Determinants of entry mode choice: an
upper echelons perspective
Youp van der Leun (s1688197) Student at the University of Groningen
DETERMINANTS OF ENTRY MODE CHOICE: AN UPPER ECHELONS PERSPECTIVE
Abstract
This thesis aims to determine how experiences, values, and personalities of executives influence the entry mode choice of a firm. Building on the framework of the upper echelons theory, executives’ age, organizational tenure, international experience, functional background and country of origin are linked to the entry mode choice of the firm they lead. This thesis also aims to find out whether these determinants of the entry mode choice are moderated by the managerial discretion of the executive and the job demand he faces. The sample consists of 217 cross-border acquisition and joint venture deals, completed by Dutch and German publicly listed firms. The logistic regression analysis indicated that shorter serving executives tend to choose acquisitions over joint ventures. In addition, managerial discretion significantly moderates the relationship between organizational tenure and entry mode choice, and between the culture of an executive and the entry mode choice.
Key words
INTRODUCTION
The entry mode a firm uses when entering a foreign market is considered of eminent importance for firm performance and survival (Ekeledo and Sivakumar, 2003; Efrat and Shoham, 2013). The entry mode of a firm can differ in many aspects (Buckley and Casson, 1998). A firm can set up production activities or distribution activities abroad (Oh and Rugman, 2012), and can choose for modes with low, intermediate or high levels of control, like contracting, franchising and acquisition (Buckley and Casson, 1998). Next to that, a firm can choose for internationalization in incremental steps, as suggested by Johanson and Vahlne (1977), or choose strategies of rapidly expanding into multiple countries and geographical regions (Almor, 2013).
An inappropriate entry mode cannot only result in the blockage of opportunities in the entered market, but also in financial losses for the firm, and even exit from this market (Mathe and Perras, 1994). A famous example of a wrong entry mode decision is Wal-Mart in Germany, where the firm bought 95 Wertkauf and Spar Handel stores and turned them into Wal-Mart stores in 1997. In 2006, they left the market, because the concept of the stores did not fit the preferences of the German customers (Pioch, Gerhard, Fernie, and Arnold, 2008). Also, the German insurance firm Allianz suffered losses in the past because of their wrong entrance strategy of acquisition of foreign operations (Mathe and Perras, 1994).
According to one stream of literature, the choice for a certain entry mode by internationalizing firms is based on external factors. These external factors are mainly related to the home country, the host country and the distance between these countries (Morschett, Schramm-Klein, and Swoboda, 2010; Oh and Rugman, 2012).
Another stream of literature names internal firm factors as antecedents for the entry mode choice (Bloodgood, Sapienza, and Almeida, 1997; Ekeledo and Sivakumar, 2003; Filatochev and Piesse, 2009; Oh and Rugman, 2012). A significant part of these antecedents stem from the resource-based perspective, which are considered the drivers of firm strategy (Ekeledo and Sivakumar, 2003).
Following the transaction cost theory, a firm chooses an entry mode based on the costs associated with negotiating, enforcing and monitoring a contract. The higher these costs, the more beneficial it would be for a firm to internalize their foreign operation (Chen and Chen, 2003; Ekeledo and Sivakumar, 2003).
strategic choices and organizational performance can partially be predicted by background characteristics of the CEO and the top management team. The argument is that experiences, values, and personalities of executives influence their interpretation of situations they encounter and thus affect their choices (Hambrick, 2007).
According to Hambrick, Finkelstein, and Mooney (2005), this effect is moderated by managerial discretion, which refers to the latitude of action an executive has, and the job demand, which refers to the task and performance challenges of the job and the executive’s personal aspirations. The higher the managerial discretion and the job demand, the more executives’ experiences, values and personalities will be reflected in the firm’s strategy and performance (Hambrick et al., 2005).
Following this upper echelons reasoning, firms may not only choose certain entry modes because of home and host country characteristics (Morschett et al., 2010; Oh and Rugman, 2012) or because of the expected transaction costs (Chen and Chen, 2002), but also because experiences, values, and personalities of executives influence the entry mode decision (Hambrick, 2007).
