Degree of internationalization and firm performance : the moderating effects of cultural and gender diversification of boards.

Degree of Internationalization and Firm Performance

Master Thesis

Serif Karsu 10425993 27-10-2013

University of Amsterdam: Faculty of Economics and Business Business Studies/International Management

Thesis Supervisor: dr. Ilir Haxhi Second Reader: Erik Dirksen

! "! Abstract!"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!#! Acknowledgements!""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!$! 1.Introduction!""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!%! 2.Literature Review!"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!&! 2.1. Measuring Internationalization!#######################################################################################################################################!$! 2.2. Internationalization and Firm Performance!################################################################################################################!%! 2.2.1.Benefits of Internationalization!""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!#! 2.2.2. Cost of Internationalization!"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!$%! 2.2.3. A glances at the literature regarding the internationalization and performance relationship on a time frame!""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!$%! 2.3. Board Diversity and Firm Performance!####################################################################################################################!"&!

3.Hypothesis Development!""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!'(!

3.1. Effects of Degree of Internationalization on Firm Performance!######################################################################!"'!

3.2. Cultural Diversification’s effect on Firm Performance!#######################################################################################!"(!

3.3. Gender Diversification’s effect on Performance!###################################################################################################!"(! 3.4. Moderating effects of Cultural Diversification!######################################################################################################!"$! 3.5.Moderating effects of Gender Diversification!#########################################################################################################!"%! 3.6. Framework!##########################################################################################################################################################################!&)! 4. Methodology!""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!)*! 4.1 Data Sources!#######################################################################################################################################################################!&)! 4.2 Sample!###################################################################################################################################################################################!&"! 4.3 Dependent variables!#########################################################################################################################################################!&"! 4.3.1 Return on Assets!""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!&$! 4.3.2 Return on Revenue!""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!&&! 4.3.3 Tobin’s Q!""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!&&! 4.4. Independent variables!#####################################################################################################################################################!&&! 4.5 Moderating variables!########################################################################################################################################################!&*! 4.6 Control Variables!###############################################################################################################################################################!&*! 4.7.Method of Analysis!###########################################################################################################################################################!&+! 5. Results!"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!)(! 5.1. Descriptive Analysis!#######################################################################################################################################################!&'!

5.2. Degree of Internationalization and Firm Performance!########################################################################################!&$!

5.2.1. RoA Regression!"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!&#! 5.2.2.RoR Regression!""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!&#! 5.2.3. Tobin’s Q Regression!"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!'%! 5.3. Cultural Diversification and Firm Performance!#####################################################################################################!*"! 5.3.1. RoA Regression!"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!'$! 5.3.2. RoR Regression!"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!'$! 5.3.3. Tobin’s Q Regression!"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!'&! 5.4. Gender Diversification and Firm Performance!######################################################################################################!*&! 5.4.1. RoA Regression!"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!''! 5.4.2. RoR Regression!"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!''! 5.4.3. Tobin’s Q Regression!"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!'(!

5.5. Moderation effect of Cultural and Gender Diversification!################################################################################!*+!

! &! 6.Discussion!"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!#%! 7. Limitations!"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!#(! 8. Future Research!""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!#+! 9. Conclusion!"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!#+! 10.References!"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!$*! 11. Appendix!""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!$#! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! !

! *!

Abstract

In this study we will expand earlier literature on the degree of internationalization and firm’s performance by studying how the board diversification affects this relationship. More particularly, considering the inconsistent results in previous studies, we first, explore the direct effects of degrees of internationalization expressed in terms of foreign over total sales and foreign over total assets on firm financial performance. And second, we test how this relationship is moderated by cultural and gender diversification at board level. In the current thesis, we argue that a higher degree of cultural and gender diversification at board level would positively affect the relationship between the internationalization and the performance. Taking economies of scale, a spread of risk, and multiple (new) perspectives into account, we argue that the degree of internationalization will have a positive influence on firm performance.

Cultural diversification value has been calculated based on the nationalities of the board members. All board members have been assigned a value based on the Kogut & Singh (1988) formula, which shows cultural distances between the nations based on Hofstede’s (1980) cross-cultural model. For a sample of 52 firms among the top 100 US firms, our results reveal that a positive correlation between the degree of internationalization and the firm performance, while, the moderating effects of cultural and gender board diversification is revealed to be non-significant.

This study contributes to theory, with regards to the relationship between the degree of internationalization and firm performance, by including the cultural and gender diversification at board level as moderators in the relationship. We argue that the diversification at board level will contribute to more (successful) internationalization, and therefore, play a significant role in terms of internationalization. Our result shows a positive correlation between the degree of internationalization and firm performance and we argue it is more accurate since the diversification at board level was included in the analysis. From a managerial perspective, this study will investigate to what extent cultural and gender diversification contribute to (successful) internationalization.

