CEO non-nativity and foreign equity
commitment:
A study of Dutch firms
Nicolas van der Tol 11684992 22 June 2018
MSc Business Administration: International Management University of Amsterdam
Final Version Master Thesis Supervisor: Dr. Niccolò Pisani
ABSTRACT
Despite a growing number of non-native individuals amongst top-management-teams (TMTs), research on the relationship between Chief Executive Officer (CEO) non-nativity and a firm’s pattern of internationalization through foreign equity commitments remains relatively unexplored. Additionally, recent literature suggests nationally diverse TMTs are linked with comparatively higher firm performance and levels of internationalization. Using the Upper Echelons Theory (UET), this study researched 80 Dutch firms to determine the relationship if the addition of a non-native CEO was positively related to foreign equity commitment. This study concludes confirming the highly significant relationship between CEO non-nativity and foreign equity commitment, and that companies wishing to internationalize with higher equity should consider non-native CEOs.
Keywords: CEO non-nativity, foreign equity commitment, TMT performance, internationalization, upper echelons theory
STATEMENT OF ORIGINALITY
This document is written by Nicolas van der Tol who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it. The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
Table of Contents
1.Introduction... 5
2.Literature review... 7
2.1 Internationalization theories... 7
2.2. Scale and scope of internationalization... 9
2.3. Entry modes ... 10
2.4. Top management team and national diversity ... 11
2.5: The role of CEO and upper echelons theory……….…...…...…….12
3. THEORETICAL FRAMEWORK ... 15
3.1. CEO non-nativity and foreign equity commitment ... 15
3.2. The moderating role of the scale and scope of internationalization ... 17
3.3. The moderating effect of the firm size ... 18
4. METHODS ... 21
4.1. Sample and data collection ... 21
4.2. Measures ... 21
4.2.1. Dependent Variable ... 22
4.2.2. Independent Variable ... 22
4.2.3. Moderating Variables ... 22
4.2.4. Control Variables ... 22
4.3. Statistical analysis and results ... 23
5. DISCUSSION ... 28
5.1. Academic relevance ... 31
5.2. Managerial implications ... 32
5.3. Limitations and suggestions for future research ... 32
6. CONCLUSIONS ... 35
7. REFERENCES ... 37
List of Figures Figure 1: Conceptual model ... 19
List of Tables Table 1: Descriptive statistics ... 26
1.0: Introduction
Discussion on the topic of firm internationalization remains commonplace in the context of international management studies. According to Paunovic and Prebezac (2010), internationalization can be defined as a series of business activities outside national borders, based on applying the notion of international marketing. Kirca et al. (2012) describe internationalization as a process that interacts with the structure, functioning, strategy and performance of a firm. Both definitions indicate the broad spectrum of business activities that internationalization theory relates to, demonstrating the importance of further research. The impact of TMTs and nationality diversity on firm performance is another aspect of internationalization theory increasingly mentioned in academic studies (Greve et al. 2009; Kaczmarek and Ruigrok, 2013; Carpenter et al. 2004).
Recent studies on top-management-team (TMT) compositions within top multinational enterprises (MNEs) noted hiring foreigners as board members or Chief-Executive-Officer (CEO) is becoming more common (Staples, 2007; Heijltjes et al. 2003). Several studies similarly indicate a positive relationship between foreign management teams, level of firm internationalization and international performance (Boone and Hendriks, 2009). Furthermore, TMT heterogeneity is positively associated with the scale and scope of internationalization, resulting in more complex strategies (Ferrier, 2001; Nielsen and Nielsen, 2013). Tang et al. (2015) point out the need for further research on the internationalization of TMTs, as different nationality combinations can have widely varying outcomes on organizational performances. Kaczmarek and Ruigrok (2013) likewise indicate the stream of TMT literature is only just beginning to emerge, despite its intuitive existence among MNEs.
Several studies have been conducted to identify various factors of TMTs that could explain the degree of firm internationalization and performance (Kirca et. al, 2012; Staples, 2007, Tanikawa et al. 2017). Studies concerning managerial or firm experience in global
markets are often cited in this context (Aharoni, Tihanyi & Connelly, 2011), research has also suggested other attributes such as age, tenure and existing degree of internationalization to have an impact on these outcomes (Tihanyi et al. 2000). Research by Nielsen and Nielsen (2013) further demonstrate a relationship between TMT nationality heterogeneity and selecting entry modes with higher degrees of equity. The impact of TMT characteristics can be described through the upper echelons theory (UET) (Hambrick and Mason, 1984).
UET describes how organizational performance is a reflection of TMT characteristics since organizational control is generally centralized within the board of directors (Hambrick and Mason, 1984). The main concept of UET is that executives’ personalities, values and experiences influence their interpretations of situations, impacting decision-making processes and ultimately, organizational outcomes (Hambrick and Mason, 1984). While a number of studies have applied UET to explore the various aspects of TMT, empirical studies on the role of non-nativity or nationality remain rare (Nielsen and Nielsen, 2011). This appears somewhat remarkable, considering the increase of non-natives on TMT’s of MNE corporations, globalization and the transformation of the executive headhunting process to transcend borders (Nielsen and Nielsen, 2013).
Research by Adams, Almeida and Ferreira (2005) highlight the powerful impact of CEOs on corporate performance. Seeing as CEOs are more involved with aspects of everyday business than others, this prompts further investigation (Adams, Almeida and Ferreira, 2005). Mackey (2008) also considers the significant impact of CEOs, concluding they can account for approximately 29% of variance in organizational profitability. Huang (2013) further demonstrates the importance of CEOs to the organization, as they show the degree of personal CEO involvement in implementing (time spent) strategy directly affects the success of implementation and organizational profitability. The following chapter will discuss relevant research and findings in order to form the basis for subsequent hypotheses.