Because the main focus in research has been on external factors (Morschett et al., 2010; Oh and Rugman, 2012), firm factors (Bloodgood et al., 1997; Filatochev and Piesse, 2009; Oh and Rugman, 2012) and transaction costs (Chen and Chen, 2003; Ekeledo and Sivakumar, 2003), I want to find out whether characteristics, like the experiences, values, and personalities of the top management influences the entry mode decision, and whether this influence is amplified by managerial discretion and job demand. This in order to improve the understanding of entry mode decision-making.
This leads to the following research question:
LITERATURE REVIEW
In this section, a description of the upper echelons theory and an overview of entry modes will be given. Based on the upper echelons theory, there will be hypothesized how characteristics of executives can influence the entry mode decisions of a firm. After that, two moderators that are expected to amplify this relation will be discussed, resulting in a conceptual model.
1. Upper echelons theory
The core of the upper echelons theory is that experiences, values, and personalities of executives influence their interpretations of strategic situations, and consequently affect their choices (Hambrick, 2007).
According to Hambrick and Mason (1984), complex decisions are made based on multiple behavioral factors. This is contrary to other theories, where decisions are seen as outcomes of mechanic processes that result in economic optimization (Hambrick and Mason, 1984). Hambrick and Mason (1984) debate that techno-economic based decision making is limited by multiple factors. One of these factors is bounded rationality, which refers to the idea that situations that are uncertain and informationally complex, are rather interpretable than knowable in an objective way (Hambrick, 2007). Other behavioral factors that limit techno-economic decision making named by Hambrick and Mason (1984) are the willingness to achieve multiple and conflicting goals, having countless options and varying aspiration levels. The more complex the decision that has to be made, and the more uncertain the outcomes, the more relevant this behavioral theory is expected to be (Hambrick and Mason, 1984).
1.1 Strategic choices
vision. This further limits his perception. Finally, the information that will be processed by an executive is selected based on his cognitive base and values (Hambrick and Mason, 1984). According to Hambrick (2007), these personalized lenses that executives use to create their perceptions, are formed by their experiences, values, and personalities. Thus, experiences, values, and personalities enter the decision-making by affecting the executive’s perception of the situation. Next to that, experiences, values, and personalities enter directly into the decision making, because they order consequences or alternatives of possible decisions on preference (Hambrick and Mason, 1984). By affecting the decision making in these two ways, experiences, values and personalities of executives become reflected in the strategy and performance of a firm (Hambrick, 2007).
1.2 Executive power
The upper echelons theory argues that ‘if we want to understand why organizations do the things they do, or why they perform the way they do, we must consider the biases and dispositions of their most powerful actors – their top executives’ (Hambrick, 2007: 334). Finkelstein (1992) adds that focusing research on the characteristics of entire top management teams gives a stronger explanation of organizational strategy and performance than focusing on a single top executive, like the CEO. Leading an organization is a shared activity, which results in the entrance of characteristics of more executives than just the CEO into organizational strategy (Finkelstein, 1992; Hambrick, 2007). Hambrick (2007) makes the remark that it should be clear whether and to what extent executives engage in information processing and decision making because otherwise it would not make sense to connect their experiences, values and personalities to firm strategy and performance. This raises the question where executives derive their power from, which enables them to engage in decision making.
According to Finkelstein (1992), the power of top managers stems from the ability to cope with uncertainty, both internal and external. Finkelstein (1992) names other top managers and the board of directors as major internal sources of uncertainty, and a firm’s tasks and the institutional environment as key external sources of uncertainty. Executives’ that are able to manage these uncertainties, receive power in multiple ways (Finkelstein, 1992).
because they can control subordinates, and also because they have access to more information than managers that are lower in hierarchy.
According to Finkelstein (1992), executives that have ownership power have some control over the board of directors, since the board is there on behalf of the shareholders. This reduces the uncertainty coming from the board, making shareholding executives more powerful than others (Finkelstein, 1992).
Next to structural power and ownership power, Finkelstein (1992) debates that an executive might have expert power. Executives with relevant contacts and relationships with the environment of the firm are better able to deal with contingencies stemming from this environment (Finkelstein, 1992). Executives with relevant expertise on a certain matter, are often asked for advice on this matter and are able to influence the decision that will be made (Finkelstein, 1992).