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Acknowledgements

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I would like to give a special thank you to dr. Ilir Haxhi not only for his help, support and confidence during the process of writing my master’s thesis, but as during the whole academic year as well. Also, I wish to thank the University of Amsterdam for accepting in to the master’s program because it will allow me to go into an exciting field. I would also like to thank my friend Dino Razov for his precious helps and feedbacks that helped me to improve my thesis significantly. Finally, I wish to thank to Mr. Erik Dirksen for his feedback that greatly helped me improve the quality this thesis.

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1.Introduction

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With the speed of globalization, the world is increasingly becoming a “global village.” Knight & de Wit (1997) defined globalization as “the flow of technology, economy, knowledge, people, values, [and] ideas . . . across borders. “Globalization affects each country in a different ways due to the nation’s individual history, traditions, culture and priorities” (Knight & de Wit, 1997, p. 6).

Therefore, in this changing world, our customs, our behaviors, our perspective to look at the socio-economic climate and, basically our lives, have been changing. Unquestionably this change affects the rules of games for business globally as well. Businesses are expanding their reach across borders more than ever before. The level of the degree of internationalization of most large U.S. firms has been increasing steadily, ranging from 10 % to over 90% of total operations (Belkaoui, 1998) and for some, internationalization seems inevitable too. Due to the rapid growth in degree of internationalization of corporations, the subject has been intriguing for many scholars. Especially in the last 30 to 40 years many scholars have focused their attention to the effects of degree of internationalization on the firm performance (Ruigrok & Wagner, 2003). A number of empirical studies have been examined to understand and to show the strength and the direction of relationship between these two and yet, these empirical studies still do not have a consensus on the results of the relationship between internationalization and firm performance (Bausch & Krist, 2007). Early studies, findings supported a positive relationship. The literature suggested reasons for this postulation.

The main reason is that the markets are not smoothly integrated to each other. Therefore, by having presence in more than one market it would give the firm the opportunity to balance out the macro economical instability in one market by compensating with another.

Firms also can explode the boost production without product diversification (Gomez-Mejia & Palich, 1997). However, later studies had considered that and included the costs such as organizational and environmental complexity, and lack of managerial capacity as an essential need when it comes to internationalization (Ruigrok &Wagner, 2003). These later studies have

! '! been mostly focused on trade-off between benefits and costs of internationalization and resulted in various findings on the relationship. It still remains as an intriguing, current, and hot topic for researchers and scholars to understand the dynamics of the relationship between Internationalization and performance. Since the findings in the literature on the subject are contradictory, it still remains as a gap to study. This gap in the literature was one of the reasons that have intrigued us to evaluate the relationship to comprehend the nature of the correlation between them.

When it is about internationalization, the cultural distance is described as differences between national cultures and plays a significant role in the success of overseas operations (Tihanyi, Griffith & Russell, 2005). When a firm operates internationally, it may need to adapt to the local cultural values -- such as language, religion, education, political economy --, to pursue its success in the international markets. Therefore, the cultural distance would increase the cost of entry and decrease the operational benefits; and likely to transform the firm’s knowledge and ability to foreign markets (Schwartz, 1999). The subject of cultural distance and its effects on businesses has received great attention from researchers and scholars in the later years (Ricks, 1990).

Some literature suggests that the cultural distance is inversely-related to the corporation’s overall performance (Li & Guisinger, 1992; Chang, 1995). On the contrary, there are studies suggesting the opposite and state the cultural distance may have a positive influence on the firms’ performance (Gomez-Mejia & Palich, 1997). The arguments of these studies show that firms can exploit the organizational advantages that can be gained from foreign operations. Also they can take advantage of combining the newly acquired skills in the new markets with their own resources to give them a competitive advantage (Morosini, 1998).

Clearly, there are costs of cultural distances that firms should consider when they start operating businesses overseas so that they can perform better. Hiring managers from different nationalities may ease the adaptation process to the other cultures. When the literature regarding the subject examined, it has come to our attention that the effects of cultural diversification at board did not pay much attention and it shows itself as a gap that encourages us to go deeper in the subject in this thesis (Zahra and Pearce, 1989).

! (! Although there is not a decisive empirical study nor a definite consensus on the effects of cultural diversification at board level on performance, there is still a belief that a corporation, with a higher–diversified board, leads to a better performance since strategic decision-making is crucial for Boards of Directors and higher degree of diversification would perform better on that (Zahra & Pearce, 1989). Therefore, we shaped the research question for this thesis with including the effect of cultural diversification at board level on the relationship between degree of internationalization and firm performance since one of this thesis aims is to present either having such diversification in the boardrooms of the firms may or may not help to diminish the costs that upraised from cultural distances. Therefore, we can formulate the research question of this thesis as:

“To what extent does the degree of internationalization affect firm performance and is this relationship moderated by the cultural and gender diversification at the board level?”