2.0: Literature Review 2.1: Internationalization theories
Discussion on the significance of international trade for an organization’s prosperity has been heavily covered in academic literature since Smith’s (1776) introduction of comparative advantage, and internationalization theory discussion remains a hot-topic in the context of international business (Johanson and Wiedersheim-Paul, 2004). Currently, scholars continue to explore the various motivations and processes a firm must undergo in order to achieve internationalization. While this has led to the development of a number of internationalization theories, a selection of the most common theories relevant to this thesis will be discussed.
The theory of the multinational enterprise (MNE) developed by Hymer (1987) is often regarded as a major chapter in the development of internationalization theory (Buckley, 2011). Based on the notion that foreign direct investment is the result of market imperfections through inequalities in markets, competition through economies of scale and government intervention. Hymer (1987) identified the possibility some firms may own strategic assets that provide them with an advantage over indigenous firms in other markets. As a result, these firm specific advantages (FSAs) enable MNEs to overcome the liability of foreignness when internationalizing.
Heavily rooted in the theories of bounded rationality and opportunism, Williamson (1979) developed the principle of transaction cost economics (TCE). Uncertainty, frequency and degree of durability are three critical characteristics Williamson (1979) noticed for transactions in this context. The principle helps explain the existence of internationalization and internalization alike, as agents and organizations set out to find the most efficient coordination mechanism through perceived market imperfections. When external transaction costs are higher than internal bureaucratic costs, TCE argues firms will internationalize since
they are able to outperform foreign markets. TCE therefore describes the formation of an MNE through insourcing or outsourcing market inefficiencies.
Johanson and Vahlne (1977) developed the Uppsala Model to describe internationalization as a process of learning and gradual commitment to foreign markets. Viewing the most important obstacles of internationalization to be a lack of knowledge and resources, over time, the Uppsala Model dictates firms that are successful at home will eventually gain enough experience to internationalize. This process will occur in stages, initially through low equity commitments such as exporting to neighboring countries with similar cultures. Therefore, continued success in foreign markets will lead to further penetration of increasingly more distant ones through greater equity modes as the liability of foreignness decreases (Johanson and Wiedersheim-Paul, 2004).
The Ownership-Location-Internalization (OLI) framework states entry mode decisions are determined by the composition of the three sub-paradigms of FSAs as stated in its title (Dunning, 2001). While ownership advantages relate to nationality and nature of the company owner, location advantages to the access and cost of resources and internalization to the transfer of ownership advantages across geographical boundaries within an organization, the OLI paradigm suggests the strategic positioning of a firm to dictate entry mode choice and equity commitment (Dunning, 2001). Lastly, Dunning (2001) notes that there are four reasons why firms would consider internationalization: market, resource, efficiency and strategic asset seeking.
Focusing on the difficult to imitate attributes of the firm, the Resource-Based-View (RBV) argues resources as the key to creating competitive advantages (Barney, 1991). While resources can be either tangible; such as land, buildings or machinery, or intangible; such as brand reputation, trademarks or intellectual property, RBV also assumes resources to be immobile and heterogeneous (Barney, 1991). In addition, resources need to be VRIO/VRIN,
valuable, rare, imperfectly imitable, organization specific and/or non-substitutable, in order for businesses to develop and sustain competitive advantages. Lastly, RBV regards organizational learning as a major factor in the development of new markets.
The Institution Based View (IBV) drafted by Peng (2002) considers institutions to be determining factors of internationalization. Institutions, formal or informal, impact organizational outcomes and decision-making. The IBV also urges firms to consider the presence or absence of certain institutions that can impact business activities before undergoing internationalization (Peng et al. 2015).
2.2: Scale and Scope of internationalization
Prior to participating in international markets, firms need to decide to what extent they wish to internationalize. As Lu and Beamish (2001) note, the degree of internationalization can be explained in terms of scale and scope, which offer valuable insight to a firm’s strategy.
Peng et al. (2015) define the scope of internationalization as the geographic spread of affiliates across countries. Similarly, the scale of internationalization is referred to as the degree to which a firm’s activities depend on foreign markets (George, Wiklund and Zahra, 2005). Research suggests firm internationalization has a positive effect on long-term performance (Lu and Beamish, 2001; Tanikiwa, Sung and Jung, 2017). This impact is even more noticeable for SMEs, as the potential market reach expands dramatically when firms look outside their own geographic boundaries (Cerrato and Piva, 2012). Combining the scale and scope of internationalization with the RBV, firms that sell highly inimitable products or services, international companies are likely to outperform competitors and successfully establish their brand simultaneously in a number of foreign markets (George, Wiklund and Zahra, 2005). Additionally, such firms will benefit from the advantages of learning and experience over time, as the increased scale of internationalization allows such firms to grow even further.
Despite the general agreement of the relationship between firm performance and degree of internationalization, the graphical depiction has seen considerable change over time. Initially, it was presented as a simple negative or positive linear relationship (Lu and Beamish, 2001). Later however, this was re-evaluated to follow a U-curve, inverted U-curve and ultimately an S-curve (Lu and Beamish, 2004). The latter was considered a better representation of a firm learning slowly to overcome the liability of foreignness, enjoying the benefits of successful internationalization and then ultimately negative again as the overruling costs of over-internationalization negatively impact the firm (Quan, 2002; Lu and Beamish, 2004).
2.3: Entry modes
The selection of a suitable entry mode remains one of the most vital aspects for a firm’s successful internationalization (Cerrato and Piva, 2012). Prior to participating internationally, firms are required to determine the degree of equity commitment, if any, they wish to place in foreign markets (Pan and Tse, 2000).