As final source of power, Finkelstein (1992) names prestige power. The perception of others concerning the influence of an executive depends on the executive’s reputation among stakeholders and in the institutional environment (Finkelstein, 1992). According to Finkelstein (1992), prestige reduces uncertainty because executives with high prestige are often active in institutional governance, where they gain information. Acquiring information from the institutional environment reduces uncertainty (Finkelstein, 1992). Moreover, prestige increases legitimacy, because executives with great prestige are expected to have powerful friends and important qualifications. Increased legitimacy reduces uncertainty (Finkelstein, 1992).
2. Entry mode choice
According to Andersen (1997), Beamish (1995) defines internationalization as ‘the process of adapting a firm’s operations (strategy, structure, resources etc.) to international environments’. It can be seen as a part of the continuous strategy process of firms (Andersen, 1997).
What distinguishes internationalization from other sorts of strategy processes, is that firms transfer products, services or resources across country borders, which implies that the firms have to select one or multiple countries where these transactions should be performed (Andersen, 1997). After the firm decided which country to enter, the firm has to decide which entry mode to choose, according to Andersen (1997).
arrangement that a firm uses to market its product in a foreign market in the first three to five years’. Root (1987: 5) defines it as "an institutional arrangement that makes possible the entry of a company's products, technology, human skills, management or other resources into a foreign country".
Fully unraveling which factors and rationales lead firms to certain entry modes might be a never-ending task (Mroczek, 2014), but the most dominant theories in the literature will be discussed here.
In this section, the transaction cost approach, the cultural distance approach and the organizational capability approach will be discussed. The goal is to discover what entry modes are distinguished in the literature.
2.1 Transaction cost approach
frequency of a transaction, internalizing becomes more attractive, because the setup costs are easier to justify for recurrent transactions than for occasional transactions (Williamson, 1979).
Next to uncertainty and the recurrence of a transaction, transaction specific investments are a critical dimension of transactions (Williamson, 1979). With transaction specific investments, transaction specific assets can be purchased, which have no or little value outside the relation (Erramilli and Rao, 1993, Williamson, 1979). This ends up in market failure, because when the buyer induces the supplier to make specific investments that have less value outside the relation, the supplier is locked in the relationship with that one buyer (Williamson, 1979). Williamson (1979) states that the buyer is committed as well because they cannot turn to another supplier, because other suppliers do not possess the specific assets (Williamson, 1979). Relation-specific investments can be in both physical capital as human capital (Williamson, 1979).
TCA implies that the higher the uncertainty, the frequency of the transaction and the transaction-specific investments, the more beneficial is a governance mode of high control (Andersen, 1997; Chen and Chen, 2003; Erramilli and Rao, 1993, Williamson, 1979).
2.1.1.The transaction cost approach in entry mode choice
In line with Williamson (1979), Mroczek (2014) states that a high repeatability of transactions increases the likeliness of firms investing in unrecoverable assets in the country to be entered. In case of high frequency and high asset specificity, firms choose a wholly owned entry mode, while in case of a low frequency and high asset specificity is chosen for a joint venture (Chen and Chen, 2003; Mroczek, 2014). In case of low asset specificity, firms choose a contractual transfer mode (Mroczek, 2014).
Thus, in cases of high asset-specificity is chosen for an entry mode of high control, due to the fact that the firm cannot just switch to another partner (Erramilli and Rao, 1993; Mroczek, 2014; Williamson, 1979). The high frequency increases the attractiveness of increased control (Mroczek, 2014; Williamson, 1979).
Asset specificity
Low High
Frequency
Low Contractual transfer Joint venture
high Contractual transfer Wholly owned oper. Figure 1: TCA. Based on Erramilli and Rao (1993) and Mroczek (2014).
So, the three entry modes distinguished by the transaction cost approach are contractual transfer, joint venture, and wholly owned operation, based on the different degrees of control a firm can have over the entry mode (Andersen, 1997; Erramilli and Rao, 1993; Mroczek, 2014; Williamson, 1979). These decisions are based on differences in uncertainty, frequency of the transaction, and asset specificity (Andersen, 1997; Chen and Chen, 2003; Erramilli and Rao, 1993; Mroczek, 2014; Williamson, 1979).
2.2 Cultural distance approach
Next to transaction cost theory, there is a line of research that puts the concept of cultural distance in a central position (Andersen, 1997; Johanson and Vahlne, 1977; Kogut and Singh, 1997).