The level of effectiveness of board of directors is up to many criteria such as their qualifications, work experience, skill sets, level of ownership, compensations etc. (Campell & Minguez-Vera, 2008). In order not to be more specific in this thesis, it has been focused on only cultural and gender diversification among their other traits and skills at board level will be taken into the empirical study. To make this empirical study, the top 100 US firms -- sorted by their revenue of 2012-- have been used. After the data collection process we have resulted with 52 samples due to missing data. For the data of the samples hierarchical regression analysis have been performed. Some of the results of this thesis are in line with the literature while others show contradictory.

This study contributes to theory, with regards to the relationship between the degree of internationalization and firm performance, by including the cultural and gender diversification at board level as moderators in the relationship. We argue that the diversification at board level will contribute to more (successful) internationalization, and therefore, play a significant role in terms of internationalization. Our result shows a positive correlation between the degree of internationalization and firm performance and we argue it is more accurate since the diversification at board level was included in the analysis. From a managerial perspective, this

! $! study will investigate to what extent cultural and gender diversification contribute to (successful) internationalization.

In the following chapters, the literature on the relationship between the degree of internationalization and performance followed by the literature on the effects of cultural and gender diversification on the performance will be given. After given the literature on the subject, the hypotheses will be developed based on the literature. Then we will present and interpret the results of the analysis that tends to give an answer to the research question of this thesis, which is, once again, “is there any relationship between the degree of internationalization, cultural and gender diversification at board level and firm performance, furthermore, if the relationship between the diversification and performance is moderated by the cultural and gender diversification?”

2.Literature Review

In this section, we discuss the relationship between degree of internationalization and firm performance. But first we should define the measurement of “internationalization.” Following, we give insight of the literature for the board diversity and firms’ performance.

2.1. Measuring Internationalization

It is important to give a clear measurement for the degree of internationalization (DOI) concept before we start our analysis. In the review of internationalization by Hitt (2006), the most common method to calculate the DOI is the ratio of foreign sales to total sales/assets. Less common methods that have been used to measure it are the ratio of foreign to total employees/subsidiaries (Hitt et al., 2006). Based on the reviews in the literature, we will use the two major methods, ratio of foreign to total assets (FA/TA), and foreign sales to total sales (FS/TS), to measure the DOI (Fortanier, 2008).

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2.2. Internationalization and Firm Performance

The relationship between internationalization and firm performance has been extensively studied in the last three decades -- especially in the international business literature. Although a great number of studies have been done, there is still little consensus that has emerged between researchers and scholars in the nature of the relationship between internationalization and performance (Bausch & Krist, 2007). But having little consensus on the literature implies that there are benefits for firms to conduct business across borders as well as the costs for it (Ruigrok & Wagner, 2003).

2.2.1.Benefits of Internationalization !

The international business literature that suggests, “The internationalization and firm performance should be positively related” based on two core theories: theory of foreign direct investment (FDI) and theories of multinational firms (Ruigrok & Wagner, 2003).

FDI theory is focused on the external environment to explain why firms engage internationally. These external factors can be counted as: 1) not perfectly integrated markets, and 2) imperfections in products, factors, and financial markets.

Different markets around the world are not integrated perfectly. Therefore, by having presence in more than one market it may reduce the risk because they may face difficulties in one market but not in another -- which make the firms gain salutary effect on their overall performances (Caves 1982; Rugman 1979).

Numerous scholars have presented various explanations why firms should gain advantage as a result of internationalization. First, Ohmae (1989) argues that, without having product diversification, firms may gain cost advantages by expanding internationally due to economies of scale. Second, based on the market imperfection theory, when firms have monopoly advantages in their home market, they can exploit advantages such as intangible, firm-specific assets, brand name etc. in different markets as well (Palich, 1994). Finally, firms also may take advantage of arbitraging the different tax regimes where it is favorable for them. Being present in a market

! ")! before the competitors arrive allows firms to raise the entry barriers for the competitors, which can lead outperforming the competitors (Lessard, 1979; Palepu, 1985).

2.2.2. Cost of Internationalization

There are different theories in the cost that firms face upon their engagement with international markets. These theories can be summarized as:

Firms face the problem of not being able to manage capacity due to increasing degrees of internationalization that brings more complexity in the organizational structure and the environmental differences (Siddhartan &Lall, 1982). These complexities may be caused by information-processing demands and the cultural problems that have arisen because of the consequence of internationalization.

As the Hofstede literature states, cross-cultural engagements in businesses will also bring higher degree of complexity into the businesses due to cultural differences. It also requires a better managerial capacity to manage the businesses across borders, which a firm may not easily gain (Hofstede, 1980).

Due to the cultural and geographical dispersion of the business activities, the governmental and transactions cost will be higher relatively the level of firms’ global expansions (Jones & Hill, 1988).