Pan and Tse (2000) have arguably delivered one of the principal papers on the topic of equity modes. The hierarchical model of entry modes (Pan and Tse, 2000) states that first, entry modes can be distinguished by non-equity and equity modes. Equity based modes being wholly owned subsidiaries and joint ventures, while non-equity modes represent contractual agreements and exports (Pan and Tse, 2000). Additionally, wholly owned subsidiaries can also be further developed as a greenfield investment; building an entire subsidiary from the ground up and acquisitions; acquiring a controlling share of a venture in the country of choice. Secondly, it is argued that non-equity modes require lower levels of control since these require substantially less investment and a far shorter learning curve. Lastly, Pan and Tse (2000) demonstrate that organizational and environmental factors can exert substantial influences at
the equity vs. non-equity level, however, this effect is less significant at the lower level of the hierarchy.
The concept of control in terms of equity modes remains a double-edged sword. Seeing as the level of control increases with the percentage of equity ownership (Pan and Tse, 2001), firms that choose equity modes must outweigh the long-term pros and cons of establishing wholly owned subsidiaries or greenfield investments. While high control modes are more often associated with higher risk and return, low control modes can be established far more quickly (Pan and Tse, 2000). However, considering the size of the firm, research argues equity modes are almost exclusively limited to MNEs, seeing as they are often the only organizations to possess the necessary resources for successful internationalization (Cerrato and Piva, 2012).
While the selection of entry mode choice can be impacted by several factors such as home and host country characteristics, industry and resources available (Brouthers and Hennart, 2007), research also notes the impact of culture on firm strategy and entry mode choice (Agarwal, 1994). These studies have shown that using Hofstede’s (1984) five cultural dimensions, it is possible to predict how firms from certain home countries will begin internationalization (Brouthers and Brouthers, 2001).
2.4: TMT and nationality diversity
A TMT can be defined as a formulation of top-level managers and directors within a firm (Finkelstein and Hambrick, 1996). Heijltjes et al. (2003) and Staples (2007) both note a growing trend of non-native employees in TMT positions. Several studies also indicate a positive relationship between nationality diversity in TMTs and overall firm performance (Nielsen and Nielsen, 2013; Carpenter et al. 2004). Tihanyi et al. (2000) similarly studied firm performance and the relationship between several TMT characteristics of firm international diversification, concluding it was positively related to lower age, higher average tenure, higher average elite education and higher international experience. The positive impact of nationality
diversity can be explained through UET, as more culturally diverse teams are better equipped to deal with the challenges of doing global business (Kaczmarek and Ruigrok, 2013).
Nationality and its impact on organizational outcomes can be depicted through the UET. One characteristic of nationality is its ability to shape individuals. From an early age, people are indirectly molded by their environment, formal and informal institutions that govern them, instilling values and cognitive patterns of thinking that are unlikely to change (Hofstede, 1984). Having a nationally diverse team can be beneficial for companies because they can benefit from multi-cultural perspectives when faced with challenges (Greve et al. 2009).
Applying the UET to gain insight into relationships at executive level is common practice. Heijltjes et al. (2003) noted the emergence of internationalized TMTs in Dutch and Swedish MNEs over a period of time, concluding a slow but certain pattern of nationality diversity. Kaczmarek and Ruigrok (2013) similarly researched the benefits of TMT internationalization. Their research indicated TMT nationality becomes advantageous but companies first need to be highly committed to international markets in terms of equity.
Nielsen and Nielsen (2013) further conclude a significant positive relationship between TMT nationality diversity and firm performance. This relationship is also positively moderated by team tenure, firm internationalization and industry munificence (Nielsen and Nielsen, 2013). Still, research is still indecisive on whether the relationship is linear or non-linear, with evidence to support both arguments. Further investigation could thus contribute to the discussion on how to best depict the relationship between TMT nationality diversity and organizational performance. Earlier research by Nielsen and Nielsen (2011) also made inquiries to the distinction between TMT international experience and nationality diversity, finding two interesting trends. First, TMTs with more international experience are more likely to select full rather than shared control modes of equity. Second, they reported TMTs with higher levels of nationality diversity tend to prefer joint venture over full control equity modes.
While Nielsen and Nielsen’s (2011) research investigated nationality diversity, the lack of research on TMT diversity through non-nativity, i.e. having foreign board members, and its impact on foreign equity commitment, presents an opportunity to measure TMT diversity differently and contribute to existing literature. Nielsen and Nielsen (2011) conclude nationally diverse teams were better equipped to deal with international challenges due to superior understanding realized through a broad range of combined experiences, culture and values. Increasing nationality diversity among TMTs can therefore foster internationalization since it increases a firm’s understanding of global patterns.
Studies by Greve et al. (2015) comprehensively researched the relationship between foreign executive appointments and individual firm-level precedents during their study 360 European firms during 2001-2005, concluding a positive relationship. Greve et al. (2015) further attributes this to the increased problem-solving capabilities of nationally diverse TMTs. The growing stream in recent research devoted to TMTs is evident of the need to further develop business literature on this topic.
2.5: The role of CEO and Upper Echelons Theory
The CEO is often referred to as the most important member of the TMT (Huang, 2013). Previous studies for example indicate the CEO can account for up to 29% variance in organizational profitability (Mackey, 2008). Adams, Almeida and Ferreira (2005) similarly note the importance of the CEO position due to relatively higher decision-making capabilities and direct involvement with day-to-day operations. Still, while research on the topic of UET and TMTs have been concluded (Nielsen and Nielsen, 2013), similar research methods investigating the impact of CEOs on internationalization through the UET been far less explored (Greve et al. 2009).