2.2.1 Entry mode as a chain of establishment
inexperience and differences across countries, has to be overcome by incrementally committing resources to a foreign market. During prior steps, market knowledge can be gained, increasing the performance during later stages (Johanson and Vahlne, 1977). So, increased market knowledge leads to increased commitment, and increased commitment enables the firm to increase the market knowledge (Andersen, 1997). Because a foreign market is always entered through exporting, this approach adds the entry mode of exporting to the three options stemming from the TCA.
2.2.2 Cultural distance as predictor of entry mode
Kogut and Singh (1988) found that the greater the cultural distance between the home country and the host country, the more firms tend to choose a joint venture or wholly owned greenfield over an acquisition. This is due to the difficulties of integrating the foreign management of the acquired firm, existing of people with a different cultural background (Kogut and Singh, 1988). These post-acquisition costs are high compared to the costs of managing a joint venture or a greenfield operation in a culturally distant environment (Kogut and Singh, 1988). In case of a joint venture, certain tasks can be assigned to the partner, who is better able to deal with local stakeholders, like laborers, buyers, suppliers and the government (Kogut and Singh, 1988). According to Kogut and Singh (1988), problems that might rise because of the cultural distance are mitigated by choosing a joint venture as the control mode, although it comes at the cost of shared control and ownership (Kogut and Singh, 1988). Kogut and Singh (1988) state that both the costs of integration and shared control and ownership can be avoided by choosing for a wholly owned greenfield investment. While the entry modes named by Kogut and Singh (1988) are in line with the modes named in TCA, they make a distinction between acquisition and greenfield investment, which are both wholly owned operations. The main difference with TCA is the reasoning behind the entry mode decision. Unlike the TCA, the costs of the transactions are not analyzed, but the focus is on the costs that come with overcoming the cultural distance (Kogut and Singh, 1988).
2.3 The organizational capability perspective
skills, and technology (Madhok, 1997). According to Madhok (1997), resources and capabilities relate to each other as in that capabilities comprehend resources and infuse them with sustainable value. Andersen (1997) states that both exploration and exploitation of capabilities can be a motive for entering a foreign market. TCA only looks at the exploitation of firm advantage by minimizing costs, whereas OC looks at both exploitation as well as the development of an advantage (Madhok, 1997). Madhok (1997) sees the accumulation of capabilities as a dynamic process, where the ability of a firm to acquire, evaluate, assimilate, integrate, diffuse, deploy and exploit knowledge is of cardinal importance. The OC suggests that internationalizing is not only about the exploitation of already existing capabilities but also in developing new capabilities, which are attained from information-based links with other parties (Madhok, 1997). Similar to Johanson and Vahlne (1977), Madhok (1997) debates that the strategic evaluation of a certain market entry depends on the existing resources and capabilities of a firm, together with the requirements of this market. In order to exploit a firm’s existing capabilities, new capabilities are necessary (Madhok, 1997). There come costs with the acquisition, interpretation and absorption of information, and the development and integration of new knowledge is an incremental process (Madhok, 1997). The greater the similarities between the existing capabilities and the capabilities that are required, the easier a firm can link its resources and existing routines to the required capabilities, which lowers implementation costs (Madhok, 1997). The OC debates that internalization is preferred when a firm has a strong knowledge base and possesses the required routines (Andersen, 1997). But when a firm enters into unfamiliar markets, where the required capabilities are further away from its existing knowledge base, knowledge can be acquired by collaboration with other firms who possess this knowledge (Madhok, 1997). Chen and Chen (2003) add that firms enter collaborations to access resources they do not own themselves. Some resources can only be used after extensive learning, like tacit knowledge, and can only be internalized through an alliance with a firm that possesses these resources (Chen and Chen, 2003).
2.3.1 The organizational capability perspective in entry mode choice
already existing knowhow, making it hard to internalize new tacit knowledge (Madhok, 1997). Madhok (1997) considers joint ventures as an entry mode that allows enhancement of firm capabilities when developing these capabilities in-house would be too slow while contractual transfer does not offer enough possibilities to internalize tacit knowledge.
2.4 Conclusion entry modes
In this section, three dominant perspectives on entry mode choice have been assessed, the transaction cost approach, the approach in which cultural distance between home and host country plays a central role and the organizational capabilities perspective. Even though the underlying rationales to choose a certain entry mode are different, five entry modes are distinguished in the literature: exporting, contractual transfer, joint venture, acquisition and wholly owned greenfield investment (Andersen, 1997; Erramilli and Rao, 1993; Johanson and Vahlne, 1977; Kogut and Singh, 1988; Mroczek, 2014; Madhok, 1997). These modes can be split up in more specific variations of a mode, but in this research, foreign market entry strategies will be subscribed under one of these five entry modes.
