Master thesis
The influence of the chief executive officer on the internationalization of small and medium sized enterprises
An upper echelons perspective
By Jorn Kamsma S2766957
Faculty of Economics and Business, University of Groningen MSC International Business and Management 2015-2016
Page 1 of 45 Master thesis * International Business & Management
The influence of the chief executive officer on the internationalization of small and medium sized enterprises
An upper echelon perspective
Jorn Kamsma University of Groningen
Abstract
This article studies the influence of the chief executive officer on the internationalization of small and medium sized enterprises (SMEs). The upper echelon theory predicts that organizational outcomes – both strategies and effectiveness – are viewed as reflections of the values and cognitive base of powerful actors in the organization (Hambrick & Mason, 1984). Based on a sample of 74 Dutch SMEs, the study shows that the CEO does indeed influence the internationalization of SMEs. The regression analysis indicated that a CEO with prior international experience will invest more time and effort in the internationalization of the firm.
Keywords
Upper echelon theory, CEO, Age, Gender, Tenure, Education, International experience, Degree of internationalization, SMEs
1. Introduction
Page 2 of 45 for multinational firms (Oviatt & McDougall, 2005). International expansion provides SMEs with the opportunity for growth and the ability to access knowledge in foreign locations (Hsu et al., 2013), however there are also barriers that can produce uncertainty and high costs (Leonidou, 2000). Within the international business literature there is research on the internationalization- performance relationship (e.g. Hsu et el., 2012). Internationalization in these studies often refers to the degree of international activities the firm undertakes (Sullivan, 1994). Previous research has studied this relationship either by focusing on exogenous factors (e.g. institutional distance) and/or endogenous factors (e.g. firm specific assets, firm age, and firm size) (Hitt et al., 2006). However few studies have examined the influence of the chief executive officer (CEO) on the internationalization of SMEs. Small firms are often less hierarchical in structure and are therefore less constrained by organizational inertia. Within these SMEs, the CEO is often the central decision-maker and may even control the composition of their firm’s decision making team (Hsu et al., 2013). According to the Upper echelons theory, first introduced by Hambrick & Mason (1984), the manager’s eventual perception of the situation combined with his/her values provides the basis for strategic choice. Agnihotri & Bhattacharya (2015) argue that, the internationalization of firms is unlikely to be successful without the benefit of their exposure and knowledge to evaluate and act on business opportunities. Hence the orientation and perception of the CEO towards internationalization may play a critical role in the development of firm’s internationalization.
This study attempts to fill a research gap by examining the effect of certain attributes of CEOs on the internationalization of SMEs. Internationalization will refer to the degree of internationalization by studying its three attributes, performance, structural and attitudinal (Sullivan, 1994). Thus, the objective of this research is to contribute to both organizational behaviour and international business literature by providing a better understanding on how CEOs influence the development the firm’s internationalization in the specific context of SMEs. Hence the research question will be;
What is the influence of the CEO characteristics on the internationalization of small and medium sized enterprises?
Page 3 of 45 and the discussion in section five. The research concludes with its limitations and presents ideas for future research.
2. Literature review & hypotheses development
2.1 SME and Internationalization
Small and medium sized enterprises (SMEs) and internationalization are central concepts in this study. SMEs can be distinguished from MNEs by their size. A definition of SMEs which is often used is the definition of the European Commission; “SMEs are enterprises which
employ fewer than 250 persons and which have an annual turnover not exceeding EUR 50 million, and/or an annual balance sheet total not exceeding EUR 43 million” (2003, p36).
Hence, a firm that meets these three criteria is seen as an SME. The most straightforward route of SMEs wishing to internationalize is exporting (Arteaga-Ortiz & Fernandez-Ortiz, 2010), since it offers greater flexibility of management actions, entails fewer business risks and requires fewer resources to be committed than other ways of entering foreign markets. Internationalization for SMEs can be an important growth strategy, especially for SMEs wishing to realize economies of scale and scope (Hsu et al., 2013). It allows firms to exploit their firm-specific resources and create the opportunity to access host-country specific advantages, increase their knowledge base, capabilities, and competitiveness through experiential learning (Ghoshal & Barlett, 1990).
Page 4 of 45 is small. Next to the overall relationship many studies have studied factors that moderate the internationalization-performance relation. These moderating variables can also been seen as barriers to internationalization. Leonidou (2004) defined these barriers as “all those
constraints that hinder the firm’s ability to initiate, develop or sustain business operations in overseas markets” (p.281). It is often thought that to compete within foreign markets the firm
Page 5 of 45 2.2 Theoretical patterns of internationalization
Within the literature on internationalization there are two main streams of internationalization patterns. These two are the Uppsala internationalization model (Johanson & Vahlne, 1977, 2009) and the born global/international new venture model (Oviatt & McDougall, 2005).
The Uppsala internationalization process model was first introduced by Johanson & Vahlne (1997). The theory builds on two underlying assumptions; uncertainty and bounded rationality. The model also includes two change mechanisms. Firms change either by learning from their experience of operations, current activities, in foreign markets or firms change through the commitment decisions they make to strengthen their position in the foreign market. Hence, experience builds a firm’s knowledge of markets and this knowledge influences decisions about the level of commitment and the subsequent actions undertaken. For example, the theory predicts that firms enter countries that are relatively close in terms of cultural and geographical distance and start with low commitment governance mode, e.g. an agent. Over time the firm gains market knowledge, this reduces the uncertainty and subsequently increases the level of commitment. This results in incremental investments and incremental international growth.