Hambrick and Mason (1984) developed the UET to illustrate how strategic-decision making is influenced by experiences, characteristics and personalities. Building on bounded rationality and behavioral theories, UET notes the way executives perceive their corporate environment is a reflection of their cognitive base and values. Seeing as how these characteristics impact perception, UET states this also impacts decision-making. Consequently, UET implies managerial characteristics can be used to partially predict organizational outcomes (Hambrick and Mason, 1984).
While previous studies using UET to explain relationships between TMT characteristics and firm performance have been studied in terms of education, work experience and tenure (Carpenter et al. 2004), non-nativity studies are limited, with the notable exception of Nielsen and Nielsen (2013), who distinguish between TMT international experience and nationality diversity. Furthermore, studies like Heijltjes et al. (2003) confirmed the existing trend of nationality diversity among MNEs while Tihanyi et al. (2000) further researched TMT age, tenure and existing degree of internationalization on performance, concluding a positive effect. However, relatively little research has focused on the role of TMTs in the decision to internationalize. Conclusively, the limited research on CEO non-nativity and effects on internationalizing is cause for investigation. This research therefore aims to contribute to existing literature by adding to literature on CEOs, TMTs, UET and organizational performance by answering the following question:
3.0: Theoretical framework
Attempts to internationalize by MNEs are often associated with complex challenges and cost, summarized by Hymer (1986) as the liability of foreignness. The continued trend of MNEs hiring foreigners for TMT positions to help overcome these challenges is reason for increased investigation (Greve et al. 2009). Kaczmarek and Ruigrok, (2013) attribute this behavior as an attempt by MNEs to match managers with strategy. Greve et al. (2009) further indicate levels of TMT nationality and international experience is positively related to changes in geographical and cultural postures for Dutch and Swiss MNEs operating in the financial sector. This is line with previous studies by Heijltjes et al. (2003) on Dutch and Swedish MNEs, also noting a slow but certain trend of TMT heterogeneity. Nielsen and Nielsen (2013) further suggest nationality diversity among TMTs can positively affect MNE performance abroad. Taking the CEO as the most important member of a TMT (Huang, 2013), the majority of TMT research is considered also be relevant to this position, yet is relatively understudied. The following sections will review additional literature to form three hypotheses.
3.1 CEO non-nativity and foreign equity commitment
This hypothesis proposes CEO non-nativity and foreign equity commitment has a positive effect on the level of foreign equity commitment.
The influence of TMT’s on MNE performance, internationalization and strategy has been well documented (Finkelstein and Hambrick, 1996; Outtainah, 2015; Nielsen and Nielsen, 2011). Previous studies have indicated foreign managers can have different impacts on MNE outcomes in comparison natives (Nielsen and Nielsen, 2011). As described by Hambrick and Mason (1984), an individual’s general behavioral traits, values, cognitions and other social norms portray one’s nationality. Consequently, nationality can be a powerful medium through which individuals inherit the appropriate communication, decision making and social skills for
their region that are unlikely to change (Hofstede, 1984). This implies that nationality remains a critical factor in the selection process of TMT individuals like CEO’s, since certain nationalities may be better suited for certain environments and challenges than others.
The impact of TMT nationality on internationalization strategy can be further examined through the UET (Finkelstein and Hambrick, 1996), which argues the organizational outcomes are reflections of the perception and values of the executives in that organization. Especially in the context of bounded rationality (Williamson, 1979), which states managers are limited by their knowledge, resources and time when making a decision, pre-existing cognitive thought patterns inherited through nationality can lead to varying perceptions of the same environment and therefore, lead to different strategic decisions.
As depicted by the UET (Finkelstein and Hambrick, 1996), TMT members play the most important role in establishing and executing strategy. Research by Mackey (2008) specifically indicates CEOs can account for 29% of the variance in organizational profitability (Mackey, 2008). Greve et al. (2009) further demonstrate how different configurations of TMT’s impact the respective levels of internationalization for European firms, suggesting firms are likely to select top executives whose personal profiles correspond to their strategies. Especially if the MNE in question is targeting geographical regions it has little to no experience in (Greve et al, 2009). Similarly, Boone and Hendriks (2009) argue that a large number of foreign managers are hired precisely because of their knowledge and understanding of their home country, implicating the importance of TMT on internationalization. This added knowledge equals added value for the business through reducing liability of foreignness (Hymer, 1987). The CEO is shown to be the most important member of a TMT (Huang, 2013) and is therefore a strong influencer of corporate strategy and performance as depicted by UET. Previous research also indicates TMT diversity to be positively related to internationalization measures through higher equity commitments (Nielsen and Nielsen, 2013, Tihanyi et al. 2001).
This coincides with previous research that concludes TMT heterogeneity is positively associated with the predilection to execute more complex strategic attacks through high equity commitment (Fourier, 2001).
Based on the aforementioned research and literature review, this paper argues that CEO non-nativity is positively related to a firm’s equity commitment abroad. This is because their upbringing and background often embeds a tendency to implement and execute comparatively more complex strategies, likely resulting in internationalization through methods of greater control and equity. Also, foreign CEOs can bring additional knowledge and insight to unexplored geographical regions, decreasing liability of foreignness and stimulating entry modes with higher equity. MNEs that are considering entering distant markets with potentially higher modes of equity could therefore benefit from appointing a foreign CEO. Therefore, the following hypothesis is proposed:
Hypothesis 1: CEO non-nativity is related to a greater equity commitment when investing
abroad
3.2: The moderating effect of scale and scope of internationalization
This hypothesis proposes the scale and scope of firm internationalization moderates the relationship between CEO non-nativity and foreign equity commitment.