2.2.3. A glances at the literature regarding the internationalization and performance relationship on a time frame

If we look at the literature in a timeline, we see there was a general postulation towards a positive relationship between internationalization and the firm performance. However, scholars have questioned this postulation heavily in the later years. Let us look at the literature within time frames to get a better understanding how theories have been shaped in time.

In the 1970s, there was a fundamental principle regarding the positive relationship between internationalization and performance. Researchers and scholars shared a strong focus on the benefits of international expansion and a subsequent suggestion of a positive and linear form of

! ""! the internationalization-performance relationship. These studies produced inconsistent and contradictory findings (Ruigrok & Wagner, 2003, p.65). As a reason for the inconsistency, contradictory, and ambiguous findings; later many scholars have pointed out, not taking costs of internationalization into account (Gomes & Ramaswamy, 1999).

However, later in the 1980s and 1990s, researchers acknowledged that internationalization could be subject to risk and failure. That opinion has changed the postulation that was mainly accepted in the 1970s. Recent studies have begun to examine the benefit-cost trade-off of internationalization. Since then, scholars have been trying to remodel the shape of the relationship. D. Thomas and L. Eden summarizes the models have been reached regarding the relationship between internationalization and performance as five major models. These models are (Thomas & Eden, 2004);

- Positive and Linear Model; the model indicates that as firms expand internationally, there is a positive, linear impact on firm performance (Buhner 1987, Vernon 1971).

- Positive but with diminishing returns. In this model, there is a positive impact first on performance, but with time, returns from international activities diminish, however the curve is still positive. (Gomes & Ramaswamy, 1999)

-U-shaped relationship. This model illustrates that firms get negative performance at the beginning of internationalization. But over time, with gaining international experience their performance would move to a positive direction. (Capar & Kotabe, 2003, Lu & Beamish, 2001) - Inverted U relationship model. Contrary to the U-shaped model, this model states that firms will face positive performance at the first phases of internationalization. But over time the cost of internationalization (such as; higher coordinating costs) outweighs the profit, and performance will become negative after it reaches its peak. (Gomes & Ramaswamy, 1999; Hitt, Hoskisson, & Kim, 1997)

- Sigmoid Relationship. This model is also called as “a three-stage” and “S-Shaped.” This model consists of three different stages. In the first stage, there is a negative slope due to initial costs and liability of foreignness, which is defined as “the cost of doing business abroad that result in a competitive disadvantage” (Zaheer, 1995). In the second stage (mid-stage) there is a positive

! "&! slope due to reasons such resource augmentation, economies scale and scope and reaching access to lower cost resources. In the third stage, the slope is negative again because of the raising coordination costs. (Contractor, Kundu, & Hsu, 2003)

Overall, we see that there is still not a clear, agreed-on picture of relationship between internationalization and performance in our day. There are different theories and contradictory results in the literature without any empirical consensus between researchers and scholars. Thomas & Eden (2004) contended that there might be three partial reasons for that. Firstly, the definition of internationalization could be different in these studies. Secondly, reflection of the theoretical benefits and cost of internationalization to firms’ performances might be conflicted. Finally, this relationship between internationalization and performance might be different in the long-term and short-term and that might be ignored in the empirical measures (Thomas & Eden, 2004, p.92).

Apparently, internationalization has benefits and costs. These benefits and costs can be caused internally and externally. “During the last decade, many scholars have paid particular attention to the benefit-cost trade-off to evaluate the relationship between internationalization and performance” (Ruigrok & Wagner, 2003, p. 7).

2.3. Board Diversity and Firm Performance

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Since the main focus of this study is the diversification of the boards, we have gone through the literature to see whether diversified boards may or may not make a difference on firm performance. The findings in the literature regarding the relationship vary.

The link between the Board of Directors and firm performance has been an intriguing subject for many scholars. Scholars have been seeking variation evidence to show if there is a relationship between these two. Some studies in the literature argue that the higher level of creativity, innovation can be encouraged by diversification. A better quality of decision-making could be performed at individual and group levels, as well as at the executive board of director level as the consequence of diversification (Zahra and Pearce, 1989). After considering these impacts, it should be asked whether the high degree of diversification at board level would provide better

! "*! performance. Many studies have been done in the literature to find a satisfying answer to this question.

Finkelstein and Hambrick (1996) examined the subject and they outlined two key functions for boards that are highly related to the performance of the organization. As the first key function, boards are commonly the most influential actors determining strategy direction and decision-making inherent in their structural position. Secondly, boards fulfill a monitoring role that may include: representing shareholders, monitoring proper use of organizations’ wealth; response to takeover threats; and hiring, compensating and monitoring top management work (Finkelstein & Hambrick, 1996).