A more recent stream in the literature of SMEs is the born global or international new venture theory (Oviatt & McDougall, 2005). This theory emerged from the field of international entrepreneurship (Segaro, 2012). The theory of international new ventures builds on the assumption that due to recent technological innovation and the presence of an increasing number of people with international business experience have established new foundations for MNEs. The authors defined international new ventures as “a business
organization that, from inception, seeks to derive significant competitive advantage from the use of resources and the sale of outputs in multiple countries” (Oviatt & McDougll, 2005,
Page 6 of 45 This study builds on the upper echelons theory and assesses CEO characteristics and studies a more behavioural approach to explain differences in internationalization behaviour of SMEs. Both the Uppsala as the international new venture theory build upon the assumption that gaining international experience will subsequently increase the international activities of firms.
2.3 The upper echelons theory
This research builds on the upper echelons theory and studies the corporate elite characteristics to assess why some SME’s are more internationalized than others. In the following section the upper echelons theory will be discussed in more detail to gain insight in the characteristics which are appropriate for this research.
The upper echelons theory was first introduced by Hambrick & Mason (1984) and provides a foundation for empirical research into the links between managerial background and organizational outcomes. According to the behavioural theory of the firm, the experiences, background and characteristics of top managers shape their cognitive perspectives. Hambrick & Mason (1984) argued that, organizational outcomes – both strategies and effectiveness – are viewed as reflections of the values and cognitive bases of powerful actors in the organization. Hence the decision maker’s choice of action is influenced by its cognitive base and values. The cognitive base reflects the decision makers;
1. Knowledge or assumptions about future events, 2. Knowledge of alternatives, and
3. Knowledge of consequences attached to alternatives.
Values are defined as the decision makers principled for ordering consequences or alternatives according to preference. Because, decision-makers cannot view every aspect of the organization and environment, their field of vision is limited by their cognitive base and values (Hambrick & Mason, 1984). Hence, the manager’s eventual perception of the situation combined with his/her values provides the basis for strategic choice. These strategic choices, which are influenced by the manager’s cognitive base and values, are in turn of influence to the company’s performance (Hambrick & Mason, 1984).
Page 7 of 45 The use of the demographic approach has been criticised on the grounds that it does not access the “black box”, the process linking demographic factors with organizational outcomes (Lawrence, 1997; Pettigrew, 1992). For example Pettigrew (1992) questioned the theoretical and the empirical validity of the underlying assumption that demographic characteristics are reliable variables for measuring cognitive base. Researchers could also use physiological constructs to measure the cognitive values of top executives (Lawrence, 1997). However one key limitation of using physiological constructs is related to the unwillingness of executives to cooperate in a bunch of physiological tests (Hambrick, 2007). Although there has been some criticism on the demographic approach, it should be noted that there is an extensive body of empirical research with significant results and findings (Herrmann & Datta, 2005). For example, in a sample of 380 foreign market entries Herrmann & Datta (2006) found that CEO international experience was associated with greater propensity of choose greenfield investment and acquisition over joint ventures. Hsu et al. (2013) found, among a sample of 187 Taiwanese SMEs, that age, educational level, international experience and duality of the CEO have moderating effects on the relationship between internationalization and firm performance. Agnihotri and Bhattacharya (2014) found a significant relation between educational level and international exposure of the CEO and export intensity among a sample of Indian firms. Wiersema and Bantel (1992) tested some of the demographic characteristics of the top management team (TMT) on a sample of Fortune 500 firms and found a firms that are more likely to undergo changes in corporate strategy had TMTs characterized by lower average age, shorter organizational tenure, higher team tenure, higher educational level, higher educational specialization heterogeneity and higher academic training. The following paragraph of this report presents more findings of past research on certain demographic characteristics.
Page 8 of 45 managers. If in firms the CEO wields dominant power, studying only the CEO may provide sufficient information to test propositions. Among SMEs it is expected that CEOs have more decision making power than among large multinational firms. The CEO is the agent ultimately responsible of all strategic decisions a company makes (Jaw & Lin, 2009). Hence, within SMEs it is expected that the characteristics and background of the CEO will have much influence on the strategic outcomes of the organization.
2.4 The Chief Executive officer
The CEO has the unique responsibility for the strategic success of the firm (Finkelstein, 1992). The chief executive officer is the person within a company who has the ultimate responsibility over every decision and action of all the employees of a company, including those decisions and actions of which they are not aware (Farkas & Wetlaufer 1996, p.110). Following the resource based view (Barney, 1992), resources can lead to a sustainable competitive advantage when they meet the following characteristics; valuable, rare, inimitable and non-substitutable. According to Daily et al. (2000) the CEO has the possibility to become a resource that can create a sustainable competitive advantage. The CEO has been viewed as a unique organizational resource. As noted by Norburn (1989) compared to all other members of the firm, the CEO has achieved to reach the top position in the firm. These researchers (Daily et al., 2000; Farkas & Wetlaufer 1996; Norburn, 1989) all show that the CEO is the most important person within the firm and that he or she can steer the firm in new directions, such as expand to other international markets.
Page 9 of 45 experience of the CEO has a significant positive effect on the relationship between international diversification and firm performance. These examples of previous research show that the CEO is of influence on the internationalization of firms. However as Herrmann & Datta (2005) argue, within the research on upper echelon theory there are still gaps. For instance, the effects of CEO characteristics have not yet been studied in all international contexts and the results of previous studies have been contradicting. Also, due to the availability of data most upper echelon research takes place among relatively large US-based firms (e.g. Daily et al., 2000; Herrmann & Datta, 2005; Kent & Moss, 1994; Krishnan & Park, 2005; Sambharya, 1996). Hence, this indicates the studying the effects of CEO characteristics within the contexts of SMEs enlarges the current upper echelon literature.
Page 10 of 45 research there are not many studies which included the effect of gender. Krishnan & Park (2005) have studied gender diversity among TMT, however the effect gender in an individual context has been relatively unexplored.