Firm internationalization refers to the expansion of a firm’s business activities beyond its own geographical borders (Rugman and Verbeke, 2004). An analysis of top Dutch and Swedish companies in 2003 concluded the internationalization of TMTs was considerably lacking, with only 10-11% of board members being foreigners in the Netherlands (Heijljtjes et al. 2003). Further insight to the Dutch data also noted only two companies had foreign CEOs at the time, and the number of non-native TMT members was linked to the number of foreign
subsidiaries and sales abroad (Heijltjes et al. 2003). Ultimately, this research concluded the rate of internationalization for the companies themselves far surpassed the internationalization of their TMTs, signifying a moderating relationship (Heijltjes et al. 2003).
More recent research on Dutch TMTs similarly indicates nationality diversity can be beneficial for companies, but only in cases where they are strongly committed to foreign markets in terms of depth, size and respective levels of internationalization (Kaczmarek and Ruigrok, 2013). In addition, Kaczmarek and Ruigrok (2013) suggest the decision of opening TMT positions to foreigners is based on cost-benefit analyses that are highly dependent on strategy. Nationality diversity is therefore best utilized when firms have difficulties internationalizing themselves and exposure is high. This variable will follow a similar measure of internationalization as done by in previous studies (Carpenter et al. 2004; Greve et al. 2009; Kaczmarek and Ruigrok, 2013). The following hypothesis is proposed:
Hypothesis 2: The scale and scope of firm internationalization moderates the relationship
between CEO non-nativity and foreign equity commitment.
3.3: The moderating effect of firm size
Contrary to intuitively adopting firm size as a control model, this hypothesis proposes firm size moderates the relationship between CEO non-nativity and foreign equity commitment.
Firm size relates to the number of people within an organization, but can also include sales (Nielsen and Nielsen, 2011). Lu and Beamish (2001) indicate firm size affects the perception of risk and amount of resources available. Tanikawa et al. (2017) note how smaller firms are less likely to have non-native TMT members, since most MNEs adopt an Uppsala model style of approach, gradually internationalizing the company, later hiring expert foreign
TMT members to combat any remaining challenges. Previous studies have also indicated a positive relationship between firm size and export activity (Cavusgil and Nevin, 1981) and that firm size is a determining factor for internationalization (Vida, Reardon and Fairhurst, 2000). This is in line with more recent research by Chelliah et al. (2010) concluding that size functions as a moderating factor for internationalization compared to relatively smaller firms. The authors attribute this relationship to firm size being correlated to measures of international selling experience, which leads to increased confidence and thus the selection of higher-risk entry modes (Chelliah et al. 2010). Considering this is the case for TMT positions in general, this is effect is considered to be even less likely for the important position of CEO.
Hypothesis 3: Firm size moderates the relationship between CEO non-nativity and foreign
equity commitment
3.4: Conceptual model
CEO non-nativity Foreign equity commitment
Scale and scope of internationalization
The aforementioned hypotheses have been summarized in a conceptual model for visual purposes. In summary, this depicts a test if CEO non-nativity will increase foreign equity commitment. The moderator variables, are also hypothesized to both be positive, and will be used to provide further insight to the relationship between CEO non-nativity and foreign equity commitment from the perspective of scale and scope of internationalization and firm size. The following section concerns the setup for this experiment.
4. Methods 4.1 Sample and data collection
A cross-sectional research design was applied to research the effect of CEO non-nativity on foreign equity commitment. The sample consists of the largest 80 Dutch companies in 2015 according to revenue. The companies themselves operate in a variety of industries, featuring global giants like Royal Dutch Shell and lesser known companies such as Spyker Cars. This sample size was deemed sufficient as previous research indicates the number of foreigners on the board can be affected by size (Heijltjes et al. 2003). Thus, adding more, in other words smaller, firms will likely not increase the sample size to include more firms with non-native CEOs. Additionally, this was deemed to offer the most complete data set, as precise figures for foreign equity commitment in subsidiaries was often found lacking.
The majority of information and firm-specific data was gathered from the ORBIS database, an extensive collection of corporate facts and figures commonly used in academic management studies (Alkemade et al. 2015). While some data such as CEO nationality was occasionally missing or incomplete, data entries were supplemented with information gathered from reputable sources such as the company’s annual report or website.
4.2 Measures
4.2.1 Dependent variable
The dependent variable is the percentage of foreign equity commitment a company holds in its foreign affiliate. This figure was generally expressed as a percentage in the ORBIS dataset. However, while the data set contained information on over 100 Dutch companies, in some cases this data was either missing or coded as Wholly Owned (WO) or Majority Owned (MO), which respectively indicated a 100% or larger than 50.1% ownership stake. Considering
this case was usually reserved for smaller companies, the precise figure of 80 was selected by revenue were selected as they offered what appeared to be the most complete data.
4.2.2 Independent variable
The independent variable is CEO non-nativity. In most cases, CEO nationality was provided in terms of citizenship by the ORBIS dataset but occasionally needed to be supplemented through corporate websites or other reputable sources. Subsequently, with SPSS a dummy variable was created to distinguish between native and non-native CEOs for each company; with ‘0’ indicating a Dutch CEO, and ‘1’ indicating a non-Dutch CEO. Cases of CEOs with dual citizenship with one being Dutch were labelled ‘0’.
4.2.3 Moderating variables
This research uses two moderators: scale and scope of firm internationalization and firm size. Scale and scope of firm internationalization is quantified through the average ratio of foreign sales to total sales. Therefore, the larger the percentage or dependency on international sales for a firm, the more internationalized it is perceived to be. Firm size is measured by the number of total employees. It is expected that both moderators will positively affect the relationship between foreign equity commitment and CEO non-nativity.
4.2.4 Control variables
Three control variables: TMT size, firm age and industry were used to control the statistical relationship between CEO non-nativity and foreign equity commitment.
