The Effect of
International Boards on Firm
Internationalization
Master thesis
MSc International Business and Management MSc International Financial Management
University of Groningen, Faculty of Business and Economics
Suzanne de Vries Student Number: s2183315 s.m.de.vries.5@student.rug.nl
Abstract
Internationalization is becoming increasingly important for firms to survive and to obtain long-term success because of the heightened competition in the global economy. This study examines the effect of the percentage international directors on a board on the internationalization of a firm. A sample of publicly listed firms with headquarters in either the United Kingdom, the Netherlands, Germany or Belgium is used. The results show a positive association between the share of international directors on the board and firm internationalization. However, international directors are not the only source of international expertise. Therefore, this study also examines the relationship between the share of internationally experienced domestic directors on the board and the internationalization of the firm. Internationally experienced domestic directors are defined as nationals with either international study, work, and/or board experience. The results show that this relationship is also positive and significant. However, the results also indicate that the effect of the share of international directors is slightly stronger than the effect of the share of internationally experienced domestic directors.
I: Introduction
Diversity has been used to refer to many types of differences among people. A definition that is used by Williams and O’Reilly (1998) is that diversity is “any attribute that another person may use to detect individual differences”. Pelled, Eisenhardt and Xin (1999) define board diversity as the degree to which a board is heterogeneous with respect to demographic attributes. Both are broad definitions, so it could include numerous types of diversity such as gender, age, ethnicity, tenure, educational and functional background (Milliken and Martins, 1996; Williams and O’Reilly, 1998). An important question in diversity is how differences between group members affect the group process and performance (Rivas, 2012). There have been several studies about diversity in boards, however the results have been inconsistent. Therefore, the question of whether diversity between board members is beneficial for companies remains undecided (Cannella, Park and Lee, 2008).
Diversity in boards could be related to a company’s degree of internationalization (Rivas, 2012). Over the last few decades there has been a dramatic rise in FDI and the international activities of the largest MNCs have been growing. These are just two indicators of the increasing globalizing trends in the world economy (World Investment Report, 2015). This globalizing trend leads to a growing economic integration. This integration expresses itself in increasing cross-border movements of products, capital, managers and other employees (van Veen and Marsman, 2008). Therefore, it could be possible that boards are increasingly diverse in terms of nationality. Academic research has found that over the last two decades the incidence of international directors in executive ranks or supervisory boards of the world’s largest multinational corporations increased significantly. Moreover, 75 percent of the 80 largest MNCs of the world had at least one foreign member on their boards in 2005 (Staples, 2007). As earlier stated, diversity (in different forms) in boards could have an influence on the degree of internationalization. The question is if this is also the case for diversity in nationality specifically. Therefore, this study aims to examine if a higher degree of international directors in boards leads to a higher degree of internationalization. Furthermore, a distinction will be made between foreign members and the international background of national board-members. This will be done by answering this research question:
Does a higher share of international directors in a board and a higher share of domestic directors with international experience in a board affect firm internationalization?
a contribution to the existing literature by analyzing the effect of nationality diversity in boards on the degree of internationalization, but also by researching if international experience of domestic board members has an effect on the internationalization of the firm. Furthermore, it contributes to the literature because of the focus on the effect of specifically nationality diversity, and not diversity in general. Other studies often focus on different diversity types, such as age, tenure, functional and educational background (i.e. Rivas, 2012). A practical implication of this study for firms can be more insight into the criteria that can be used to appoint board members by international companies, depending on the objectives of the firms related to internationalization.
The structure of this thesis is as follows: in section II an overview of the existing literature on the topic will be given. This will lead to section III, which will state the research question and the hypotheses. Consequently, in section IV the data collection and methodology will be discussed. This will be followed by section V, which will examine the empirical results. Finally, in section VI and VII, this will lead to the discussion and the conclusion.
II: Literature review
This section will introduce a review of the available literature about the topic. First, firm internationalization will be explained. Second, the composition of boards and their function will be discussed. Furthermore, differences in board structure in the United Kingdom, the Netherlands, Germany and Belgium (the sample countries) will be discussed. Third, the relationship between international members on a board and firm internationalization will be explored. Finally, the concept of internationally experienced domestic board members and their effect on firm internationalization will be introduced.
2.1 Internationalization of firms
Internationalization can be defined as “the degree to which firms rely on foreign markets for customers and factors of production” (Lee and Park, 2006). Major firms in most industries have accomplished significant degrees of internationalization (Mattsson, 1998). Furthermore, internationalizing is becoming increasingly important for companies to survive and to obtain long-term success because of the heightened competition in the global economy (Bartlett and Ghoshal, 1998).
inputs from foreign countries (Lu and Beamish, 2004). Third, it allows companies to make domestic products available in foreign markets (Cullen and Parboteaah, 2005). Fourth, firms are able to reduce revenue fluctuations by market-risk diversification (Kim, Hwang and Burgers, 1993). Fifth, companies are able to reduce input costs and control output markets by leveraging market power (Tallman and Li, 1996). Finally, it allows firms to transfer resources across border (Tihanyi, Johnson, Hoskisson and Hitt, 2003). These beneficial outcomes may enable companies to survive, grow and make a profit (Chen, 2011).
