence of the parent firm size towards the

12 corporate boards size (Lehn et al., 2009; Linck et al., 2008). Top management teams tend to increase its number of members as a response to the expansion of the parent firm, in order to remain effective as operations become more complex than before (Boone et al., 2007). For that reason, it is adopted as a relative measurement in relation to foreign subsidiary board size. Parent firm size is measured by the number of full-time employees working for the organization. As it did not have a sufficient score in regards of the skewness, and to ensure a normal distribution in this variable, it was transformed into a logarithmic variable (log).

The second parent firm characteristic is the cultural distance, and it is used to measure the level of cultural differences between the parent firms. If there is a large cultural distance between the parent country and the host country, having the subsidiary board monitoring the foreign subsidiary more closely can result, as a reaction, in a size increase of the board (Du et al., 2011). Similar to previous studies, to measure the average cultural distance of the MNE, the method created by Kogut and Singh (1988) was used by combining masculinity, individualism, power distance and uncertainty avoidance. This method includes Hofstede’s dimensions, that is presented below. Where n is the number of partners, Iij stands for the i-th cultural dimension for firm j. K stands for the Hofstede score for that dimension in the Netherlands. Vi is the variance of the i-th dimension.

Cultural distance: ∑ {∑ {(𝑙𝑖𝑗−𝑙𝑖𝑘)2 𝑉𝑖 }/4} 4 𝑖=1 𝑛 𝑛 𝑖=1 Subsidiary characteristics

As for subsidiary characteristics, the first one used is Subsidiary size. In the process of the foreign subsidiary’s enlargement, the role of a board in the subsidiary gain additional importance, in order to provide better monitoring to solve the more and more complex operations and activities resulting from the growth. This requires a more active board with more members, so the effectiveness does not decrease (Du et al., 2011; Reuer et al., 2014). The size of the subsidiary is measured by the number of full-time employees working at the foreign subsidiary. As a consequence of the positive skewness identified in this independent variable, a logarithmic (log) transformation was conducted.

Second subsidiary characteristic is Geographic focus, which is the determinant of the activity where the subsidiary is operating. Mentioned in the prior research done by Buckley (1993), states that the enlargement of a management team can be a vital force for the

international growth of a company. Which can be effected by the uncertainty and complexity of a foreign country that is higher than in the home country due to lack of information (Kim

13 et al., 2005). The six measurements that geographic focus contains is: the Netherlands,

Benelux, Western Europe, Europe, EMEA, and World. From this, a variable was transformed into a dummy variable, where the Netherlands was indicated as a 0, and the rest of the

measurement countries were coded into a 1.

Control variables

Year of establishment pertains to the year the subsidiary was established. Over different times the economy can be doing better or may be in the middle of a financial crisis. These

characteristics surrounding the uncertainty of an environment can influence the way the board was designed (Reuer et al., 2014). Because it is argued in previous research that there is an existing positive relationship between the age of the firm and the board size (Boone et al., 2007; Miller & Eden, 2006), this variable was considered. The measurement was taken from the BOM survey, where the year the subsidiary was the establishment by the parent firm was asked.

International strategy is the ability of the subsidiary to adapt with the environment of the industry. High scores in these questions can be characterized as there is a present global strategy that is taken into account by the parent firm, where the subsidiary acts as a

‘’pipeline’’ for the organization (Boone et al., 2007). Measurement of the international strategy was done by three survey questions in regards of the subsidiary’s industry: 1) business activities are susceptible to scale economies, 2) competitors exist that have a

presence in all key markets and 3) standardized product technology exists worldwide. As this being a 7-point Likert scale, that is ranging from “fully disagree” to “fully agree’’, a

Cronbach alpha test was conducted, showing a value of 0.703.

Entry mode decision is the choice made by the parent firm when expanding into a foreign market that is outside of its domestic market (Anderson & Gatignon, 1986). Which can be done by a joint venture or a wholly owned subsidiary. The different choices of entry mode require various degrees of adaption to the environment (Davis, Desai, & Francis, 2000), and have accordingly a great impact on the outcomes and possibilities of the company (Anderson & Gatignon, 1986). Along with the increased capabilities needed to handle this, can effect the size of the board in a subsidiary (Lehn et al., 2009; Kim et al., 2005). Thereof a dummy variable was created, joint venture got assigned a 0, and wholly owned subsidiary a 1. Where wholly owned subsidiary includes the acquisition of a Dutch firm, acquisition of a non-Dutch firm, and newly established subsidiary.

14 Marketing spending is the amount of money that the parent firm spend on activities regarding its marketing and promotion operations. Shown by previous research, firms that spend more money on marketing and promotional activities have a greater possibility to achieve a skill that can create a sustainable competitive advantage over other firms in the same industry (Onyeiwu, 2003), and the need for a greater board to be able to handle this may be needed. To measure this variable the percentage of the parent’s firm's annual sales that goes into promotional and marketing activities were recorded.