In the literature, there were many studies that argued that the relationship between the diversification of board members and the firm performance should be directly correlated (Bantel & Jackson, 1989). Just as Finkelstein and Hambrick (1996), and Murray (1989) state one of the key arguments among the reasons why firms with much diversified board should outperform others is that they have a higher capability of making decisions based on the evaluation for more alternatives compared to the firms with less-diversified boards. Murray (1989) also emphasizes that the higher degree of diversification would positively affect firm image. When this reflects on the consumer behaviors, it would have a positive effect on the firm performance and shareholder value. Encouraging creativity and innovation within the firm, and providing the ability of better understanding the local and foreign markets are also mentioned as advantages of holding a diversified board for corporations (Murray, 1989). Zahra and Pearce (1989) also state that better board functioning will lead to a better organisational performance (Zahra & Pearce, 1989). In his study, Murray sampled 84 food and oil companies to determine whether having diversified groups would lead to better performances. He used the composition of age, educational degree level, average tenure and occupational history to measure the diversification. The results of his study showed that the relationship between the performance and the diversification differs according to the industry. Diversified groups outperformed in the rapid, and dynamic changing markets. Diversification allegedly gives the ability to adapt to quick changes in the markets (Murray, 1989). As a limitation of Murray’s work, it is stated that not only the age, educational

! "+! degree and tenure but the racial and ethnic diversification criteria would be more informative and relative while measuring the diversification ( Erhardt, Werbel & Shrader, 2003).

Alternatively, there were arguments in the literature against cultural diversification. Some of these studies suggest that diversification at board level may increase the time for the decision-making process because of possible more opinions and more questions. This time-consuming decision process may lead a lower performance for the firms in the high competitive sectors that require making decisions and taking actions very quickly (Hambrick, 1996). Diversified boards may make better quality decisions in the long run because their members were from different cultural, ethnic and gender backgrounds. However, the quality decisions that made in a long run may not always balance the negative effects of not being able to make quick decisions (Hambrick, 1996).

Without a doubt, one of the most important diversification of boards is gender diversification. Findings on the effects of gender diversification on firm performance are also contradictory. In one study, Catalyst (1995) reported that 97 out of the top 100 US companies -- measured in terms of revenue -- had at least one woman board member. In an earlier study by Catalyst (1993), 82 per cent of the 50 most valuable Fortune 500 firms were noted as holding at least one woman director on the boardrooms. (Erhardt, Werbel & Shrader, 2003)

There have been a number of studies that evaluated the relationship between gender diversification and firms’ performance. In one study, Shrader (1997) showed the relationship between these two variables. In his study, he used the gender diversification at the middle and upper management level, as well as at the board of directors’ level for large-sized corporations. The result of his study reported a positive relationship between gender diversification and firm performance (Shrader, 1997).

In another similar research that was conducted by Burke (2000) for Canadian firms, has exposed similar findings. In the result of Burka’s study, a significant correlation between the number of women in the boards and the firm performance (as indicated with revenue, assets, number of employees and profit margins) has been found. In this sense, Burka’s study suggests that firms with greater performance are tent to hold a higher degree of gender diversification (Burke, 2000).

! ",! Another recent study by Carter et al. (2003) also reveals a positive relationship between the gender diversification and firm performance as indicated by Tobin’s Q base on their empirical study with the data from Fortune 1000. We also see positive relationships between the gender diversification of board and the firm performance in the studies of Erhardt and Werbel (2003) and Adams and Ferreira (2004).

Singh et al. (2001) conduct a large survey of women directors on top UK boards. They show that even though female representation has increased over the years, the proportion of firms that had at least one female director has dropped by July 2000 from 64 per cent in 1999 to 58 percent. They show that this development had also occurred in the US, as well. Therefore, they find that female directors are more likely to be a member on the boards of large firms, with many employees and with the highest profits -- although the profit variable does not seem to be reported in their study.

In the study of Selby (2000) notes that firm performance can be positively affected by the presence of women board members upon her study with the top US firms (Selby, 2000). The findings of Bilimoria and Wheeler (2000) and Mattis (2000) on the subject are similar as well. They support the idea of women directors because they provide competitive advantages by increasing the ability of dealing in labor and products market. They state that women directors are more open to newer ideas and approaches to doing business (Billimoria & Wheeler, 2000). There is another similar view on the subject that the presence of women helps the boards fulfill its strategic role because they may have a slight edge over men (Fondas, 2000). Carter’s study is also among the studies that predict a positive relationship between gender diversification and firm performance (Carter, 2003).

But there are critics on the studies that predict a positive relationship between gender diversification and firm performance. The critics say studies on the subject are mostly based on US firms and take large firms as their sample so the results could be skewed. Some studies using large US firms show negative results as well. Shrader (2000) took the largest 200 US firms and analyzed the effects of gender diversification on firm performance (measured by ROA and ROE). The results of this study did not show any significant positive correlation (Shredar, 1997). In the study of Kochan (2003) also shows no positive relationship between these two variables

! "'! for US firms (Kochan, 2003). Another study conducted not for the US firms but Danish firms did not bring out any significant effect of the gender diversification on firm performance (measured by Tobin’s Q (Rose, 2004)

In summary, the existing literature suggests different findings on the impacts of diversification of the boards on firm performance. There are a higher number of studies showing a positive relationship between diversification and firm performance; however opposite views exist.