Internationalization is also related to many challenges and threats, and is therefore significantly risky and costly (Chen, 2011). Because of the increased size and complexity of the company, internationalization may expose companies to organizational problems (Tihanyi et al., 2000). These could include coordination difficulties, incentive misalignment, and information asymmetry between subsidiaries and their headquarters (Zaheer, 1995). This, consequently, could lead to increased monitoring costs (Tihanyi et al., 2000). Furthermore, internationalization involves significant investments, which could include facilities procurement and installation, and the recruitment and training of qualified staff (Lu and Beamish, 2004). According to Sirmon, Arregle, Hitt and Webb (2008) these investments could take years to generate profits. Lastly, internationalization could create problems related to liabilities of newness (Lu and Beamish, 2004) and foreignness (Hymer, 1976), such as unfamiliarity with environments and political, economic and cultural differences. These make the outcomes of internationalization variable (Chen, 2011).
A lot of companies regard internationalization as an integral part of their strategy (Spreitzer, McCall and Mahoney, 1997). According to Mintzberg (1987) strategy making is about changing perspectives and/or positions. Merlin (1992) argues that internationalization involves both. Thus, internationalization is a major part of the ongoing strategic process of most of the big firms. This process influences the ongoing development and change in the international company in terms of scope, business idea, action orientation, nature of managerial work, organizing principles, dominating values and converging norms. The internationalization process is related to all of these mentioned aspects. Melin (1992) therefore states that internationalization processes are defined by a high level of complexity, variability and heterogeneity.
2.2 Board composition
firm and to hire and supervise the executive directors of the firm (Beasley, 1996). In the literature the board is also commonly described as the formal link between the shareholders of company and the executives entrusted with the day to day functioning of the firm (Monks and Minow, 1995). The board of directors receives its authority for internal control and decision-making from the shareholders of the company (Fama, 1980). Depending on the corporate governance regulations in a country, the board of directors includes only non-executive directors, such as shareholder appointed directors and in some cases employee representatives, or also executives such as the CEO and CFO (Kaczmarek and Ruigrok, 2013).
In earlier studies, the agency theory is often adopted as a means of analyzing boards. It is argued that the structure of the board arises from the choices that the economic actors make in response to the governance problems they face in the company (Adams, Hermalin and Weisbach, 2010). The argument of resource dependent theorists on this specific topic is similar. They often view board structure as a result of a rational organizational reaction to the conditions of the external environment (Hillman, Withers, and Collins, 2009; Pfeffer, 1972a). So, both argue that the structure of the board is dependent on the reaction towards either external or internal conditions.
The causal relationship between the composition of the board and critical contingencies can occur in two opposite directions. As a result of a strategy that is already planned, new board members can be specifically appointed because of their knowledge or because they have access to resources that can help the company with the intended strategy (Boeker and Goodstein, 1991; Pearce and Zahra, 1992). However, it is also possible that as a result of their knowledge or the access to specific resources that specific board members are associated with subsequent strategic changes (Mizruchi and Stearns, 1988; Finkelstein and Hambrick, 1996).
Internationalization brings significant risks and managerial challenges. This increases demands on top managers and boards (Musteen, Barker and Baeten, 2009). Nadler, Behan, and Nadler (2006) suggest that a constructive board can not only be involved in strategic decisions, but also has to provide input to the implementation of the strategy. Kim, Burns and Prescott (2009) add to this that in addition to providing control and service, board executives can add a strategic perspective into the decision-making processes that enhances the top management teams strategic action capabilities. Furthermore, they argue that the competitive landscape of today should call for both internal (between structure and environment) and external (between structure and environment) fit that provide a base for competitive advantage.
All in all, boards and their composition can have an influence on the strategy of a company. Internationalization can be seen as an important part of this strategy. The share of international board members and the international experience of home-based board members are part of the board composition. This specific part of board composition could have an influence on the internationalization of a company.
2.2.1 Differences in board composition in the four countries
This study concentrates on the largest stock-exchange listed firms from four modern and well developed countries of Western Europe, which house a large number of MNCs, namely the United Kingdom, the Netherlands, Germany and Belgium. All of these countries share some similarities, but also have significant differences in terms of their corporate governance regimes. The Netherlands and Belgium, contrary to the United Kingdom and Germany, are small-sized economies, for which early internationalization can be important for national competitiveness (Kaczmarek and Ruigrok, 2013). Limited factor and demand conditions because of the small population of these two smaller countries makes their firms embark on the internationalization path early, which can impact the structure of the firms (Greve and Ruigrok, 2008; Ruigrok and van Tulder, 1995).
Germany and Belgium are described as het network-oriented system (also the Rhine model), which is based on the civil law system. This system operates with the proportional electoral mechanism that tends to lead to strong employment protection with the focus on stakeholder value rather than shareholder value (Albert, 1993; La Porta, Lopez-de-Silanes, Shleifer and Vishny, 1998; Moerland, 1995).
The Netherlands is an economy with a system that lies between a coordinated and liberal market economy. This means that listed firms have a choice between either a one- or a two-tier board structure. Generally, companies opt for a two-tier board with a separate executive board and a supervisory board (Kaczmarek and Ruigrok, 2013). However, according to Van Veen and Elbertsen (2008) there is a slow change towards a one-tier board systems observable.
Belgium is a country in which companies can choose for both a one-tier board or a two-tier board. Generally, companies in Belgium opt for a two-two-tier board structure. The study of Dehaene, De Vuyst and Ooghe (2001) found that around 40 percent of the companies in Belgium had a CEO with a dual position and thus a two-tier board.