These modes can be ranked in order of ownership and control, and in order of resource commitment and risk (Erramilli and Rao, 1993). Export, followed by contractual transfer is regarded to be the mode with the lowest degree of ownership, and also with the lowest degree of resources that have to be committed, and risk (Erramilli and Rao, 1993; Herrmann and Datta, 2006; Hill et al., 1990; Johanson and Vahlne, 1977). Subsequently, acquisitions and greenfield investments are high control modes, but also demand high levels of resource commitment, and involves high risk (Erramilli and Rao, 1993; Herrmann and Datta, 2006; Hill et al., 1990). Joint ventures involve medium levels of both control and risk (Erramilli and Rao, 1993; Herrmann and Datta, 2006; Hill et al., 1990; Madhok, 1997).
Little risk High risk Little control High control Exporting Contractual
transfer
Joint venture Acquisition Wholly owned greenfield
3. Hypotheses: risk propensity
As discussed before, entry modes can be divided by reviewing the extent of risk that comes along with the entry mode chosen by the entering firm (Andersen, 1997; Erramillie and Rao, 1993; Kogut and Singh, 1988). Following the upper echelons theory, which states that experiences, values, and personalities of executives become reflected in the strategy and performance of a firm (Hambrick, 2007), CEOs and top management teams (TMTs) with a propensity for risk can be expected to choose entry modes associated with higher risk than do CEOs and TMTs who are more risk averse.
According to Huff and Prybutok (2008), risk propensity determines risk behavior. So, in the case of entry mode decision, risk propensity determines the risk associated with the entry mode that the firm engages in. Risk propensity is ‘the current tendency of an individual to take or avoid risk’ (Huff and Prybutok, 2008: 36). Risk propensity consists of risk preference and can be modified by past experiences (Huff and Prybutok , 2008). According to Huff and Prybutok (2008), risk preference is a trait that differs per individual. Sitkin and Pablo (1992) debate that risk propensity of an individual at a certain point in time is modified by actions and processes in the past. The level of risk propensity changes as the individual gains experience (Sitkin and Pablo, 1992). Huff and Prybutok (2008) debate that if actions in the past considering decisions with certain levels of risk had positive outcomes, the confidence level of the individual regarding the dealing with risk increases, which subsequently will result in a higher risk propensity to approach decisions that involve risk in the future.
3.1 Age
respondents. Kannadhasan (2015) found support for his hypothesis that the level of risk tolerance decreases as age increases.
Applying this to the entry mode decision, it can be expected that older executives will choose less risky entry modes while executives that are younger will choose more risky modes. This leads to the following hypotheses:
H1a: The younger an executive is, the more the firm he leads will engage in risky entry modes.
H1b: The younger a TMT is on average, the more the firm they lead will engage in risky entry modes.
3.2 Organizational tenure
In the literature, experience in one and the same organization is associated with a lower risk propensity (Herrmann and Datta, 2006; Laufs et al., 2016). Wiersema and Bantel (1992) state that a long organizational tenure can be expected to be associated with a high commitment to the status quo, as well as with the values of the firm. An individual improves his understanding of procedures and policies that apply to the organization, which might make him reluctant to change these structures (Wiersema and Bantel, 1992). Herrmann and Datta (2006) debate that CEO firm tenure is linked with a lower risk-taking propensity. Longer tenure is associated with better understanding of complex environments, but longer firm tenure also leads to a knowledge base that is more narrow (Herrmann and Datta, 2006). With an increased tenure, perceptions become restricted, which results in less risky strategic decisions (Herrmann and Datta, 2006; Laufs et al., 2016), because executives tend to enact strategies they are familiar with (Laufs et al., 2016). On the other hand, according to Laufs et al. (2016), executives that work in the firm for a shorter period have more diverse sources of information and have a higher risk-taking propensity.
Applying this to the entry mode decision, it can be expected that executives with a longer firm tenure will choose less risky entry modes while executives that are active in the firm for a shorter period will choose more risky modes. This leads to the following hypotheses:
H2a: The shorter the organizational tenure of an executive, the more the firm he leads will engage in risky entry modes.