TMT size is measured as the number of board members. Certo et al. (2006) demonstrates TMT size can have an impact on financial performance through the increased number of solutions and information processing capabilities. Furthermore, they conclude TMT
size is correlated to firm size, another commonly used control variable in similar studies (Nielsen and Nielsen, 2013; Heijltjes et al. 2003; Certo et al. 2006).
Firm age is measured from the date of a company’s inception until the end of the 2016 financial year. Research indicates firm age is related to financial performance, as older firms are likely to have more difficulty overcoming limited product life cycles or other challenges associated with corporate aging (Loderer and Waelchli, 2010). Therefore, firm age can be used order to control for firm-level variables and account for deviation, as seen in similar research by Heijltjes et al. (2003).
Industry was intuitively classified by three sectors: primary, secondary and tertiary. The primary sector contained all companies working with raw materials. The secondary sector represented manufacturing and production companies, while tertiary indicated service and tech companies. Industry can serve as a control variable it has a strong the relationship with profitability (Barney, 1991; Buckley 2011;), and has been applied in similar studies (Boone and Hendriks, 2009). Since these are categorical variables, all 80 companies were labeled a code based on their respective industry through SIC codes. Furthermore, the three levels of industry were noticed to be mutually exclusive. Therefore, after the SIC coding process, the primary and secondary sectors were coded in SPSS as two dummy variables.
4.3 Statistical analysis and results
Prior to running a regression analysis, a multicollinearity test was used to ascertain the correlations between predictor variables. The findings are presented in Figure 1: Descriptive statistics.
Multicollinearity is a case of multiple regression in which the predictor variables themselves are highly correlated (Paul, 1998). The strength of this prediction is indicated excessively high R figures, signifying the variance explained. In cases where the variance
explained is greater than (>0.7), control variables may need to be removed in order to correct near-linear dependencies among repressors (Paul, 1998). While the majority of variables indicate strong correlation, the relationship between firm size and scale and TMT size (R=0.931) doesn’t fulfill the requirement for (R<0.7). Similarly, firm size and the scale and scope of internationalization was too high (R=0.0.881). Therefore, one control variable, TMT size, had to be removed from the experiment to avoid multicollinearity. Subsequent tests testing the moderating variables separately were thus conducted.
The test included the top 80 Dutch companies by revenue. In total, there were 38 primary sector companies, 16 secondary sector companies and 26 tertiary sector companies, counting a total of 12 foreign CEOs and average sales were equal to €8.49 billion. Company age was measured approximately 54 years old with an average of 7.85 TMT positions.
For the moderating variables, the scale and scope of internationalization indicated a mean figure of 0.184, while the mean firm size was 0.218. This signifies that Dutch companies earn close to twenty percent of their revenues domestically.
A hierarchical regression analysis test was applied to determine the relationships between the variables. Hierarchical regressions are useful to determine if the changes in variables being measured explain a statistically significant amount of variance in a dependent variable, after accounting for other tested variables (Paul, 2011). In other words, whether or not there is a positive or negative effect relationship between variables and how reliable this measure is. This research followed the Ordinary Least Square (OLS) analysis, a statistical method that can be applied to determine the “fit” of a function with data through minimizing the sum of squared errors (Paul, 2011). Prior to running the test, variables were centered and the interaction terms between CEO non-nativity and scale and scope of internationalization were processed similar to CEO non-nativity and firm size. This meant the first model contained control variables, the second model the independent variable and the first moderator, with the
first and second moderators being tested in the third and fourth model respectively to their interaction term. This distinction is important to make otherwise the results could be skewed. The results of the regression analysis are reported in Table 2: Regression results.
The regression model can be largely interpreted through monitoring three measures: significance (p-value), beta standardized coefficient and the goodness-of-fit (R2
). Significance tests the null hypothesis that the coefficient has no effect or is equal to zero. Figures with low significance (p < 0.05) indicates a predictor’s value is related to changes in the response variable, depicting whether or not the hypothesis is supported by the results. The beta standardized coefficient compares the strength of each individual independent variable to the dependent variable and depicts the direction the change occurs. The higher the absolute value of the beta coefficient, the stronger the relationship between the variables. Goodness-of-fit indicates a measure of how close the data is to the fitted regression line between a range of 0 and 100%. In most cases, a higher the percentage of R2
indicates a better the fit between the model and data. However, goodness-of-fit cannot determine if the predictions and coefficient estimates are biased, errors due to residual plots need to be considered prior to making conclusions. Additional results of further models depict not all of the included variables can be considered explanatory as the level of significance was below the required threshold. A summary of the results from Table 2: Regression results will now be presented.
For hypothesis one, the adjusted R2 figure is noted to improve significantly from model
1 to model 2 (R2
= 0.036/0.049 and R2
= 0.178/0.171). The positive change in R2
indicates the variable of CEO non-nativity is considered explanatory in terms of other variables tested. Furthermore, this indicates CEO non-nativity has a significant positive effect on foreign equity commitment for Dutch firms, supporting hypothesis one.
For hypothesis two, the moderating effect of scale and scope of internationalization is shown to have a positive significant effect on foreign equity commitment (b = 0.283, p =
0.003). However, the interaction term between the scale and scope of internationalization and CEO non-nativity was not significant (b = 0.181, p = 0.298). The lack of significance leads to a rejection of hypothesis two, since no moderating effect was found.
For hypothesis three, the results indicated a similar case as hypothesis two. The direct effect of firm size and CEO non-nativity was negative and significant (b = -0.791, p = 0.004). While the interaction term was also negative but not significant (b = -1.019, p = 0.283), this means the interaction term between CEO non-nativity and firm size has to be considered insignificant, leading to the rejection of hypothesis three.
For the control variables, industry and TMT size reported insignificant values, suggesting industry did not have a relationship on foreign equity commitment for Dutch MNEs. However, firm age was reported significant (b = -0.154, p = 0.006), indicating this attribute can have a significant relationship on foreign equity commitment.