According to the German Stock Corporation Act of 1965, all German stock corporations are required to have two boards, namely a management board (executive board) and a supervisory board. The members of the supervisory board are either shareholder representatives or employee representatives. Membership of both the management board and the supervisory board is not allowed (Jungmann, 2006)
In the United Kingdom, listed firms are recommended to have a one-tier board, in which executive and non-executive directors work together. Generally, this leads to the situation in which the core of the top management team is also represented on the board (Kaczmarek and Ruigrok, 2013). However, due to recent changes in the governance code of the United Kingdom, there is now a trend observable toward limiting the presence of executive directors on the board of the firm. This means that more often only the CEO and the CFO are appointed to a board seat (Pye et al., 2012; Van Veen and Elbertsen, 2008).
influence the likelihood of foreigners in both the non-executive and the executive parts of the board of a company. So, it would be expected that differences are observed within the boards of the different countries in terms of the share of international directors. This in turn could influence the degree of firm internationalization in the separate countries.
2.3 International boards and the impact on firm internationalization
National diversity within a board can be defined as the number of foreign nationals to the total number of members (Caligiuri, Lazarova and Zehetbauer, 2004). The level of nationality diversity within executive boards can give different signals about an MNC. First, it can be seen as an important indicator for the degree of internationalization of an MNC (van Veen and Marsman, 2008). So, the higher percent of foreign directors within a board is, the more internationalized an MNC is. Furthermore, besides indicators such as percentages of foreign assets, foreign sales, or foreign employees, the degree of nationality diversity within the board can display to what extend it is focused on the international market instead of on its country-of-origin (Ruigrok and van Tulder, 1995). Second, according to Bartlett and Ghoshal (1998) nationality diversity can be seen as a signal of the ‘transnational mindset’ of a company. A transnational mindset means that a firm understands the need for multiple strategic capabilities, the need to view problems and opportunities from both local and global perspectives, and a willingness to interact well with others. Third, the presence of intricate knowledge on foreign markets in boards can be considered as advantageous for MNCs (Athannassiou and Nigh, 2000; Tan and Mahoney, 2006). This is mainly because higher nationality diversity is supposed to be an important requirement for quality of strategic decision making, so a more diverse team can lead to better company performance on the international market (van Veen and Marsman, 2008). With this is meant that the nationality diversity could add intricate knowledge on foreign markets to the knowledge pool of the board and this could improve the quality of strategic decision making.
skills and abilities. This could be especially advantageous because internationalization is a complex process and it has high information processing demands. (2) According to Dutton and Duncan (1987) boards whose team members have more diverse skills and orientations are able to be more creative and swift in strategic problem solving. Furthermore, they are often less prone to groupthink (Bantel and Jackson, 1989; Jackson, 1992) and maybe more likely to overcome their domestic myopia (Barkema and Vermeulen, 1998). Also, according to Kim and Mauborgne (1991) this diversity could lead to more trust and perceptions of procedural justice among a firms’ product and geographic unit managers by signaling that a board takes different interests into account when allocating resources internationally. (3) Diversity in boards increases their socio-cognitive complexity (Jackson, 1992; Wiersema and Bantel, 1992). The cognitive base of a person influences the perceptual process underlying their decision making. First, it limits the person’s field of vision, or the parts of the environment to which attention is directed. Second, selective perception occurs because the person only pays attention to some of the stimuli in the field of vision. Last, the information that is processed is filtered through the lens of the cognitive base (Hambrick and Mason, 1984). The cognitive base of a person evolves from experiences, including training and background (Cyert and March, 1963). So, if a team consists of a diverse pool of members (for example including people with a different nationality), and therefore with very different backgrounds, their cognitive bases will be significantly different and thus the team will be more socio-cognitive complex. It could be that teams that are more socio-cognitive complex have the ability to make better sense of the changing international market opportunities and to coordinate the conflicts that come with internationalization (Murtha, Lenway and Bagozzi, 1998).
other board members, thus they have the ability to give a more independent opinion and to be more critical towards decisions that are made, which benefits the monitoring role of the board (Choi, Park and Yoo, 2007; Choi, Sul and Min, 2012).
According to Jackling and Johl (2009) and Musteen et al. (2009) the emphasis of agency theory concerning the role of independent directors in guiding executives’ internationalization actions is supported. Independent directors may better monitor executives and provide them with resources, advice, and counsel that increases their strategic action capabilities in moving towards internationalization (Chen, 2011). So, if directors with a different nationality are able to be more independent, this can also have a beneficial effect on the control role of the board.
Past studies on diversity in boards have often emphasized the benefits of a high degree of diversity. However, it can also have negative consequences. The study of Milliken and Martins (1996) suggests that nationality diversity within a group, not specifically boards in this case, may have negative effects on individual and group outcomes early in a group’s life. A reason for this could be that it takes time for group member to get over their interpersonal differences on observable dimensions (like a difference in nationality) that tend to be related to lower levels of initial attraction and social integration (O’Reilly, Caldwell and Barnett, 1989). However, this negative effect tends to be initial, because when a certain level of behavioral integration (Hambrick, 1994) has occurred, groups may be able to obtain beneficial results from the greater variety of perspectives within a diverse group. Furthermore, diversity within a group may significantly restrict efforts to take decisive action (Goodstein, Gautam, and Boeker, 1994). Board members bring their individual interests and commitments to the board (Baysinger and Butler, 1985; Kosnik, 1990). Differences between these interests are likely to lead to different ideas about proposed strategic changes. The greater the diversity of board interests, the greater the potential for conflicts to develop based on divergent definitions of organizational goals and policies (Clegg, 1990; Mintzberg, 1983; Powell, 1991). Conflict is not necessarily a bad thing, especially not when it leads to creative and higher quality decision-making. However, in some cases the conflict is too great to overcome, which could lead to inefficient, and bad decision-making.
information specific to the country the firm is headquartered in. All of this could result in a lower incentive for firms to appoint international directors. Especially smaller firms might find it difficult to attract international board members and to bear the costs of their attendance at board meetings. Lastly, language barriers and potential opposition of existing (domestic) board members could also make appointment of international directors more difficult. These problems could lead to companies trying to find alternative ways of internationalizing their boards, one of which is appointing home-country based board members with international experience (Oxelheim et al., 2013).