3.3 International experience
Herrmann and Datta (2006) state that working experience of executives outside their home country is beneficial for firms because the knowledge that executives have gained abroad has a positive impact on the firm’s effectiveness in foreign markets. These executives are aware of international business practices and market opportunities in other countries, which leads to an increase in self-confidence by these executives (Herrmann and Datta, 2006). Carpenter, Pollock, and Leary (2003) add that executives with international experience are more capable of dealing with uncertainty stemming from international operations. Following Sitkin and Pablo (1992), the executive’s ability to deal with the uncertainty in the past reduces his perception of the risks associated with the uncertainty in the future. Thus, the risk perceived by executives with international experience regarding international operations is lower than that of executives without this experience (Herrmann and Datta, 2006). Next to a lower risk perception, the risk propensity of executives with international experience is also higher, because their confidence in their own ability to deal with uncertainty makes them engage in riskier strategies (Laufs et al., 2016).
Applying this to the entry mode decision, it can be expected that executives with international experience will choose more risky entry modes while executives without international experience will choose less risky modes. This leads to the following hypotheses:
H3a: The more international experience an executive has, the more the firm he leads will engage in risky entry modes.
H3b: The more international experience a TMT has on average, the more the firm they lead will engage in risky entry modes.
4. Hypotheses: desire for control
Next to looking at the degree of risk entry modes carry with them, entry modes can be divided by reviewing the degree of control each entry mode offers. (Andersen, 1997; Erramillie and Rao, 1993; Herrmann and Datta, 2006; Kogut and Singh, 1988). Following the upper echelons theory, which states that experiences, values, and personalities of executives become reflected in the strategy and performance of a firm (Hambrick, 2007), CEOs and TMTs with a strong desire for control can be expected to choose entry modes associated with higher degrees of control than do CEOs and TMTs who have less desire for control.
take responsibility for group projects and find it hard to hand over control to others, where low desire for control people feel more comfortable in case other people make decisions, and they do not aspire a leadership role within a group (Burger, 1992). Executives can be expected to score relatively high on the desire for control-scale because they already are in leadership positions. Nevertheless, other factors can be expected to influence the desire for control. Those factors and the associated hypotheses will be introduced below.
4.1 Functional background
Herrmann and Datta (2002), in line with Hambrick and Mason (1984), debate that the functional background of an executive is an important indicator of the cognitive lens that this executive brings to the job. Even though executives usually have work experience in a variety of functions, they generally worked a significant part of their career in one functional area, like production, marketing or finance (Herrmann and Datta, 2006). Because executives with different functional backgrounds differ in their perspectives and knowledge bases, they can be expected to evaluate strategic options differently, and make different choices (Hambrick and Mason, 1984; Herrmann and Datta, 2006).
Hambrick and Mason (1984) separate two functional backgrounds. First, an output functional background, like product R&D, marketing, sales or an entrepreneurial background. Second, a throughput background, like process R&D, operations, and accounting. Output functions focus on growth, the search for a new market or product opportunities and monitoring and subsequent adjustment of products and markets (Hambrick and Mason, 1984). Throughput functions emphasize the improvement of efficiency in the transformation process of firms (Hambrick and Mason, 1984). Herrmann and Datta (2006) state that executives with a throughput functional background stronger emphasize efficiency and control than do executives with an output functional background, whereas executives with an output functional background are more used to situations with higher levels of ambiguity (Herrmann and Datta, 2002). Thus, executives with a throughput functional background can be expected to have a higher desire for control (Hambrick and Mason, 1984; Herrmann and Datta, 2002; Herrmann and Datta, 2006).