In short, according to the current literature five characteristics have been identified that are expected to influence the internationalization of SMEs. These five characteristics are to reflect the cognitive perspectives of the CEO and also determine a part of the information processing capacity of the CEO (Roth, 1995). According to Hsu et al. (2013) CEOs who overstrain their information processing capability are more likely to devote suboptimal time and attention to scanning the international environment. Hence, the higher information processing capabilities will positively reflect the firm’s internationalization. The five CEO characteristics that are expected to influence the internationalization of SMEs and will be studied in this research are; age, gender, tenure, educational level and international experience. In the following section these characteristics will be further explained and it will be discussed why these characteristics are expected to influence the SMEs internationalization. For each characteristic a hypothesis will be stated.
2.4.1 CEO age
An individual’s age is expected to influence the strategic decision-making perspectives and choices (Wiersema & Bantel, 1992). Former research has found that the age of the CEO is associated with several organizational outcomes. For instance Wiersema & Bantel (1992) found that a lower average age of the top management team resulted in more organizational changes concerning the strategy. Agnihotri & Bhattacharya (2014) also found a significant negative relation between top management team age and firms’ internationalization. Tihanyi et al. (2000) also stated that a higher average age among the top management team is negatively correlated with a firm’s internationalization. They base their argument on the assumption that personal agendas for financial and career stability become more important for older executives than they are for younger executives. However, different studies are not consistently finding a negative relation between age and organizational outcomes. For example Hermann & Datta (2006) also argued a negative relation between CEO age and the choice of FDI entry mode, however there results did not show a significant negative relation. Kerami et al. (2006) also did not find a significant relation between the age of the CEO and their performance in strategy development.
Page 11 of 45 more likely to seek growth by means of exploring new innovative strategies in an effort to grasp opportunities than older managers. Younger managers tend to be more risk oriented. Low executive age has been associated with both corporate growth and volatility in sales and earnings (Child, 1974).
Hambrick and Mason (1984) also argued that managerial age is negatively associated with the ability to integrate obtained information when making decisions. Hsu et al. (2013) extended this argument by arguing that, due to the lesser ability to integrate information effectively higher managerial age leads to poorer performance with respect to decision making. Among there sample of 187 Taiwanese SMEs they also found a significant negative relation between CEO age and firm’s internationalization performance relation. Zaheer (1995) argued, when SMEs enter new markets they will need to operate in different institutional and cultural environments. To overcome this liability of foreignness SMEs will need to learn and partially adapt to the local environment to gain legitimacy. Based on the fact that older managers have less physical and mental stamina, they may not be able to change their attitude and behaviour towards strategic internationalization decisions more easily than younger managers (Hsu et al., 2013). At some point CEOs become bound by their own inertia (Jaw & Lin, 2009).
Following the above theoretical arguments that internationalization is a strategic path which increases risk and requires more information process capacity due to environmental and institutional differences, it is expected that older CEOs will invest less in international activities. Hence, this can be formulated in the following hypothesis:
Hypothesis 1: CEO age is negatively related with the degree of internationalization of an SME.
2.4.2 CEO Gender
Among the upper echelon theory the effect of gender diversity is relatively under investigated. This might have to do with the fact that women were for long absent in the top management of organizations (Mainiero, 1994). In her exploratory study on women in senior management positions Mainiero (1994) argued that, in previous decades women have long suffered major physical and psychological barriers to advancement to the top level of the organizations.
Page 12 of 45 their study on CEO succession that when a male CEO is succeeded by a female CEO this will decrease the risk-taking behaviour of the firm. This would indicate a negative relation with international activities.
Krishnan & Park (2005) propose four arguments why the representation of women in top management teams may confer numerous benefits on the organizations. First in a global market place women are more likely than men perceived as leaders by group members. They argue that firms which operate globally the environment calls for a lot of social interaction, which according to social identity theory women possess more than men (Kent & Moss, 1994). Second, the challenges women face on their way up in organizations equip them with the necessary skills to cope with uncertainty in task requirements. This argument is based on Maniero’s (1994) exploratory study of 55 high-profile female executives. According to Maniero women face five major hurdles during their climb in the corporate ladder; getting assigned to a high visibility project, demonstrating critical skills for effective job performance, attracting top level support, displaying entrepreneurial initiative and accurately identifying what the company values (1994). Women who are in senior management positions have already survived these barriers and are therefore better equipped than male senior managers (Krishnan & Park, 2005). Third, women are more likely to possess a cognitive style which emphasized harmony, compared to their male counterparts. This would enable them to bring people together and overcome organizational challenges. The final and most important argument which they propose is that women are more likely than men to adopt a “learning” approach within their networking strategy. This would indicate that female CEOs would be more likely to seek extra organizational relationships and this would increase the firms’ international activities.
The above arguments propose that female CEOs will be better equipped to overcome barriers that firms have to face when they want to expand internationally. Hence, it is expected that female CEOs will engage in more international activities than male CEOs. This is formulated in the following hypothesis:
Hypothesis 2: Having a female CEO is positively related with the degree of internationalization of an SME.
2.4.3 CEO tenure
Page 13 of 45 firm. Within the literature on SMEs short tenure and managerial youth are often associated with a high pace of internationalization (Jaw & Lin, 2009). Some researchers argue that long-tenured CEOs are often complacent and old fashioned (Boeker et al, 1997; Simsek et al., 1999). Long-tenured CEOs may be at a stage where financial security is critical and risk-taking viewed as a threat to security (Jaw & Lin, 2009). Considering internationalization is not without risk, pursuing an international strategy may not be attractive to longer-tenured CEOs. Boeker (1997) also found that older CEOs are less adaptable to new ideas or behaviours. In comparison new CEOs attempted novel ideas and new methods, while longer-tenured increasingly avoided more risky behaviour.
Page 14 of 45 suggest that the CEO will press for higher resource commitment to foreign markets with increasing tenure, due to a more extensive knowledge-base.