2.4 International experience of domestic board members
When the earlier mentioned problems related to board internationalization are significant, firms may opt to appoint domestic directors with international experience instead of international directors. This could be seen as al alternative solution to ensure that the required expertise and resources are available within the board (Oxelheim et al., 2013). This would imply that these two types of board internationalization are substitutes. However, domestic directors with international experience and international board members might also fulfill different roles on the board, i.e. advisory vs. monitoring. This could imply that these two types of board members might complement each other on boards rather that being a substitute for each other (Oxelheim et al., 2013).
A national could have acquired the required international experience, even without a passport and a childhood history in a foreign country, by having spent a substantial amount of time there or in comparable locations (Carpenter, Sanders, and Gregersen, 2001). This could include living, working or studying abroad (Tihanyi, Griffith, and Russel, 2005), international responsibilities in a domestic firm (Herrmann and Datta, 2002), language skills (Piekkari, Welch, and Welch, 1999), international board positions (Carpenter and Westphal, 2001), other international connections (Athannassiou and Nigh, 2002) or simply exposure to cultural diversity (Tihanyi et al., 2005).
they also will have relevant and valuable knowledge about international customers, employees, suppliers and markets, just like an international member would have.
Second, another argument of Oxelheim et al. (2013) could also apply to domestic members with international experience. They argue that foreign board members often are included in foreign networks, and are therefore able to bring valuable expertise and network ties to company. This could help with gaining access to foreign resources and with opening up more foreign business opportunities. By studying, working or participating in board abroad, domestic members could also gain a foreign network that nationals without international experience are less likely to have. Furthermore, domestic directors with international experience could also have bigger networks of international directors and could therefore help companies with the recruitment of foreign board members.
Finally, it is argued that foreign board members are more independent than domestic board members. The reason for this is that it is assumed that foreign board members are not a part of the social network of the other board members, thus they are likely to be able to give a more independent opinion and to be more critical towards decisions that are made (Choi et al., 2007; Choi et al., 2012). For instance, regarding strategic decisions about the internationalization of the firm. However, this is less likely the case for internationally experienced nationals. There is a very high possibility they are included in the social networks of the other domestic directors, and therefore they can not be considered to be more independent than the domestic members without international experience.
To conclude, some of the arguments can be applied to both foreign board members and domestic members with international experience, whereas other arguments can only be applied to foreign members. All in all, the literature seems to imply that there are more arguments for specifically international board members, that cannot be substituted by nationals with international experience. Therefore, it would be expected that a higher degree of international directors will have a higher effect on firm internationalization than a higher degree of internationally experienced domestic board members will have.
III: Research question and hypotheses
The literature review above leads to the following research question:
This leads to two hypotheses:
H1: A higher share of international directors within a board will be positively related to the degree of firm internationalization.
H2: A higher degree of domestic directors with international experience within a board will be positively related to the degree of firm internationalization.
IV: Data and methodology
4.1 Sample selection and data collection
The sample is from the population of publicly traded firms headquartered in the United Kingdom, the Netherlands, Germany or Belgium at the end of 2010. The United Kingdom and Germany are the two biggest economies in the European Union and they are the home country to several famous MNCs, so they are necessary to consider in the sample. These economies represent an important part of the European economy. Furthermore, Heijltjes, Olie and Glunk (2003) showed that the Netherlands is a country with a high international focus, so this country is also included in the sample. Finally, Belgium is a country with a similar GDP as the Netherlands and is therefore important to include so that a relatively complete picture can be shown. Another important consideration was the data availability, and for these four countries the data was readily available in a database, namely the Director Data Database1. For the firms in the sample, data was collected for 2010 about the relevant board variables, such as the names of the CEO and directors, their nationality, gender, and their year of birth. The identity of the individual board members was gathered out of the Director Data Database. Furthermore, the identity of the board members was verified by checking the firms’ annual reports of 2010. The nationalities, gender and year of birth were also provided by the Director Data Database. When data was missing, additional sources, such as the Executive Profile & Biography from Bloomberg, Wikipedia or Forbes, were used to fill in the gaps. Based on the database and other sources, the nationality of all of the directors was established.
Information on the international experience of home country-based board members was gathered from the annual reports of the relevant companies. When the information in the annual reports was not sufficient, additional information was found through Bloomberg’s Executive Profile & Biography, Forbes, Management Scope and Wikipedia. To be able to gather such information, it was required to read the biography of each of the directors carefully. International experience of home based-members is defined as a member who studied or
worked abroad (Tihanyi, Griffith, and Russell, 2005) or had an international board position (Carpenter and Westphal, 2001). So, to assess the international experience of the domestic directors three types of information were collected: (1) whether they had studied abroad (i.e. international study experience); (2) whether they had worked for a foreign-based company (i.e. international work experience); (3) whether they had been or still were the director of an international company (i.e. international board experience). Especially Bloomberg provided a lot of the above mentioned information. The only variable that possibly suffered from measurement error was the international work experience of the domestic directors, because it was not always possible to assess whether a domestic director who had worked for a foreign firm had actually worked abroad or just in a subsidiary of that firm within the home country.