A further problem with many of the existing studies is that the samples used are typically only based on the largest (listed) firms that may have lead to skewed results and therefore unreliable and not representative of the actual relationship.

3.Hypothesis Development

In the chapter, the hypothesis will be developed according to the literature on our research area.

3.1. Effects of Degree of Internationalization on Firm Performance

As we mentioned, in the related literature review, there is no strong proof on the direction of relationship between degree of internationalization and the firm performance. However, the subject has intrigued the many scholars and the businessmen worldwide with pace of extensions of businesses cross the borders. The research conducted by the scholars has been contradictory. For instance, Grant (1987), Grant, Jammine and Thomas (1988), and Geringer, Beamish and da Costa (1989) have found a positive relationship between the degree of internationalization and firm performance. On the other hand, Michel and Shaked (1986) concluded their analysis with a negative relationship between these two variables. Furthermore, even though the literature may sound that firms should benefit from conducting businesses abroad, the empirical studies can not seem sufficient enough to prove these expectations.

However, we argue that the positive effects of being presence in more markets overweight the costs of it. Being present in multiple markets will result in mutual costs, which can be spread among more subsidiaries. In turn, this contributes to economy of scale advantages, which will decrease costs per subsidiary. Furthermore, we argue that being present in more markets can increase the firm’s long-term goals, by spreading financial and environmental risks among more

! "(! subsidiaries. Therefore, the first hypotheses of this study will shaped as that firm performance will be affected positively by the degree of internationalization.

H1. There is a positive relationship between degree of internationalization and firm performance.

3.2. Cultural Diversification’s effect on Firm Performance

As can be seen in the literature review above, we stated that according to Hofstede states cross-cultural engagements in businesses would also bring higher degree of complexity into the businesses due to cultural differences. It also requires a better managerial capacity to manage the businesses across borders, which a firm may not easily gain (Hofstede, 1980). Geringer (1989) also claims that firms may suffer because of the difficulty of managing higher levels of cultural diversity (Geringer, Beamish & DaCosta, 1989).

In this study, we argue that having a higher degree of cultural diversification at board level (i.e., we measure diversification at board level) may ease facing the problems caused by cultural clashes that can be faced during conducting businesses overseas. We argue that having a higher degree of cultural diversification will lower the costs of understanding the way of business in foreign markets by holding a board member from those nations. Eventually, firms will enjoy having this cultural diversification at boardroom by performing better. Furthermore, we argue that having a higher degree of cultural diversification will successfully contribute to firm performance by having multiple cultures, and therefore perspectives, discussing business practices. In turn, this will contribute to a better decision-making process and better (financial) results.

Therefore, we conclude our hypothesis accordingly and it can be stated as; H2: Cultural diversification of the board positively affects firm performance.

3.3. Gender Diversification’s effect on Performance

The literature mainly gives evidence on positive relationship between gender diversification and firm performance. For instance, Shrader et al. (1997) examined firm financial performance with gender diversity at the middle and upper management, and at the board of director levels for

! "$! large firms. They found general organisational effects, but few top-level diversity effects on performance and, in general, reported a positive link between women (diversity) in management positions with firm financial performance.

In this thesis, we argue that, firms would gain a competitive advantage by having a higher degree of gender diversification at board level. In line with Billimoria & Wheeler (2000), we argue that women are more open to newer ideas and approaches to doing business. We also argue that having a higher degree of gender diversification would increase the ability of dealing with the business in labor and products markets. Having a higher diversity will result in more creative discussions, which will contribute to reviewing more options. In turn, this can contribute to finding solutions/ideas, which were not thought off before.

Therefore, this thesis states that the direction of the correlation between gender diversification at board level and firm performance shall be positive. Therefore, our third hypothesis can be formulated as;

H3: Gender diversification of the board positively affects firm performance.

3.4. Moderating effects of Cultural Diversification

Since, based on the literature, cultural diversification may increase the likeability of firms’ performance abroad and eventually overall, the higher degree of cultural diversification of the boards may ease the internationalization activities decisions for the firms. Holding this higher degree of diversification may increase the possibility of overcoming the problems that have been caused by cultural distances when firms operate in foreign markets (Zahra and Pearce, 1989). In this study, we argue that having a cultural diversification at board level may bring about a higher degree of internationalization. Having more board members who have a higher degree of knowledge over the culture, businesses, language, network may leverage the process and progress of breaking into those markets. It may make a firm more aggressive in sense of approaching businesses over boarders. Furthermore, cultural diversification at board level results in having a better understanding in foreign markets. This experience/knowledge that board members may possess make it easier for firms to enter a foreign market.