Table 1: Descriptive statistics
Variable Mean Std. Dev. 1 2 3 4 5 6 7
1. CEO non-nativity 0.02 0.249 1
2. Firm age 54.17 41.802 0.144** 1
3. TMT size 7.85 1.085 -0.066** 0.663** 1
4. Primary sector 0.45 0.335 0.313** -0.090** 0.249** 1
5. Secondary sector 0.14 0.118 -0.043* 0.072** 0.005 -0.130** 1
6. Scale and scope of
internationalization 0.231 0.313 0.098 0.488** 0.320* 0.088** -0.254** 1
7. Firm size 0.517 0.279 -0.499** 0.345** 0.931** 0.517** -0.277** 0.881** 1
Table 2: Regression results
Dependent Variable: Foreign equity commitment Model 1
Model 2 (H1) Model 3 (H2) Model 4 (H3)
Beta Sig. Beta Sig. Beta Sig. Beta Sig. Beta Sig.
Constant 0.000** 0.000** 0.000** 0.000** Control variables Firm age -0.154 0.006* -0.261 0.000** -0.241 0.000** -0.099 0.031* Primary sector -0.382 0.087 -0.193 0.068 -0.277 0.042* 0.051 0.582 Secondary sector -0.203 0.042 -0.218 0.070 -0.195 0.181 -0.162 0.212 Independent variable CEO non-nativity 0.350 0.000** 0.317 0.002* -0.498 0.886 Moderator variables
Scale and scope of internationalization 0.283 0.003*
Firm size -0.991 0.004*
Interaction terms
Scale and scope of internationalization x CEO
non-nativity 0.181 0.298
Firm size x CEO non-nativity -1.019 0.283
R2 0.036 0.178 0.344 0.267
Adjusted R2 0.049 0.171 0.205 0.239
Change in R2 0.045 0.122 0.087 0.031
5.0: Discussion
The following sections of this chapter will include discussion on results, managerial implications and limitations and suggestions for future research.
Overall the results from this study indicate there is a positive and significant relationship between CEO non-nativity and foreign equity commitment among top Dutch firms. Demonstrating on average, Dutch MNEs with non-native CEOs are more likely to have higher equity commitments abroad then Dutch MNEs with native CEOs. This is evident in the increasing measures of firm internationalization, indicating CEO non-nativity within Dutch TMTs is associated with more sales abroad. This is in line with previous research on Swedish and Dutch companies by Heijltjes et al. (2003) and more recent research by Kaczmarek and Ruigrok (2013) on Swiss and Dutch firms, which suggest this trend is likely to continue in the future. Research by Nielsen and Nielsen (2013) also indicates the positive effect of TMT nationality diversity can have on firm performance, as national values appear to be stronger predictors of strategy than professional experience or cultural socialization. Dutch MNEs that wish to engage in internationalization through equity modes could therefore benefit from appointing foreign CEOs that are better equipped to deal with the complexities of international business. However, similar to conclusions made by Heijltjes et al. (2003), the low number of foreign CEOs (12/80) also suggests continued reluctance from Dutch firms to match the rate of TMT internationalization with firm internationalization.
In terms of moderator variables tested, issues with insignificant p-values for both scale and scope of internationalization and firm size led to the rejection of hypothesis two and three. Scale and scope of internationalization and firm size can therefore not be considered to have a statistical relationship between CEO non-nativity and foreign equity commitment. It is suspected the small amount of CEOs present in the data set reduced the measured effect of the interaction terms. While intuitively increasing the sample size could remedy this, including
more (i.e. smaller) firms in the hope of including more foreign CEOs is unlikely to be effective, as firm size and is positively related to higher levels of TMT diversity (Heijltjes et al. 2003).
Despite this irregularity, both moderating variables are still noted to be significant. Meaning, scale and scope of internationalization is positively related to foreign equity commitment. This intuitively suggests Dutch MNEs with relatively higher levels of foreign sales to global sales are more likely to also have higher foreign equity commitments.
For the third hypothesis, the direct effect of firm size as a moderator was surprisingly shown to be negative. Suggesting that smaller firms are more likely to apply higher equity commitments than larger firms. One reason this could be is the recent rise of successful Dutch startups that find it easier to internationalize because of SMEs inherit increased responsiveness to external factors. While this would arguably be in contrast of Uppsala model types of internationalization processes for business that are commonly noticed in the Netherlands, the country’s high-quality infrastructure could certainly facilitate this process.
5.1 Academic relevance
This research was conducted in order to contribute to the limited knowledge relationships between TMT diversity attributes and their impact on corporate strategy and performance. More specifically, the relationship between CEO non-nativity and foreign equity commitment for Dutch firms was researched. This contributed to the relevant discussion on the UET (Hambrick and Mason, 1984), which emphasizes the importance of powerful agents (senior executives) in the firm. Additional studies on this topic were also deemed relevant since this can develop future studies to gain more understanding of factors influencing TMT performance.
Staples (2007) notes that TMTs are becoming increasingly foreign. One reason for this study was therefore to understand how an increase in foreigners within TMTs affect internationalization processes. In addition, similar research on Dutch firms conducted previously concluded the importance of continuous monitoring and attention, since these relationships may change over time (Heijltjes et al. 2003; Kaczmarek and Ruigrok, 2013). Also, while previous studies in this field have investigated a number of factors such as age, tenure and international experience (Tihanyi et al. 2000), the lack of attention to nationality in demographic research, especially among TMTs, requires the relationship to be investigated further.