For the empirical analysis the data on boards was merged with financial data. Financial data was collected from Orbis and the Datastream/Worldscope database. Since financial data was not available for all the firms in the sample, five firms had to be excluded. This was mainly due to missing data on foreign sales, which is one of they key variables in the internationalization measure, and thus cannot be exclude from the analysis. The sample is therefore slightly biased towards large and often more internationalized firms. A lag period was established, following the study of Rivas (2012). The reason for this is to produce tangible results. Also, this is in line with the fact that earlier studies have used a convention of a few years to study the implementation of strategies (such as internationalization) (Wally and Becerra, 2001). The data on the nationality and international experience of the board members is from 2010 and the financial data is collected from 2012. This provides a lag period of two years.
After excluding the firms with missing data, the final sample consists of a total of 1.177 directors from 83 firms, of which 313 directors (24 firms) in the United Kingdom, 147 directors (16 firms) in the Netherlands, 508 (27 firms) directors in Germany and 209 directors (16 firms) in Belgium.
4.2 Description of the sample
at the differences in governance systems, as mentioned before, it would be expected that the percentages of Belgium, the Netherlands and Germany would be similar and that the United Kingdom would be the percentage that would differ. However, the difference in percentage in German boards could be explained by the fact that a supervisory board in Germany has to consist of both shareholder representatives and employee representatives. The employee representatives often have been working in the firm for a long time and it is plausible that most of them will be nationals.
A large number of the international directors in the sample comes from the United States, namely 25 percent of the total number of foreign directors, and from other European countries (excluding the home country). For example, 36 percent of the international directors on the boards in the United Kingdom came from the United States and 31 percent came from other European countries. Furthermore, 32 percent of the international directors on the Dutch boards came from the United States and 58 percent came from other European countries. Especially in Germany and Belgium most of the foreign directors came from other European countries, namely 78 percent and 79 percent. The European countries that are most represented on international boards are the United Kingdom, France and the Netherlands.
Other nationalities than mentioned above are also represented in the sample. There were 20 Asian directors (China, India, Israel, Japan, Kuwait, Lebanon, and South Korea), 10 South American directors (Brazil and Colombia), 18 African Directors of which 13 from South Africa (the rest from Ghana, Ivory Coast, Morocco and Zambia), two Russian directors, 12 Canadian directors and three directors from New Zealand.
The data on international experience among home-country based directors shows that a relatively large percentage of the total sample of domestic directors (48 percent) has either international study, work or board experience. In terms of differences between the four countries the data shows that the share of international experienced domestic directors is significantly lower in Germany than in the other countries, namely 33 percent against 65 percent, 65 percent and 61 percent in respectively the United Kingdom, Belgium and the Netherlands.
be that both are significantly larger economies than the Netherlands and Belgium and therefore more study opportunities could be available within their home country, so studying abroad adds less value. However, this is only one possible explanation, other factors could come into play trying to explain this.
4.3 Dependent and independent variables
One of the main independent variables is the number of foreign members to the total number of directors on a board (PERCENT_INT). The reason a percentage is used is because that makes it possible to capture both the presence of international directors, and the weight of foreign representation on the boards (Oxelheim et al., 2013). The second main independent variable is the percentage of domestic directors with any type of international experience (INT_EXPERIENCE), either international study, work or board experience. Furthermore, the variable international experience will be divided intro three types of international experience (all in percentages against the total number of domestic directors): international study experience (INT_STUDY), international work experience (INT_WORK) and international board experience (INT_BOARD).
For the regression two main explanatory, or independent, variables are used. Both are a measure for the degree of internationalization of the firm. The first measure is foreign sales as a percentage of total sales (FOREIGN_SALES). This reflects the firm’s dependence on sales to foreign markets (Sanders and Carpenter, 1998; Sullivan, 1994). As an alternative to this, the second measure is foreign assets as a percentage of the total assets (FOREIGN_ASSETS) of the firm. This reflects the firm’s reliance on owned foreign stocks. In the international business literature, the sales and asset dimensions address a firm’s dependence on foreign consumer markets and foreign resources, respectively (Sanders and Carpenter, 1998; Sullivan, 1994). The theoretical range for both of the factors is 0 to 1, and when closer to 1 the degree of internationalization will be considered as higher.
4.4 Firm-specific control variables
A control variable for firm performance (FIRM_PERF) is also included. This is measured by using the return on assets (ROA), which is defined as the earnings before interest and tax (EBIT), divided by the total of the firms’ assets. Firms that perform well, could have more resources available to undertake entry into international markets.
A control variable for a firm’s growth opportunities is also included, following the study of Masulis et al. (2012) and Oxelheim et al. (2013). The firm’s growth opportunities (TOBINS_Q) are measured by using TOBIN’s Q, which is defined as the market value of firm equity plus the book value of firm assets minus the book value of firm equity, all divided by the book value of firm assets.
4.5 Board-specific control variables
A set of board-specific control variables is included in the analysis. To control for the age of board members, the variable BOARD_AGE is included. This is the average age of the board members (Oxelheim et al., 2013). Cochran, Wartick and Wood (1984) argue that older board members might be more reluctant to accept new ideas, are more risk-averse and are less likely to accept new challenges, such as a higher degree of internationalization for the firm.
Furthermore, there is a control variable included to control for the size of the board (BOARD_SIZE). This is defined as the number of members on the board. Research on firm governance supports the view that the size of the board may be a function of the complexity of the firm’s environment (Sanders and Carpenter, 1998). Furthermore, the size of the board may influence the level of heterogeneity on the team. Larger boards may reduce the power and influence of a single person (Amason and Sapienza, 1997; Haleblian and Finkelstein, 1993). This in turn may influence strategic decisions, such as the degree of internationalization to pursue.