Hypothesis 3: CEO tenure is positively related with the degree of internationalization of an SME.
2.4.4. CEO educational level
Education is an important element that shapes a person’s individual cognitive base. Within the literature many studies find a positive relation between education level and organizational outcomes (e.g. Agnihotri & Bhattacharya, 2014; Hsu et al, 2013; Wiersema & Bantell, 1992). However there are few studies who argue in the other direction. Herrmann & Datta (2002) found an insignificant relation between CEO successor’s education and level of entry mode decision. In a study among US-based firms they found that on average firms that had a CEO without a university degree were outperforming firms that had a CEO with a university degree (Jalbert et al. 2002). A possible explanation for this result could be CEOs which have a university degree are educated to assess a situation and make strategic decisions within a certain framework, while CEOs which did not possess a university degree were more likely to think out of the box.
While this is an interesting finding it is not the generally expected view within the upper echelon theory. According to Hambrick & Mason (1984) education serves as an indication of a person’s knowledge, skill base, values and cognitive preferences. Firms operating in multiple countries have to deal with different institutional environments. To overcome the barriers to internationalization the management of firms will need to be able to adapt to changes (Zaheer, 1995). Hence, the CEO is presented with much new information which he or she will need to process. According to Hsu et al. (2013) this information processing capacity plays an important role during the internationalization of an SME. CEOs that overstrain their information processing capability are more likely to devote suboptimal time and attention to scanning the international environment, leading to lower firm performance.
Page 15 of 45 absorb new ideas and possess an increased capacity to process information. Herrmann & Datta (2005) also argued that top management teams with above average educational level had greater tolerance for ambiguity, be more receptive to change and have the knowledge base and competencies for systematically seeking new opportunities and for evaluating multiple options. They also found a positive relation between top management team education and international diversification.
Following the above theoretical assumptions it is expected that CEOs with a high educational level will invest more in international activities than less educated CEOs. This expectation is formulated in the following hypothesis:
Hypothesis 4: CEO educational level is positively related with the degree of internationalization of an SME.
2.4.5 CEO internationalization experience
The final characteristic that this study will address is the international experience the CEO has obtained during his or her career. International experience of top executives is a factor that has gained increasing attention in the past few years (Agnihotri & Bhattacharya, 2014). Oviatt & McDougall (2005) build their theory of international new ventures on the assumption that due to recent technological innovation and the presence of increasing number of people with international business experience have established new foundations for MNEs.
Research suggests that when top managers have international experience, their perception and personality take on a more international orientation (Sambharya, 1996). The experience of living in a foreign country, with different customs and habits has a profound impact on the cognitive orientation of managers (Herrmann & Datta, 2005). In addition to being able to integrate the obtained cultural differences with their own culture, they are better equipped to deal with uncertainties and ambiguities associated with international operations (Sambharya, 1996). Prior research has indicated that managers of most SMEs do not perform sufficient global scanning (Hsu et al, 2013). Hence they may lack the information necessary to exploit international opportunities. According to Sambharya (1996) one way of firms to respond to global competition is by giving power and importance to managers with international experience and thus legitimizes the international career path.
Page 16 of 45 markets is important in overcoming the physic distance involved in doing business in foreign countries (Johanson & Vahlne, 1977). According to Ghoshal & Barlett (1990) international experience is valuable for the development of a global mind-set and increases the information processing capacity that allows managers to switch between global and local tensions. International experience can contribute to easier acquisition of information that is effective towards international growth (Herrmann & Datta, 2005). It is also expected to have an impact on the risk perception of managers. Managers who lack international experience are less certain of their abilities to manage foreign operations (Agnihotri & Bhattacharya, 2015), which often leads to an overstatement of potential risk associated with resource commitment. As Sambharya (1996) also argues international experience may serve as a proxy for the reduction of uncertainty and as a surrogate for accumulating cultural knowledge which reduces the perception of risks associated with international activities.
As the above arguments all suggest previous research has also found a variety of associations between international experience of top executives and firm internationalization. Within the literature on top management teams multiple researchers have found a positive relation with the firm’s degree of internationalization (Agnihotri & Bhattacharya, 2014; Carpenter & Fredrickson, 2001; Herrmann & Datta, 2005; Sambharya, 1996) The international experience of solely the CEO has also been significantly positively associated with the internationalization and firm performance (Daily et al. 2000; Herrmann & Datta, 2006; Hsu et al, 2013). Daily et al. (2000) also found an interactive effect between CEO international experience and outside succession on the degree of internationalization and corporate financial performance. This builds on the argument that CEOs who have multiple business experience and are brought in from the outside tend to make more changes in structure procedures and people (Hambrick & Mason, 1984).
In short this all leads to the assumption that SMEs who have CEOs with much international experience will likely have more international operations than SMEs who have CEOs with less international experience. Building on the above set of argument the following hypothesis advances:
Page 17 of 45 2.5 Conceptual model
The following figure shows the conceptual model of this study.
Figure 1: Conceptual model (source, author)
3. Methods
3.1 Sample and data collection
This study draws upon a data set of Dutch SMEs. As of 1 January 2016 the Netherlands counted 422.265 SMEs, this accounted all firms between 2-250 employees and represents 24% of all businesses in the Netherlands (Kvk, 2015). The sample of SMEs, which were surveyed for this research, was identified by means of the Orbis database of Bureau van Dijk. The Orbis database contains company information on over 200 million companies worldwide. The emphasis of the Orbis database is on private companies, which matches with the purpose of this research. Unfortunately the information that the Orbis database provided did not include enough information to do the statistical analysis. Therefore the Orbis database was used as a means to identify the sample. To derive a suitable sample, a few exclusion criterions were used. First, this study solely includes SMEs. SMEs are defined by the European Commission as firms which employ fewer than 250 employees and which have an annual turnover not exceeding EUR 50 million, and/or an annual balance sheet total not exceeding EUR 43 million (2003 p.36).