H4a: Executives with a throughput functional background will choose high control entry modes
H4b: A TMT consisting of relatively many executives with a throughput functional background will choose high control entry modes
4.2 Culture
Uncertainty avoidance is the dimension in Hofstede’s model that refers to the extent to which a society is tolerant for ambiguity and uncertainty (Hofstede and Hofstede, 1991). Uncertainty avoidance gives an indication of the extent to which individuals from a certain society feel comfortable or uncomfortable in unstructured situations (Hofstede and Hofstede, 1991). According to Hofstede and Hofstede (1991), uncertainty avoiding cultures try to avoid uncertainty by rules, laws and safety and security measures. These cultures see different opinions or habits more as a threat than do uncertainty accepting cultures, whereas the latter is more tolerant regarding different opinions (Hofstede and Hofstede, 1991). Mroczek (2014) states that when the level of uncertainty rises above the boundary that is acceptable for the firm, the firm is expected to use a higher control governance mode. Following this logic, executives from an uncertainty avoiding culture can be expected to have a lower boundary under which uncertainty is acceptable. They can consequently be expected to choose sooner for a high control mode than executives from an uncertainty accepting culture, ceteris paribus. Moreover, individuals from an uncertainty avoiding culture look for ways to avoid uncertainty (Hofstede and Hofstede, 1991). In the entry mode setting, this can be done by choosing a high control mode (Erramilli and Rao, 1993 ;Kogut and Singh, 1988). This leads to the following hypotheses:
H5a: Executives from uncertainty avoiding cultures, will choose high control entry modes, relative to executives from uncertainty accepting cultures.
H5b: TMTs consisting of relatively many executives from uncertainty avoiding cultures will choose high control entry modes, relative to TMTs consisting of executives from uncertainty accepting cultures.
5. Moderators
To what extent top executives influence their organizations, is depending on two moderators: managerial discretion and job demand (Hambrick, 2007).
The first identified moderator is managerial discretion. According to Hambrick (2007), this refers to the latitude of action an executive has. Discretion exists in a situation where the executive faces few constraints, and when there are multiple alternatives. Finkelstein and Hambrick (1990) state that in a situation of restricted discretion, managerial predispositions have less influence on strategy and performance than in situations of high discretion. So, in case of high discretion, the characteristics of the executive become noticeable in the strategy and performance of the firm (Hambrick, 2007).
Finkelstein and Hambrick (1990) argue that the level of discretion is determined by three forces. First, the extent to which the environment allows variety and change. Levels of managerial discretion vary across industries (Finkelstein and Hambrick, 1990). Finkelstein and Hambrick (1990) debate that industries with high product differentiability offer managers possibilities for discretion, like price, distribution, and promotion. These forms of latitudes do not exist in commodity industries, like gas or coal mining (Finkelstein and Hambrick, 1990). Other industry factors associated with high managerial demand are high market growth, demand instability, competitive market structures, low capital intensity, and freedom from regulation imposed by the government (Finkelstein and Hambrick, 1990). The second force is the extent to which the organization gives the executive the power to formulate and execute a wide array of possible actions (Finkelstein and Hambrick, 1990). Finkelstein and Hambrick (1990) name organizational inertia as a force that reduces managerial flexibility in managing critical domains. Next to this, the availability of resources is positively related to managerial discretion, because resources are necessary to implement strategic initiatives (Finkelstein and Hambrick, 1990). So, unavailability of resources restricts the possibilities of an executive and thus his discretion. Hambrick (2007) names a weak board as an organizational factor associated with managerial discretion because a weak board imposes fewer restrictions on the implementation of strategic initiatives of the executive. The third influential force on managerial discretion is the executive himself (Hambrick, 2007). This refers to the extent to which an executive is able to create multiple courses of action (Finkelstein and Hambrick, 1990).
H6a: Managerial discretion amplifies the relation between the age of an executive and the riskiness of the entry mode the firm he leads will engage in.
H6b: Managerial discretion amplifies the relation between the organizational tenure of an executive and the riskiness of the entry mode the firm he leads will engage in.
H6c: Managerial discretion amplifies the relation between the international experience of an executive and the riskiness of the entry mode the firm he leads will engage in.
H6d: Managerial discretion amplifies the relation between the functional background of an executive and the extent of control over the entry mode the firm he leads will engage in.
H6e: Managerial discretion amplifies the relation between the culture of an executive and the extent of control over the entry mode the firm he leads will engage in.
5.2 Job demand
Job demand is the difficulty of a job (Hambrick et al., 2005). Hambrick, et al. (2005) present job demand in the literature as a broad concept, consisting of demands such as the degree to which an employee has to work hard and fast, the deal of work he has to do, and the time he has to fulfill his responsibilities. The definition used by Hambrick, et al. (2005: 474) is ‘the degree to which a given executive experiences his or her job as difficult or challenging’. Hambrick, et al. (2005) choose the perspective of the experience of the executive, because the job demand not only depends on measurable aspects as the time required to do the job or the time that the job is on an executive’s mind but more importantly on how the executive perceives all this.
demands on an executive, especially when he is supposed to make a relatively high amount of decisions (Hambrick, et al., 2005). This contributes to a relatively high job demand.