4.6 Descriptive statistics of the sample
TABLE 1
Descriptive Statistics and Correlations
N Mean SD 1 2 3 4 5 6 7 8 9 1 BOARD_SIZE 14.18 4.70 1.00 2 BOARD_AGE 58.81 3.09 -.19 1.00 3 PERCENT_INT 33.32 21.61 -.46** .24* 1.00 4 INT_EXPERIENCE 53.69 25.98 -.32** .18 .39** 1.00 5 FOREIGN_SALES 65.89 28.50 -.11 .23* .27* .26* 1.00 6 FOREIGN_ASSETS 37.32 32.35 -.22* .18 .161 .30** .42** 1.00 7 FIRM_SIZE 17.63a 1.84 .38** .003 -.01 -.03 -.23* -.01 1.00 8 FIRM_PERF 6.80 6.06 -.22 -.29** .16 .03 -.11 .04 -.36* 1.00 9 TOBINS_Q 1.37 0.53 -.29** -.17 .18 -.003 .34** .12 -.26* 0.66** 1.00
Note: a Logarithm, * denotes statistical significance at the 5 percent level, ** denotes statistical significance at the 1 percent level
As illustrated in Table 1 above, an average company in the final sample of 83 firms generates 66 percent of their total sales from foreign markets, 37 percent of their total assets is foreign and has a TOBIN’s Q-value of 1.4. The average size of the firms in the sample is 45,3 million Euros (in assets), the average ROA is 6.8 percent. On the average board in the sample 33.3 percent of the board seats are allocated to international directors, and more than 53 percent of the domestic directors has some kind of international experience. When the international experience is divided into the three types the data shows that on an average board 20 percent of the domestic directors has international study experience, 44 percent has international work experience and 39 percent has international board experience (not pictured in table). Furthermore, the average board in the sample has 14 members and the average age of the board members is 59 years. The average board size is relatively high, this could be explained by the big boards of the German companies. In Germany firms are required to appoint both shareholder representatives and employee representatives. This often leads to bigger boards than in the other three countries.
4.7 Correlation patterns
also shows a significant positive correlation between the share of international experienced domestic directors and the percentage of foreign sales against total sales. Furthermore, there is also positive significant correlation found between the share of internationally experienced domestic directors and the percentage of foreign assets.
As evidenced in the matrix, the average age of the board is significantly and positively correlated with the degree of internationalization (foreign sales to total sales). So, when the average age increases, the degree of firm internationalization will also increase.
4.8 Analysis method
In order to analyze the relationship between the independent and independent variables, the hypotheses will be tested by performing several tests. The estimation method that will be used is ordinary least squares (OLS) regression. The analysis will be executed in SPSS.
V: Empirical results
5.1 Regression analysis
sales and thus the higher the degree of internationalization. Most studies have found that the larger a company is, the more likely it is to export its products (Christensen, da Rocha and Gertner, 1987; Lall and Kumar, 1981), and thus to generate more foreign sales. However, some studies have found the opposite, which means small firms having a higher level of international intensity than large firms (Balcome, 1986; Calof, 1993). Therefore, the results on this relationship are not entirely consistent. The results of this regression indicate that the latter is true. Lastly, the coefficient of the control variable TOBIN’s Q, which measures the firm’s growth opportunities, is positive. This would mean that firms with more growth opportunities, will have a higher degree of internationalization.
In model (2), Table 2, the percentage of foreign sales is regressed on the main independent variable PERCENT_INT, which is the percentage of international directors on the board, and on a set of firm-specific and board-specific characteristics, i.e. the size of the firm, the performance of the firm, TOBIN’s Q, the average size of the board and the average age of the board. It can be observed that in firms with a higher percentage of international directors on the board, the foreign sales are also higher, and thus the degree of internationalization. This is evidenced by the significant positive coefficient. This result is in line with the predicted outcome that a more nationality diverse board has a positive effect on firm internationalization. Furthermore, the results show that all of the control variables except one, namely the firm performance, are statistically significant. This is consistent with model (1). However, the size of the board is in model (2) also positive and significant. This means that a bigger board, is positively related to the degree of internationalization. Amason and Sapienza (1997) argue that a large board could have a higher degree of heterogeneity, which could lead to a more diverse stock of knowledge, skills and abilities This in turn could have a positive effect on the degree of internationalization, as internationalization is a complex process which requires high information processing abilities (Rivas, 2012).
To conclude, the results in table 2 are in line with the prediction regarding the share of foreign board members and firm internationalization because they imply that firms with a higher share of international directors on the board will have a higher degree of firm internationalization. Furthermore, this means the results in Table 2 confirm hypothesis 1.
TABLE 2
Results of OLS Regression Analysis for Percentage of International Directors on Firm Internationalization
FOREIGN_SALES FOREIGN_ASSETS
Variable Model (1) Model (2) Model(3)
PERCENT_INT .346* (2.344) .230 (1.338) BOARD_SIZE .723 (1.074) 1.458* (2.010) -.740 (-.871) BOARD_AGE 2.665** (2.746) 2.169* (2.244) 1.899 (1.712) FIRM_SIZE -3.873* (-2.274) -4.826** (-2.831) 2.282 (1.084) FIRM_PERF -.659 (-1.012) -.899 (-1.401) .133 (.185) TOBINS_Q 22.014** (3.091) 21.817** (3.151) 7.190 (.907) R-squared Number of firms .238 83 .289 83 .192 65
Note: * denotes statistical significance at the 5 percent level, ** denotes statistical significance at the 1 percent level. T-stat in parentheses.
variable, which is the share of domestic directors with international experience, also shows a positive significant relationship with the percentage of foreign sales, and thus the degree of internationalization. This is as predicted.