Subsidiary education depends on the level of education within the subsidiary staff. Ball and McCulloch (1993) highlight in their research, that there is great importance of education level when it comes to the employees especially many top managers of large American multinationals. This can therefore have an effect on size of the team needed to handle the activities and operations of a foreign subsidiary. To measure this, the percentage of how many full-time employees holding a degree in higher education in the foreign subsidiary was collected.

4. Results

In order to find support for the two hypotheses that is developed for this study, several statistical tests have been executed in SPSS. The number of subsidies in the final sample came out to a total of 143. To test the validity of the variables, a Cronbach alpha test was conducted. There were four models that were statistically tested with the goal of finding support for the two hypotheses. This with the use of a linear regression model and negative binomial model. Both reporting the unstandardized Beta coefficient (β), the standard error and the significance level of the respective variables.

4.1 Descriptive statistics

Table 1 displays the mean, standard error and the correlation between the dependent variable, independent variables and the control variables. The correlation matrix shows the correlations found between the variables included in the models. A few numbers of observations are identified. Board size and marketing spending have a positive correlation (r=0.220; p<0.01), which shows a weak linear relationship between the two variables. Both of the subsidiary characteristics show a significant effect on the dependant variable, whereas the size of the subsidiary shows a correlation (r=0.316; p<0.01). Meaning that the strength of the

15 relationship is at a moderately positive level. The second subsidiary characteristic, that is the geographic focus of the subsidiary, has a correlation of (r=0.171; p<0.05). This explains that there is a small correlation between these variables.

As for the highest correlation that is present between the parent firm size and the subsidiary size (r=0.466; p<0.01), this is below the threshold of 0.7, which indicates low levels of multicollinearity in the result. This is demonstrated by the lack of high correlations in the results. The control variable international strategy has three interesting correlations. The first correlation is the entry mode of the subsidiary, which has a small correlation of (r=0.175; p<0.05), and the second noteworthy moderate correlation is with the parent firm size (r=0.212; p<0.01). As for the last correlation with international strategy is with

subsidiary size (r=0.143; p<0.01). Subsidiary education level and the size of the subsidiary has a negative correlation (r=−0.291; p<0.01). Furthermore, geographic focus has positive correlations with the size of the parent firm (r=0.432; p<0.01), and also with the independent variable subsidiary size (r=0.205; p<0.01).

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4.2 Regression analysis

Table 2 presents the effects that the parent firm characteristics and the subsidiary characteristics have on the size of the subsidiary board, it was performed with a linear regression analysis. Model 1 is the baseline model, that consists of only the control variables and their effect on the dependent variable. Model 2 includes the effects of the control

variables and the first hypothesis which comprise of the parent firm characteristic variables, the size of the parent firm and the cultural distance. Where the first hypothesis stem from. In Model 3, focuses on effect of the subsidiary characteristics, subsidiary size and geographic focus, together with the control variables. Where the second hypothesis derive from. The complete model is displayed in Model 4, containing all variables and their interaction effects.

Parent firm characteristic one shows a significant result in model 2, with an unstandardized Beta value (β=0.048; p<0.05). Regarding the second parent firm

characteristic, has an unstandardized Beta value of (β=0.006; while having an insignificant p-value). Displaying that the relationship between the parent firm characteristic variables positively effects the board size of the foreign subsidiaries. These findings show support for the first hypothesis.

The result in model 3, highlights that there is the interaction effect of subsidiary characteristic one has an unstandardized Beta value of (β=0.172; p<0.001). As for the second characteristic from the subsidiary, an unstandardized Beta value of (β=0.002; p<0.05). These findings demonstrate that the subsidiary characteristics has a positive significant effect on the size of the board, this provides support for the second hypothesis.

In model 4, when including both parent firm characteristics and subsidiary characteristics, a significant interaction is shown with the dependant variable with an unstandardized Beta value of (β=2.924; p< 0.001). Where the first parent firm characteristic shows an unstandardized Beta value (β=−0.050; p<0.1), and the second parent firm

characteristic presents an unstandardized Beta value of (β=0.019; p<0.05). Subsidiary characteristic one bears an unstandardized Beta value of (β=0.220; p<0.001), whilst the second characteristic shows an unstandardized Beta value of (β=0.003; p<0.05). That characteristics from both the parent firm and the subsidiary, show a positive moderating effect on the size of the top management team in the foreign subsidiary. Proven by the positive significant effect in the statistical model.