! "%! Overall, this thesis posits that the cultural diversification at board level have a positive influence both on firm performance and on the degree of internationalization separately. Since we argue that cultural diversification will have an effect on both internationalization and firm performance, we argue that the cultural diversification might act as a moderator on the relationship between the degree of internationalization and firm performance. Thereupon, we conclude our hypothesis as;

H4: The relationship between the degree of internationalization and firm performance will be moderated by cultural diversification of the boards; higher cultural diversification will be positively related to the firm performance through internationalization.

3.5.Moderating effects of Gender Diversification

!

-.!/0!/.!.01023!14562!4507!58!072!9/02:10;:2!183!072!<2832:!3/62:./=/>10/58.?!3/:2>0!2==2>0.!58! =/:@! A2:=5:@18>2! 1.! 072! A107! 5=! 7BA5072./.! 326295A@280! .2>0/58C! 072! 9/02:10;:2! @1/89B! A:5A5.2.!1!A5./0/62!:2910/58.7/A!420D228!<2832:!3/62:./=/>10/58!183!=/:@!A2:=5:@18>2#!! E8!07/.!072./.C!D2!1:<;2!0710!<2832:!3/62:./=/>10/58!10!451:3!92629!@1B!7162!18!/8=9;28>2!58! 072! 32<:22! 5=! /802:810/5819/F10/58! 1.! D299#! ! -.! Billimoria & Wheeler (2000) stated in their study, a higher degree of gender diversification would increase the ability of dealing with the business in labor and products markets that may lead a better performance on internationalization GCampell & Minguez-Vera, 2008).

Since we argue that the gender diversification at board level have a positive influence on both the degree of internationalization and firm performance, we argue that there may be a moderating effect of it on the relationship between the degree of internationalization and firm performance as well. Therefore we formulate our hypothesis as;!

!

H5: The relationship between the degree of internationalization and firm performance will be moderated by gender diversification of the boards: Higher gender diversification will be positively related to the firm performance through internationalization.

! &)! 3.6. Framework ! !

4. Methodology

The data used in the search was obtained through different sources. The data used in the dependent variables (RoA, RoR and Tobin’s Q) of this research were obtained from the University of Amdsterdam’s DataStream. DataStream is described by the University of Amsterdam as a “financial database of businesses, stock prices, and macroeconomic data.” The data for Foreign Assets/Total Assets (FATA), and Foreign Sales/Total Sales (FSTS) were also obtained from datastream. We also had access to Compustat, through Wharton Research Data Services (WRDS). This allowed us to gain data for the list of board members of the firms including the number of women board members, which allowed us the information to calculate the gender diversification of the boards. Compustat is described by the WRDS as “a database of U.S. and Canadian fundamental and market information on active and inactive publicly held

! &"! companies.” With the data of the list of board members, we did a thorough search on the Internet to identify the nationalities of these board members to calculate the cultural diversification value of board for each firm.

4.2 Sample

The top 100 US firms -- determined by the 2012 revenue according to the “annual ranking of America’s largest corporations” of the Fortune 500 -- were used as the sample for this research. These indices consist out of large publicly traded firms in the US. Once we obtained the data for each variable except for the “cultural diversification value,” we went through the process of omitting observations that had missing values. We ended up with 63 observations. Since we use the Hofstede model to measure the cultural diversification we omitted observations (firms) that contains board members who are not from one of the nations that is not studied in the study of Hofstede because it would be difficult for us to assess the distance for these countries. These steps resulted in 52 observations for the study.

4.3 Dependent variables

!

The dependent variable of this study is firm performance. We will use Return on Assets, Return on Revenue and Tobin’s Q to measure firm performance, which will be elaborated in the subsequent sections. To determine if findings differ for any of the firm performance measures, these all dependent variables will be tested independently for each model for the years of 2009, 2010 and 2011.

4.3.1 Return on Assets

Return on Assets (ROA) measures the ratio of annual net income to average total assets a firm holds during a financial year. As such, it measures firm performance while taking efficiency into account. It is important to control for industry when using ROA as a performance measure, because some industries may require a relatively large amount of assets to obtain comparable profits compared to other industries. The data needed to calculate ROA is derived from COMPUSTAT. The following formula was used to calculate ROA:

! &&! 4.3.2 Return on Revenue

Return on revenue (ROR) is a measure of profitability that compares net income of a company to its revenue. This is a financial tool used to measure the profitability performance of a company. Also called net profit margin. The data needed to calculate ROR is derived from COMPUSTAT. RoR compares the net income and the revenue. The only difference between net income and revenue is the expenses. An increase in ROR is means that the company is generating higher net income with lesser expenses.

Calculation (formula); This can be expressed in the following formula as below;

Return on Revenue (ROR) = Net Income / Revenue

Both of these figures can be found in the income statement. Net income is also sometimes referred to as profit after tax.