The coefficients do differ from the coefficients for the share of foreign board members in model (2), Table 2. Both are positive, but the coefficient of the share of international directors (.346) is slightly higher than the coefficient of the share of internationally experienced domestic directors (.290). The regressions are executed on the same variables and numbers. This could provide evidence that both the share of foreign board members and the share of internationally experienced domestic board members should be taken into account when evaluating the internationalization of firms. However, it also could provide evidence that more international directors in a board has a stronger effect on the degree of internationalization than a higher percentage of internationally experienced domestic directors has.
Model (5), Table 3, is a re-estimation of model (4), replacing the percentage of foreign sales with the percentage of foreign assets, as an alternative measure of firm internationalization. None of the control variables in this model is significantly associated with the dependent variable of the percentage of foreign assets. The main explanatory variable does have a positive significant effect on the degree of internationalization, when measured in the percentage of foreign assets against the total assets. This means that a higher degree of internationally experienced domestic directors will lead to a higher percentage of foreign assets to total assets, and thus a higher degree of internationalization.
TABLE 3
Results of OLS Regression Analysis for Percentage of Internationally Experienced Domestic Directors on Firm Internationalization
FOREIGN_SALES FOREIGN_ASSETS
Variable Model (4) Model (5)
INT_EXPERIENCE .290* (2.622) 0.353* (2.648) BOARD_SIZE 1.289 (1.886) -.496 (-.642) BOARD_AGE 2.353* (2.495) 1.710 (1.614) FIRM_SIZE -4.333* (-2.624) 2.393 (1.234) FIRM_PERF -.809 (-1.282) .113 (.165) TOBINS_Q 23.926** (3.466) 9.261 (1.216) R-squared Number of firms .301 83 .257 65
Note: * denotes statistical significance at the 5 percent level, ** denotes statistical significance at the 1 percent level. T-stat in parentheses.
separation of the management board and the supervisory board. The supervisory board is required to include both shareholder representatives and employee representatives.
TABLE 4
Results of OLS Regression Analysis with Country Effects Included
FOREIGN_SALES FOREIGN_SALES
Variable Model (6) Model (7)
PERCENT_INT .439*** (2.793) INT_EXPERIENCE 0.346*** (2.750) BOARD_SIZE .848 (.899) .495 (.524) BOARD_AGE 2.298** (2.015) 2.343** (2.057) FIRM_SIZE -7.523*** (-3.826) -6.313*** (-3.249) FIRM_PERF -1.125 (-1.799) -.974 (-1.573) TOBINS_Q 17.223* (2.510) 20.130*** (2.928) DUMMY_NL -17.189* (-1.705) -12.147 (-1.180) DUMMY_GER .143 (.015) 4.051 (.398) DUMMY_BEL -24.091** (-2.592) -19.979** (-2.130) R-squared Number of firms .367 83 .365 65
Note: * denotes statistical significance at the 10 percent level, ** denotes statistical significance at the 5 percent level, *** denotes statistical significance at the 1 percent level. T-stat in parentheses.
types that are used are international study experience (INT_STUDY), international work experience (INT_WORK) and international board experience (INT_BOARD).
First, in model (8) the percentage of foreign sales is regressed on the share of domestic directors with international study experience and the total set of control variables. The results show no significant association between the share of domestic directors with international study experience and the degree of internationalization of the firm.
In model (9) the percentage of foreign sales is regressed on the share of domestic directors with international work experience and the total set of control variables. There can be a significant positive association observed.
In model (10) the percentage of foreign sales is regressed on the share of domestic directors with international board experience and the total set of control variables. The relationship between the percentage of nationals with international board experience and firm internationalization is positive and significant.
As for the control variables, in all three models the variables BOARD_AGE, FIRM_SIZE and TOBINS_Q are significantly associated with the degree of internationalization. This observation is consistent with the results of regression models (1), (2) and (4).
The results in Table 4 indicate that international work experience and international board experience of domestic directors do lead to a higher degree of firm internationalization and that international study experience does not have this significant effect. A possible explanation for this is that the international experience gained from studying abroad is less relevant to the internationalization of the firm, than the international experience gained from working abroad and participating in international boards.
TABLE 5
Results of OLS Regression Analysis for the Different Types of International Experience on Firm Internationalization
FOREIGN_SALES
Variable Model (8) Model (9) Model (10)
INT_STUDY .182
(1.215)
INT_WORK .255**
(2.371)
(1.917) BOARD_SIZE .895 (1.305) 1.128 (1.669) .929 (1.370) BOARD_AGE 2.461** (2.506) 2.518*** (2.665) 2.303** (2.333) FIRM_SIZE -3.677** (-2.156) -4.176** (-2.517) -4.118** (-2.432) FIRM_PERF -.765 (-1.167) -.861 (-1.348) -.906 (-1.366) TOBINS_Q 23.823*** (3.284) 24.507*** (3.502) 22.583*** (3.199) R-squared Number of firms .252 83 .290 83 .263 83
Note: * denotes statistical significance at the 10 percent level, ** denotes statistical significance at the 5 percent level, *** denotes statistical significance at the 1 percent level. T-stat in parentheses.