18 In order to investigate the validity of the result, and to investigate the positive

skewness identified in the dependent variable. Two overdispersion tests were performed (Cameron & Trivedi, 1990). Based on the Poisson model, and its actual and fitted variables, two new variables were created;

𝑍𝑖. [(𝑌𝑖 ℮ ɱ𝑖)2℮(𝑌𝑖)/(√2 ɱ𝑖)] 𝑊_𝑖. 𝑔(ɱ_𝑖)/(√2ɱ𝑖)2

Where g(ɱi) can be specified as either ɱi orɱi. For this case, Yi, is the actual number of board members, and ɱi is the predicting number. The tests involve regressing Wi on Yi, and a significant t-value permits rejection of the null hypothesis that the variance in the response function Yi equals its mean. As a result of these tests, an overdispersion was identified. Since the Poisson regression model does not control for such, it was ruled out, in favour of a

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5. Discussion and conclusion

5.1 Contributions and implications

A significant amount of research that has been done in IB mainly focused on the structuring and decision making of corporate boards (Lehn et al., 2009; Harris & Raviv, 2008; Raheja, 2005), and is less known about the boards in the subsidiaries, for this reason, the aim of this study has been to shed a light on the boards in foreign subsidiaries. While the subsidiary boards have been discussed, the attention has been directed towards the activeness of a board (Du et al., 2011), the importance of a board (Kriger, 1988), the roles performed by a board (Leksell & Lindgren, 1982), and how decision making is entrusted to a board (Strikwerda, 2003). The boards in subsidiaries differ from corporate boards, which is proven by the study, as there is significant evidence that specific such subsidiary characteristics are essential to how the formation of organizations. Concerning the lack of information and uncertainty that comes with the fast changing environments (Kriger, 1988), boards in subsidiaries are facing several disadvantages, leading to an increased amount of responsibility (Strikwerda, 2003), and complexity of tasks (Gong, 2006). The composition of a board has shown by prior research to also be effected by; year of establishment (Boone et al., 2007; Miller & Eden, 2006), international strategy (Boone et al., 2007), entry mode (Anderson & Gatignon, 1986), marketing spending (Onyeiwu, 2003), and subsidiary education (Ball & McCulloch, 1993).

One important element to consider when looking at TMT’s in subsidiaries is the geographical focus, as it drives composition. Corporate boards, on the contrary, remain unaffected by the geographical diversity and geographical scope concerning the subsidiary and its board. Under these circumstances, there will be a need to increase the size of the TMT. In accordance with Dalton et al. (1998) that larger boards are necessary when the level of environmental uncertainty is greater. One underlying factor could be that monitoring, and control are essential to the geographical scope of the subsidiary. The composition of the subsidiary board can help improve the adaptability of a firm, as a response to external environmental factors and challenges present in a host country (Kriger, 1988). While operating in various geographical regions that differ from each other, a sufficient number of board members need to be held to oversee the operations. Leading to an MNE to have fewer appointed board members in the TMT of the subsidiary in a foreign entity that solely focuses on one country. Whilst the same subsidiary in the MNE can expand the TMT as it decides to operate overseas.

22 Whilst there are unique factors inherent to subsidiaries that drive the size of the TMT, there are also similarities between the boards of subsidiaries and those of their partners. Seen by the positive influence that the size of the subsidiary has on the subsidiary board, provides an insight that a larger subsidiary needs a larger number of directors. Which can be explained by the advantage of increased monitoring when the operations become more complex (Boone et al., 2007; Linck, et al., Coles et al., 2008). Interestingly the size of the parent firm has a negative effect on the size of the subsidiary board. A possible

explanation for this is, that the board of the parent firm can oversee more of the activities in the subsidiary, leading to a reduced need of a larger number of directors in the

subsidiary board. The positive effect displayed by cultural distance is shown on the members of the subsidiary board. Which prior research argues to be explained by the added need for control in organizations, resulting from new complex situations. From either the growth of a firm (Boone et al., 2007), or high levels of cultural distance (Du et al., 2011).

The results from this thesis imply that there is significant support that the size of a TMT in a foreign subsidiary is a product of its environment, both internally and externally. Which can provide managerial implications, such that the MNE consider these factors when constructing a board in a subsidiary.

5.2 Future research and limitations

Despite the findings presented by this study, the limitations of this study should also be taken in account for. The primary data was collected through a survey in 2011 resulting in a sample size of 200. The research setting takes place in North Brabant in the Netherlands, this cluster may differ from others in the need for a larger board, and could influence the generalizability of the results.

Future research can try to broaden the perspective of the study by including a more diverse sample, and by collecting data from subsidiaries located in different countries. Another limitation is that the survey was completed by a manager of the MNE, resulting in a risk of the data being one-sided and not include updated information about the

subsidiary. Future research could replicate this survey with the same companies in later years and include subsidiary personal as well. This could provide a more comprehensive understanding and an insight into the changes and its effects in a company. Even though both of the hypotheses were supported, a more extensive qualitative research about the internal factors that have an effect on the subsidiary.

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