This research contributed by shedding light on the nationality characteristics of arguably the most important member of the TMT, the CEO. Ferrier (2001) notes how diversity among a workforce can offer a competitive advantage through increased perspective, allowing multi-national teams to outperform better than comparatively less diverse TMTs. The positive effect between TMT nationality diversity and financial performance is well established, however, internationalization of the TMT can also lead to challenges (Carpenter et al. 2004). Companies must be careful to avoid over-internationalization of their TMTs, as extensive heterogeneity could make communication in the upper echelons of the firm increasingly complex.
Despite moderating variables not being supported by the regression model, this study further contributes to academic literature by questioning the moderators of firm size and scale and scope of internationalization. While this could be attributed to the lack of foreign CEOs in the data, it challenges the assumption that firm size and level of internationalization positively impacts foreign equity commitment.
5.2 Managerial implications
Dutch MNEs attempting to internationalize with comparatively high levels of equity should consider hiring a foreign CEO. Despite evidence that the trend of hiring non-native CEOs remains slow in the Netherlands (Heijltjes et al. 2003), foreign CEOs in Dutch companies consistently invest higher levels of equity in foreign affiliates than Dutch CEOs. Conversely, companies less interested in greater equity commitments should consider native CEOs. Secondly, while hiring a foreign CEO or building a diverse TMT in terms of nationality can be beneficial for firm performance (Carpenter et al. 2004), the external and internal environment must be considered. While the benefits of CEO non-nativity and TMT internationalization are the main areas of interest for this study, there can also be considerable drawbacks to TMT nationality diversity. Executives in MNEs should therefore consider TMT internationalization as a helpful exercise rather than an organizational goal.
Finally, the results indicated in the regression do not show that the impact of CEO non-nativity on foreign equity commitment is related by firm size or the scale and scope of internationalization. While this is contrary to previous studies (Nielsen and Nielsen, 2013), MNEs should consider how these factors would impact the benefits of hiring a foreign CEO.
5.3 Limitations and suggestions for future research
The first obvious limitation is the measure of CEO non-nativity through nationality. This is because nationality does not always reflect the upbringing or environment an individual was raised in. Further investigations could be improved through accounting for more detailed measures of nationality. Additionally, in cases of CEOs holding dual nationalities where one was Dutch, the individual was considered Dutch. Not accounting for cultural influences from the other nationality could thus be an improper reflection of nationality. It is recommended that
future studies review cases of dual citizenship more closely to determine whether or not the individual’s background and upbringing reflects the citizenship they hold.
Another possible limitation is the issue of categorizing CEO nationalities as native or non-native. Similar to issues measuring nationality, this method of classification ignores the various cultural and geographic distances between cultures. More culturally informed research could therefore be constructed by applying cultural dimensions like Hofstede’s (1984) model. Also, non-nativity is a fairly crude statistical method of testing TMT diversity, especially considering the fairly low number of CEOs available in the data. In order to give a more accurate representation of CEO non-nativity and foreign equity commitment, researching this effect with additional variables such as CEO ‘length of employment’ (time spent at current firm) or ‘length of contract’ could be interesting.
The results of this thesis are limited by time, as they only contain data from the end of one financial year, depicting only a snapshot of relationships at that fixed moment. This could influence results since non-native CEOs may have recently joined a company and not had time to implement their own strategies. A longitudinal analysis, similar to the study by Heijltjes et al. (2003) capturing the performance over a set period of time would almost certainly offer a better illustration of CEO non-nativity and foreign equity commitment.
6.0: Conclusions
This thesis was conducted to contribute to the literature gap on TMT characteristics and foreign equity commitment through the independent variable: CEO non-nativity. The basis of this research relies on the Upper Echelons Theory (UET) (Hambrick and Mason, 1984), which argues an executive’s experiences, values and personalities greatly influence their perceptions of situations, affecting their choices. UET features in a number of similar studies investigating characteristics of TMTs against and financial performance (Carpenter et al. 2004) and levels of internationalization (Tihanyi et al. 2001; Heijltjes et al. 2003; Kaczmarek and Ruigrok, 2013). Nielsen and Nielsen (2013) arguably conducted the most similar investigation, concluding a significant difference between nationality and foreign experience in TMTs. This study therefore focused on a reportedly under-researched aspect of TMTs, non-nativity (Heijltjes et al. 2003).
Further gaps in research were filled by investigating the separately CEO rather than the entire TMT. Although there is evidence of increasing nationality diversity among TMT positions, progress remains slow (Heijltjes et al. 2003). This lagging trend of TMT internationalization in comparison to levels of firm internationalization for Dutch firms was also noticed in this study, as only 15% of companies had a non-native CEO. Previous studies furthermore indicate relationships of varying strengths between TMT diversity and firm performance, prompting need for further study. This research contributes to the existing literature on foreign CEOs and their impact on firm performance. The CEO is often considered the most valuable part of a TMT, which implies new insights can be gained from studying them separately.
This research proposes three main hypotheses. First, CEO non-nativity has a positive effect on foreign equity commitment. This is because foreign CEOs have inherently different characteristics than native CEOs, such as international experience, making them superior
performers in international markets. Second, the scale and scope of firm internationalization positively moderates the relationship between CEO non-nativity and foreign equity commitment. Third, firm size positively moderates the relationship between CEO non-nativity and foreign equity commitment.
To test the research question, a dataset of the 80 Dutch companies based on revenue in the financial year of 2016 was sourced from the ORBIS database. Using this data, a multicollinearity test was first run to investigate the statistical relevance of the model. This concluded both moderator variables had issues with multicollinearity, meaning the variables had to be run in separate models. A total of four regressions were then computed. This indicated that CEO non-nativity positively impacts foreign equity commitment, in the case of Dutch firms.
Overall, while this research can be seen as a clear contribution to literature on TMT impact on strategy, additional studies are recommended to further understand the extent of the UET.
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