Page 18 of 45 depends heavily on foreign trade. Due to the availability of data most research on upper echelon takes place among US-based firms (e.g. Daily et al., 2000; Herrmann & Datta, 2005; Kent & Moss, 1994; Krishnan & Park, 2005; Sambharya, 1996). Also the Netherlands is part of the European Union. Over the past few years the European Commission has placed a lot emphasis on international trade among SMEs. According to the European Commission, EC 2009, SMEs are the key driver of innovation, competitiveness and growth within the European Union. To improve the performance of small- and medium-sized enterprises, they adopted the “Small Business Act for Europe” in 2008, which contains a set of common principles to make policies friendlier for SMEs. In short this makes the Netherlands a suitable country for this research.
Third, the database further excluded all firms that were not industrial companies. This is in line with previous research which also specifically focused on manufacturing firms (e.g. Herrmann & Datta, 2002). The final exclusion criterion had to do the availability of data. To acquire the information on CEO characteristics, the database needed to have the contact information of the firm. Unfortunately the financial information that was present in Orbis database did not include export revenue divided by the operating revenue. If this information was available the sample could have been reduced to Dutch SMEs which were internationally active.
Page 19 of 45 certain that the sample did not include firms which employ more than 250 employees or had more than € 50 million in sales the respondents were able to include this in the response. In total 3 respondents had to be excluded, because they employed more than 250 employees or had more than € 50 million in sales over the year 2015. Another seven respondents had to be removed from the analysis, because of incomplete information. Hence, the final sample for analysis included 74 CEOs of Dutch SMEs.
3.2 Variables
3.2.1 Dependent variable
The dependent variable in this study is the degree of internationalization. The degree of internationalization is measured differently among studies. Most often it is either measured by foreign sales as a percentage of total sales (FSTS) or foreign assets as a percentage of total assets (FATA). Sullivan (1994) argues for the use of multiple items in measuring the degree of internationalization. He suggests that the degree of internationalization of a firm has three attributes: performance, structural and attitudinal. Taking into account the recommendations of Sullivan’s (1994) research, a composite variable of three components was used to measure the degree of internationalization. This measurement was further operationalized by Segaro (2012) in a study to measure the internationalization of family SMEs.
The first component is foreign sales as a percentage of total sales, which is commonly used as a single item to measure the degree of internationalization. The second component is the percentage of the firm’s employees that spend over 50% of their time on international
activities, to capture the structural aspects of an SME’s internationalization in the SME. The
final component measures the geographic scope of sales by measuring the amount of foreign
countries in which the firm actively operates. To being able to quantify and combine the
variables the questions will be structured by a seven point scale. To test the internal consistency of this construct a reliability analysis was done. This resulted in a Cronbach alpha of 0.87 which indicates that there is high internal consistency within this construct (Bonett & Wright, 2015).
3.2.2 Independent variables
Page 20 of 45 The first characteristic, CEO age, was measured in years. Because this study specifically looks at the CEO, only the CEO age was noted. This was also done in the study by Hsu et al. (2013), who studied the moderating effects of CEO attributes on the internationalization performance relation.
The second characteristic, CEO gender, was coded by means of a dummy variable. The respondent simple had to note if they were male or female (0 = male, 1 = female).
The third characteristic, CEO tenure, was measured by means of composite variable of two questions. First the amount of calendar years he or she reportedly worked for the firm and second the amount of calendar years he or she reportedly worked in the CEO position for the firm. This approach was also implemented by Jaw & Linn (2009), who studies corporate elite characteristics and firm’s internationalization. To test the internal validity of this construct a Cronbach alpha test was done. This resulted in a Cronbach alpha of 0.76, which also indicates that there is sufficient internal consistency (Bonett & Wright, 2015).
The fourth characteristic, CEO educational level, was measured in the same approach as Herrmann & Datta (2002) and Hsu et al. (2013). Some researchers (e.g. Agnihorti & Bhattacharya, 2014) measure the educational level by measuring the total length of formal education that a person has had. However this study takes place among CEOs from a developed country and the total length of formal education might not reflect the cognitive base of the individual. Therefore the educational level was measured by a seven point scale, which measured the highest degree the CEO obtained (1 = Primary school; 2 = VMBO Degree; 3 = HAVO degree; 4 = VWO degree; 5 = MBO degree; 6 = Bachelor degree; 7 = Master degree). The scale still measures the formal education in a longitudinal way in accordance to the Dutch educational system. The scale is ranked in accordance to the amount of years it takes to finish a study path.
Page 21 of 45 this construct was 0,59 which would indicated that there is not enough consistency among the variables (Bonnett & Wright, 2015). Normally a value of 0.7 or above is considered sufficient (Bonnett & Wright, 2015). However, this approach has been successfully implemented by other researchers (Hsu et al. 2013; Sambharya, 1996). Therefore the author still beliefs that this composite variable is better than using a single variable, such as solely using international sales experience, to measure construct of international sales experience.
3.2.3 Control variables
This research argues that the characteristics and background of a CEO are correlated with the internationalization of SMEs. To test these assumptions the study will need to control for certain firm level factors which might influence the internationalization behaviour of firms. These control variables will be used to explain some variance in the dependent variable which is specified in the regressions. Control variables are a source of unobserved heterogeneity in terms of the independent theoretical variables, or are jointly associated with both the independent and dependent variables (Jaw & Lin, 2009).
First, this study will control for firm size. Henderson & Fredrickson (1996) have found that larger firm size is correlated with increasing international activity. They also indicated that larger firms have a stronger capability and abundance of resources to deal with complex information. Hence, following prior research (Herrmann & Datta, 2002; Hitt et al, 1997; Samharya, 1996; Westhead et al., 2001) this study controls for firm size by including a variable which measures the firm size in terms of reported sales revenue in the most recent financial year (Westhead et al., 2001).