5.2 Robustness tests
TABLE 6
Results for OLS Regression Analysis for Robustness Test with 2011 Firm Internationalization Data
FOREIGN_SALES FOREIGN_ASSETS FOREIGN_
SALES
FOREIGN_ASSETS
Variable Model (11) Model (12) Model (13) Model (14)
PERCENT_INT .334** (2.117) .139 (.835) INT_EXPERIENCE .111* (.914) .199 (1.507) BOARD_SIZE 1.041 (1.356) -.647 (-.777) .553 (.741) -.534 (-.675) BOARD_AGE 2.187** (2.204) 1.496 (1.382) 2.561** (2.570) 1.414 (1.346) FIRM_SIZE -3.896** (2.203) 2.249 (1.129) -3.133* (-1.776) 2.381 (1.254) FIRM_PERF .591 (1.071) .458 (.697) .637 (-1.111) .440 (.683) TOBINS_Q 7.445 (.848) -.393 (-.037) 10.075*** (1.117) 1.107 (.106) R-squared Number of firms .257 82 .123 66 .222 82 .145 66
Note: * denotes statistical significance at the 10 percent level, ** denotes statistical significance at the 5 percent level, *** denotes statistical significance at the 1 percent level. T-Stat in parentheses.
experienced domestic directors are both positive and significant for the percentage of foreign assets (degree of internationalization), which was not the case for the 2012 data. However, all in all it can be concluded that the results support the conclusions presented above.
TABLE 7
Results for OLS Regression Analysis for Robustness Test without the German Data
FOREIGN_SALES FOREIGN_ASSETS FOREIGN_
SALES
FOREIGN_ASSETS
Variable Model (15) Model (16) Model (17) Model (18)
PERCENT_INT .372** (2.065) .312* (1.691) INT_EXPERIENCE .397*** (2.880) .336** (2.157) BOARD_SIZE 1.504 (1.211) .794 (.561) .830 (.678) .138 (.099) BOARD_AGE 3.902*** (2.988) 3.369** (2.526) 3.894*** (3.167) 3.200** (2.446) FIRM_SIZE -3.958* (-1.944) 1.575 (.682) -3.029 (-1.566) 2.695 (1.229) FIRM_PERF -.983 (-1.275) .613 (.759) -1.001 (-1.358) .571 (.723) TOBINS_Q 21.977** (3.284) -.384 (-.042) 26.165*** (3.182) 3.276 (.361) R-squared Number of firms .409 55 .274 44 .451 55 .304 44
Note: * denotes statistical significance at the 10 percent level, ** denotes statistical significance at the 5 percent level, *** denotes statistical significance at the 1 percent level. T-Stat in parentheses.
VI: Discussion
6.1 Limitations
different results. It is also important to note that this study is mainly focused on large, listed multinational firms. This is the most logical choice, since these firms are active in a multitude of countries and are truly multinational in the sense that their workforce is very diverse. However, this does exclude smaller firms. Including those could have provided a more extensive overview on the topic of international boards and firm internationalization.
Furthermore, in constructing the data, annual reports and different websites have been consulted to gather the necessary information. While this is a good approach for this research, it has to be noted that other information sources, for example interviews or a survey, could potentially have provided more reliable and especially a more extensive amount of data. However, this option seems not plausible given time constraints. Related to the collection of data, the most important part of this study was the gathering of data about the international experience of domestic directors. This proved to be difficult in some cases, since it cannot be guaranteed that the whole history of a person was mentioned in the annual reports or in the other information sources. Great care has been taken while gathering this data, however, there is a possibility that information was missing and that therefore inferences about the international experience of a person are inaccurate.
Another issue regarding the data of this study is the fact that the data is cross-sectional. The data on the nationality of the board members and the international experience of domestic board members is from 2010. Longitudinal data would have given a more extensive overview over the relationship between international boards and firm internationalization and could be useful in generalizing the results and the prediction of future results.
6.2 Future research
A number of recommendations related to potential future research can be made. First and possibly the most important recommendation that can be made is that the use of longitudinal data would be valuable. By doing this, the relationship can be studied over time. Furthermore, longitudinal data could also help clarifying the causal relationship between the share of international directors and the share of internationally experienced domestic directors and the internationalization of the firm.
Second, it could be interesting to include more factors when looking at how international a board is. For example, it could be interesting to focus on the different nationalities within a board. This study has only looked at the number of international directors, not at the different nationalities. This would mean that a future study could focus more on cultural factors and differences, for instance language similarity. Furthermore, it may be interesting to look into the international experience of domestic board members more deeply if a study is not limited by time constraints. For example, it could be included how many years the board members worked abroad, in how many different countries they have worked, and in how many different international boards they have participated.
Third, including more countries and more companies per country (for instance smaller companies) could prove to be interesting. Including these could yield different and potentially interesting results.
VII: Conclusion
The objectives of this study were to find out if the share of international directors in a board and the share of internationally experienced domestic directors have an effect on the internationalization of the firm and if that effect differs. Firms out of four countries, the United Kingdom, the Netherlands, Germany and Belgium, have been selected as the sample of this study. Data regarding the nationalities of the directors, the international experience of the domestic directors and the internationalization of the firms (based on financial information) was collected and analyzed.
positive effect for both measures of internationalization. It can be observed that a higher percentage of international directors has a slightly higher effect than a higher percentage of internationally experienced domestic directors (.346 against .290).
The study also conducted a regression analysis to analyze if there was a difference in the three types of international experience (study, work or board experience) and their effect on firm internationalization. The results showed that international work experience and international board experience have a significant and positive effect on firm internationalization, however international study experience does not. A possible explanation for this is that the international experience gained from studying abroad is less relevant to the internationalization of the firm, than the international experience gained from working abroad and participating in international boards.
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