4.3.3 Tobin’s Q

The Tobin’s Q ratio has been received a significant credibility and has been used in many studies (Wernerfelt & Montgomery, 1988). The ratio is used to measure the market value of a company. It is used relative to the replacement cost of the firms’ assets. When the value of the ratio is between 0 and 1, means that cost of replacing the firms assets is higher than the value of the firms’ stocks. A higher value (greater than 1) means that the stock of the firm is overvalued (Sauaia & Castro, 2002). The formula to calculate the Tobin’s Q ratio is as below:

((Equity Market Value + Liabilities Book value) / (Equity Book Value + Liabilities Book value))

4.4. Independent variables

In our study we use the degree of internationalization as our independent variable. There are several ways to measure the degree. In this study the ratio of Foreign Assets/ Total Assets (FA/TA) and Foreign Sales/ Total Sales (FS/TS) are used (Fabienne, ) Base on the industry that a firm in, the amount of assets that is located out of home country may differ. Therefore, the ratio of FA/TA might not be enough to give away the internationalization degree of a firm. Therefore, we have decided to include the FS/TS ratio as well since they are together be more explicit to present the internationalization degree. We collected the data for FA/TA and FS/TS for the time period of 2009-2011 for the top 100 US firms that are subject to this research.

! &*!

4.5 Moderating variables

In this thesis, two characteristics of the boards have been used as moderators in the relationship between the degree of internationalization and firm performance. These characteristics are the cultural diversification and the gender diversification of the boards. Gender diversification variable is accessible on COMPUSTAT, but to calculate the cultural diversification of the board we had to go check the nationalities of the board members one by one on internet.

$"%"'"! ,-./-01.! 23450637381/39:! 97! ;910<6= Cultural diversification value of the boards will be used as moderator in the relationship between internationalization and firm performance. And it will be calculated as assigning cultural distance number to each of the board members of each sample firm based on their nationalities. These numbers will be calculated beforehand with the Kogut & Sings’ formula based on Hofstede cultural dimensions. Basically, these numbers show how much a nation is distant from the USA culturally. We will take the USA as the base country since it is the home country for the study –for the sample firms-- In the next step, the arithmetic average of the board members will be calculated by dividing the total of numbers associated with each board member to the number of board members. We will assign zero for the American board members since the USA is used as the base country.

$"%")"!>5:<50!23450637381/39:!97!;910<6= Gender diversification (GD) of the board will be used as moderator in the relationship between internationalization and firm performance as well. It is the ratio of women board members to the number of total board members.

GD = Number of Women board members/ Number of total board members (references)

4.6 Control Variables

When conducting an empirical study to see a relationship between two and more variables, it is important to isolate all the other variables that have possible effects on the dependent variable. In this research, three control variables have been used to clear the picture of the relationship between our dependent variables and the firm performance. These three control variables are firm size, industry and board size of the firms.

! &+! $"("'"!?30@!A3B5= Firm size is measured with the revenue of firms on year of 2012. The data is found in Compustat. Firm size needed to be included as control variable since researches suggest that the larger firms tend to have a higher degree of diversification in their board management level (Simpson, Carter & D’Souza, 2010). And one of the focuses of this research is board diversification.

$"(")"!;910<!A3B5= Board size is also included as a control variable among the variables subject to this research. Board size is defined as the number of directors who has seats on board (Erhardt, 2003).

$"("#"! C:<-6/0D= Finally, industry is taken as a control variable as industry-specific characteristics may significantly influence a firm’s (in)tangible assets. For instance, firms in high-tech and service-oriented industries may be more knowledge intensive than other firms. To control for these industry-specific characteristics, we used industry as a control variable.

4.7.Method of Analysis

In order to demonstrate the relationship between independent variables (FA/TA, FS/TS, Cultural Diversification and Gender Diversification) and the dependent variables (Firm performance) in the year of 2009, a hierarchical regression is used. Three similar hierarchical regression is performed for each of the variables (RoA, RoR and Tobin’s Q) that measure firm performance as we can see below in the table 1a to see if the results differ for these different firm performance indicators. In the first step of the regression, only the controls variables are entered. Independent variables are added one by one and only one at a time with the control variables in the upcoming steps (Steps 2,3,4 and 5). In the next steps, we multiplied the moderating variables (Cultural and Gender diversification) with the independent variables (FA/TA and FS/TS) to create new variables to see if there are any moderating effects in the relationship between the degrees of internationalization firm performance. Finally, in Model 10 includes all the control, independent and the moderator variables. Then we have applied the same method for the years of 2010 and 2011 to generate separate regression analysis in order to see whether results are similar in different terms and economical conjectures.

Following tables (1a, 1b and 1c) explicitly demonstrates that which variables are taken into account for each steps of the hierarchical regression analyze.

! &,!

Table 1a. Variables included in different steps of the hierarchical regression analysis for 2009.

Table 1b. Variables included in different steps of the hierarchical regression analysis for 2010.