Second, this study will control for firm age. Firm age is measured in years since the founding of the company. Older firms may behave differently than younger firms and therefore it is relevant to include in this research. Reuber & Fischer (1997) have found in that firm age was negatively related to the degree of internationalization. According to Oviatt & McDougall (2005) the earlier a new venture engages in inter-firm collaboration the higher the degree of internationalization. Older firms particularly struggle with overcoming age-related factors despite adopting an approach to strategy making that otherwise contribute to achieving positive organizational growth on international markets (Ruzzier & Ruzzier, 2015).
3.2.4 Analytical approach
Page 22 of 45 because the dependent variable is continues (Jaw & Linn, 2009). One benefit of this model is that it generates a multiple squared correlations coefficient (R2) and this coefficient provides a good indication of the value of the study (Carpenter & Fredrickson, 2001). The regression analysis will include two models. The first model only included the control variables and the second model includes the control variables with the five independent variables. The statistical analysis was done by means of IBM SPSS statistical software.
4. Results
This section of the research will start by discussing the descriptive statistics and present the correlations of the study. Before being able to show and interpret the multiple regression result, it is appropriate to investigate if there are certain violations of required conditions. Following the methods of Keller (2012) for regression analysis one has to study the residuals to check for normality, heteroscedasticity, autocorrelation (if there is time-series data) and for potential outliers. In the case of multiple regression analysis one also has to check for multicollinearity. Since this study has five independent variables, multiple regression analysis is applied and therefore this study starts by checking for multicollinearity. After all these conditions are checked the regression results are presented and the hypotheses are tested.
4.1 Descriptive statistics and correlations
Table 1 presents the means, standard deviation, and correlations of all the variables used in the research. The degree of internationalization, CEO tenure and CEO international experience variables, in table 1, are composite variables. Hence, these descriptive statistics are hard to interpret. Therefore, more information on the descriptive statistics can be found in appendix 2.
Page 23 of 45
Table 1: Means, standard deviations and correlations (** p < 0.01, *p < 0.05)
4.2 Multicollinearity
The first potential condition that has to be checked is multicollinearity. Multicollinearity is a condition that exists when the independent variables are highly correlated with one another (Keller, 2012). If there is an indication of multicollinearity in the research this could lead to wrong inferences. Multicollinearity can be checked by assessing the bivariate correlation between all the independent variables. Table 1, presents the correlations between all the variables in the research. Column one can be excluded since the degree of internationalization is the dependent variable in this study. Some researchers have argued that correlations above the 0.5 are already an indication of multicollinearity within the research, however as Pallant (2011) argues only correlations above the 0.7 should be seen as problematic. As can be seen in table 1 there is no indication of multicollinearity in this study. The highest correlation between independent variables is correlation between CEO tenure and CEO educational level. This correlation is only -.356 and therefore below the 0.7 threshold.
Another test that can be performed to check for multicollinearity in an OLS regression analysis is the variance inflation factor (VIF). The VIF measures how much the variance of an estimated regression coefficient is increased by means of collinearity. The VIF factors of the variables can be found in the table in appendix 3. According to Pallant (2011) an often used rule of thumb is that if the VIF is higher than 10, there is an indication of high
Page 24 of 45 multicollinearity. The highest VIF score is 1.24. Hence, there is no indication of multicollinearity.
4.3 Normality
In order to do a multiple regression analysis it must first be determined if the data set is normally distributed. Keller (2012) simple proposes to check for normality by drawing the histogram of the residuals. If the histogram is bell-shaped than the error is normally distributed (Keller, 2012). The histogram of the residuals is shown in appendix 4. As can be seen the histogram is not perfectly bell shaped, therefore more tests are needed. Another graphical tool for assessing the normality is the normal probably plot of the standardized data against the standard normal distribution (Pallant, 2011). The scores in the probability plot are to follow a relative straight line (Pallant, 2011). As can be seen in appendix 4, the data follows the relative straight line, however there is still some variation. Therefore the Kolmogorov-Smirnov and Shapiro-Wilk statistics are to provide better insight. A non-significant result (>.05) indicates normal distribution (Pallant, 2011). Both tests are insignificant with the values of .072 (Kolmogorov-Smirnov) and .129 (Shapiro-Wilk). Still these p-values are relatively close to the .05 threshold, which gives an indication that the data set is not perfect. However, one cannot assume that the data is non-normal distributed. Therefore this study will continue with the assumption that the data set is normally distributed.
4.4 Heteroscedasticity
The next condition that needs to be checked is heteroscedasticity or homoscedasticity. For a proper analysis the variance of the error variable is required to be constant (Keller, 2012). If this is the case than there is homoscedasticity and the condition is satisfied. The method for checking if there is heteroscedasticity in the sample is to plot the residuals against the predicted value (Keller, 2012), in this case the degree of internationalization. This plot is enclosed in appendix 5. As can be seen the residuals are not showing an increased or decreased variance over the spread, therefore there is no indication of heteroscedasticity and the condition is satisfied.
4.5 Autocorrelation
Page 25 of 45 the study deals with time-series data, instead of cross-sectional data. However, it never hurts to assume that we deal with time-series data and check for potential autocorrelation by means of a Durbin-Watson test. If the Durbin-Watson test indicates that there is autocorrelation than this means that the error terms are correlated over time (Keller, 2012). Because this study has five independent variables and has a sample size of 74 the threshold values for the Durbin-Watson test are respectively 1.49 (DL) & 1.77 (DU). When the value is below the DL threshold there is an indication of autocorrelation, when the value is in between the DL and DU threshold than the test is inconclusive and when the value is above the DU there is no indication of autocorrelation (Keller, 2012). As can be seen in appendix 6, the Durbin-Watson value is 2.154 and therefore there is no indication of autocorrelation in this study.
4.6 Regression results and hypotheses testing
Table 2 shows the results of the ordinary least-squares (OLS) regression analyses to testing the hypotheses.
Model 1 Model 2
Steps and variables β SE β SE
Intercept -13.96 (14.65) -8.090 (14.547) Control Firm Size .190 (.162) .192 (.159) Firm Age .008 (.007) .005 (.007) Independent variables CEO age -.039 (.026) CEO gender -.769 (.722) CEO tenure .051 (.130) CEO education .030 (.190)
CEO International experience .517** (.165)
F statistic 1.357 2.443*
R square .037 .206
Δ R Square .010 .122*
Page 26 of 45 The dependent variable in both models is the degree of internationalization. The base model (Model 1) includes the control variables. The second model (Model 2) includes both the control variables and the five independent variables. The R2 of model is .037. The R2 is the multiple squared correlations coefficient and shows how much variance can be explained by the variables included in the model. The F statistic of the ANOVA Model 1 is also insignificant (F = 1.357, sig. = .264). When the independent variables are added in the regression analysis the model becomes significant (F = 2.443, sig. = .023). The R2 also increases to .206 indicating that more variance can be explained by this model. However, also the adjusted R2 (Δ R2) should be taken into account, since the R2 will always increase when multiple variables are added to the model. The adjusted R2 of Model 2 is .122. Hence, in Model 2 12% of the variance in the degree of internationalization can be explained by the variables in this model. As the adjusted R2 did increase between Model 1 and 2, one can conclude that the CEO does have an influence on the internationalization strategy the company follows. An R2 of .12 does not seem high, however when it is compared with similar studies on upper echelon theory this is not uncommon. For example Jaw & Linn (2009) had an adjusted R2 of .066 in their OLS regression analyses for firm internationalization.
The first hypotheses predicted a negative relation between the age of the CEO and the degree of internationalization. As can be seen in Model 2 the beta coefficient is indeed negative, however the coefficient is not significant (β = -.39, P > .05). Hence, hypothesis one is not supported. Prior research remained inconclusive regarding the impact of age on the degree of internationalization of firms. Some researchers found a negative relation (Agnihotri & Bhattacharya, 2014; Herrmann & Datta, 2005) while others have found a positive relation (Karami et al., 2005). Carpenter & Fredrickson (2001) also did not find a significant relation between top management team age and global strategic posture.
According to the second hypotheses SMEs with female CEOs will have a higher degree of internationalization. This hypothesis was not supported by the present study. One reason for the insignificance of this coefficient might have been the low degree of female respondents. Within the entire sample there were only seven female respondents.
Page 27 of 45 increased the variation in the degree of internationalization and lead to an insignificant relation.
The fourth hypothesis suggested that the educational level of the CEO positively influences the degree of internationalization. As can be seen in Model 2, the coefficient of the educational level was indeed positive, however the coefficient was insignificant (β = .03, P > .05). Most other studies find a positive and significant relation between the CEO educational level and the firm’s internationalization behaviour (Hsu et al., 2013, Agnihotri & Bhattacharya, Herrmann & Datta, 2005). One reason for the insignificant finding might be that the sample of the current study was not diversified enough. The study of Agnihotri & Bhattacharya (2014) was conducted in India, while the study of Hsu et al. (2013) was conducted among Taiwanese SMEs. The present study had a highly educated sample, 57% of the sample had a bachelor degree and another 16% had a master degree. This indicates that more than two third of the sample was highly educated and therefore the impact of education on the information processing capacity and consequently the internationalization behaviour of SMEs might not be seen in the results of this research.
The final and fifth hypothesis predicted a positive relation between the CEOs international experience and the degree of internationalization. As can be seen in Model 2 the coefficient is indeed positive and significant (β = .517, p < .01). Hence, hypothesis was strongly supported. Other studies have also found a positive and significant positive relation between the CEOs international experience ant the internationalization behaviour of SMEs (Agnihotri & Bhattacharya, 2014; Carpenter & Fredrickson, 2001; Sambharya, 1996). However, regarding the assumption that in present time international experience is playing a vital role in business, the current study showed a stronger relationship than past studies.
5. Discussion
Page 28 of 45 of this study indicate that CEOs who possess prior international experience, either obtained by having lived abroad for educational or work related matters or gained experience by working together with international partners , invest more in the international development of the SME. However, not all demographic traits mentioned in the upper echelon theory possessed enough explanatory power on the degree of internationalization. Within the context of SMEs based in a high developed region the CEO characteristics age, gender, tenure and educational did not significantly influenced the internationalization behaviour of the firm. Below the academic relevance, managerial implications and limitations and suggestions for future research will be discussed.
5.1 Academic relevance
This research adds to the research on the upper echelon theory by testing the effect of some CEO characteristics on the strategic direction, in this case the international behaviour, of the firm. The present research studied the theoretical assumptions among SMEs in a high developed country. So far this was an uncommon direction among upper echelon research. As previously argued much research on the upper echelon research takes place among large US-based multinational firms (e.g. Daily et al., 2000; Herrmann & Datta, 2005; Kent & Moss, 1994; Krishnan & Park, 2005; Sambharya, 1996; Thanyi, 2000) or among SMEs in low developed countries (e.g. Agnihotri & Bhattacharya, 2014; Hsu et al., 2013). Therefore, by studying the influence the influence of the CEO on the strategic direction of the company in this specific context, this research has important academic relevance. Next to the academic relevance this research also brings important managerial implications. As Karagozoglu and Lindell (1998) conclude their research, globalisation is rapidly changing the environment of firms and one of top constraint faced by SMEs in internationalization is their managerial competence. This study tried to shed light upon the competences CEOs need in order for successful growth on the international market. Next to specific findings of this research it also forms a basis on which future research can build and extend the academic field concerning the upper echelons theory.
Page 29 of 45 foundations for MNEs have been established (Oviatt & McDougall, 2005). CEOs who possess international experience, either obtained by having worked with international partners or by having lived in a foreign country, will press for more internationalization than people who do not possess these experiences. Second, this study did not find a significant relation between the educational level of the CEO and the degree of internationalization of SMEs. Former research has mostly been rather conclusive that higher educated CEOs lead to an increase in international behaviour of the firm (e.g. Agnihotri & Bhattacharya, 2014; Hsu et al, 2013; Wiersema & Bantell, 1992). However, many of these studies were not conducted among a sample in a high developed country, with high educational standards.
This study was conducted in a high developed country and had a sample in which 62% of the respondents had a bachelor degree and 12% had a master degree. Hence, this study shows that by standard the cognitive base of CEOs in a high developed country, such as the Netherands, is larger. Because their cognitive ability is larger they are better able to analyse new situations and discriminate among available alternatives (Wiersema & Bantel, 1992). This result sheds light to two possibilities, either CEOs in high developed countries are selected on the degree which they obtained or people with higher cognitive ability have a stronger tendency to start their own business. Future research in the field of entrepreneurship could build on this by researching the criteria on which CEOs in high developed countries are selected and by studying the business motives of highly educated people.
5.2 Managerial implications
Page 30 of 45 Companies can use the present research for two purposes. They can either use it for recruitment criteria of new CEOs, in that case they should emphasize the experience over the other demographic characteristics, or for analysing their competitors. More specifically, by analysing the CEOs of competitive firms they can predict and anticipate on the international behaviour of these competitors. This is becoming increasingly important due to recent technological innovations (Oviatt & McDougall, 2005) and the overall reduction in trade barriers worldwide (Leonidou, 2004)
5.3 Limitations and suggestions for future research
Unfortunately this research also bears some limitations. First, the present study is not a longitudinal study. Due to the limited time-frame of the study the data was collected within a limited amount of time. Therefore it was not possible to implement a time lag between the dependent and the independent variables and the study could not control completely for reverse causality. For example, part of the international experience the CEO gained in his professional career might have been established by the internationalization path of the company for which he worked at the time of the study. Therefore it might be interesting for future research on upper echelon theory to study the demographic characteristics of CEOs who recently started at a new firm and then look at the changes in the degree of internationalization at a specific moment in the future. By means of a matched samples test the difference before and after the transition can be compared. This could show the influence of the CEO in greater detail.
Second, this study bears a low response rate. The survey was send to around 1.700 SMEs in the Netherlands. Of these 1.700 SMEs only 84 finished the survey. This a response rate of a little less than 5%. Hence, this might be an indication of non-response bias. Future studies might employ more direct measures to collect the data from the respondents than an e-mail survey.
Page 31 of 45 Besides the findings and its implications this research opened up several opportunities for future research. As previously mentioned the upper echelon theory could be better tested by means of a longitudinal study considering solely CEOs who have been recently appointed. Also some of the independent variables did not find significant results and could therefore be studied in greater extend.
Finally another interesting addition would be to increase the amount of regions. Present research on upper echelon theory mostly specifically focuses on one specific region. By adding multiple countries in the research might for example, shed light to the impact of cultural differences on the influence of the CEO in a company.
6. Conclusion
The purpose of this research was to gain more insight in the CEO characteristics that have an influence on the degree of internationalization of small and medium sized enterprises. In the literature it was found that internationalization is increasingly becoming an important growth strategy (Karagozoglu & Lindell, 1998). According to Oviatt & McDougall (2005) due to recent technological innovation and a presence of an increasing number of people with international experience new foundations for firms have been established. Hence, the people who lead firms are increasingly recognized as drivers of international growth.
According to the upper echelon theory organizational outcomes – both strategies and effectiveness – are viewed as reflections of the values and cognitive base of powerful actors in the organization (Hambrick and Mason, 1984). Hambrick & Mason (1984) argue that these values and cognitive traits are reflected in the demographic characteristics of the executives. These demographic characteristics can be studies and also have been over the past years. However, most of these studies were conducted among large US-based companies or small companies in low-developed countries. This study tried to extant the current literature by focusing on SMEs in a high developed country.
By means of an extensive literature review, five important CEO characteristics were identified (age, gender, tenure, educational level & international experience) to have an impact on the degree of internationalization of SMEs. Instead of focusing on the top management team this study specifically focused on the CEO, because the CEO has the ultimate responsibility in the organization (Farkas & Wetlaufer, 1996) and among SMEs this effect is expected to be stronger (Segaro, 2012).
Page 32 of 45 the 1,734 SMEs 84 people completed the survey. However, 10 respondents had to be excluded from the research and de final sample size included 74 CEOs.
The hypotheses were tested by means of OLS regression and it was shown that around 12% (Δ R2
= .122) of the variance in the dependent variable could be explained by the model. To extant the explanatory power of the model it also controlled for firm size and firm age. The model which included both the control and independent variables was significant (F = 2.443, sig. = .023) and therefore bears significant explanatory power. In short, this study shows that the CEO does indeed influence the internationalization behaviour of SMEs.
Looking at all the hypotheses only the international experience of the CEO had a significant and positive influence on the degree of internationalization of SMEs. In other words, SMEs which have a CEO with previous international experience are more likely to invest more time and effort in the internationalization of the firm. Another conclusion that could be drawn was that the educational level did not lead to an increase in degree of internationalization within the context of a high-developed country. The respondent in the sample were also mostly highly educated. Of the entire sample 62% possessed a bachelor degree and 12% even possessed a master degree.
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