The second factor named by Hambrick et al. (2005) is performance challenges. This refers to how much performance is required of them, usually by owners, but possibly also by other stakeholders (Hambrick, et al., 2005). Hambrick, et al. (2005) state that performance challenges are also determined by recent performances of an executive, where bad recent performances will result in pressure on the executive, where executives with good recent performances face fewer pressures, and thus face lower job demand.
The last factor, the executive’s aspirations, refers to the extent to which an executive has a strong personal desire to perform in the best possible way (Hambrick, et al., 2005). Executives who are very motivated to improve the performance of their organization put higher job demand on themselves than executives who are focused on maintaining their organization and to perform just well enough (Hambrick, et al., 2005).
Even though the image is that the general job demand is high for executives, there are big differences in pressure and difficulties of their jobs. This depends, among other things, on the munificence of the environment and the quality of their subordinates (Hambrick et al., 2005). Hambrick et al. (2005) state that the higher the job demand of an executive, the more the executive’s characteristics will be manifested in strategic choices. This because these executives cannot afford it to make comprehensive analyses of situations they face, and will take mental shortcuts by which they fall back on what they have tried or seen before. By doing so, their backgrounds and dispositions will be reflected more in their decision making (Hambrick et al., 2005). Hambrick et al. (2005) also propose that a high job demand results in a higher tendency to imitate other firms, more extreme strategic behavior, the executive placing more pressures on other organizational members, and the executive conveying confidence and calm. So, in the context of this research, job demand can be expected to amplify the hypothesized relation between age, organizational tenure, international experience, functional background and culture, and the entry mode choice.
H7a: Job demand amplifies the relation between the age of an executive and the riskiness of the entry mode the firm he leads will engage in.
Age Organizational tenure International experience Functional background Culture Entry mode decision Managerial discretion Job demand
H7c: Job demand amplifies the relation between the international experience of an executive and the riskiness of the entry mode the firm he leads will engage in.
H7d: Job demand amplifies the relation between the functional background of an executive and the extent of control over the entry mode the firm he leads will engage in.
H7e: Job demand amplifies the relation between the culture of an executive and the extent of control over the entry mode the firm he leads will engage in.
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METHODOLOGY 1. Sample and data
The sample consists of publicly traded firms in the Netherlands and Germany, that made a foreign market entry through an acquisition or a joint venture in the last three years. By using the Zephyr database, 217 deals have been traced, all of the Dutch and German firms that made an acquisition or started a joint-venture abroad. These deals consist of 158 acquisitions, completed over the last year, and 59 joint ventures, started during the last three years. For acquisitions, only the last year will be investigated, because this makes it easier to gather data considering the deal, the firm and the executives involved. The timespan for joint ventures is three years because the occurrence of a joint venture is less frequent than the occurrence of an acquisition. The extension of the timespan made it possible to study more joint ventures. For every deal, I looked up the age, organizational tenure, functional background and culture of the CEO, the CFO, and the executive board member that was named first after the CEO and CFO.
2. Measures
2.1 dependent variable
The entry mode is the dependent variable in this research. In the literature section, five entry modes are distinguished. Buckley and Casson (1998) define export as selling the products to an independent foreign distributor. In case of a contractual transfer mode, there is more commitment between two parties, and technology can be transferred, or brand names are used (Buckley and Casson, 1998; Chen and Chen, 2003). Contractual transfer does not involve equity participation or the establishment of a new legal entity, contrary to joint ventures (Chen and Chen, 2003). Herrmann and Datta (2006) define joint ventures as new entities that are created by combining the assets of at least two firms. Acquisitions are defined as purchasing an existing firm in a foreign country, where greenfield investment are defined as entries where an operation is build up from scratch (Herrmann and Datta, 2006). The dependent variable in this empirical part is binary. The entry mode is either a joint venture (coded as ‘0’) or an acquisition (coded as ‘1’).
2.2 Independent variables
ages of the TMT members at the time of the particular market entry, divided by the amount of members.
Organizational tenure is measured as the amount of years the individuals have worked in the firm at the time of the particular market entry (Herrmann and Datta, 2006; Laufs et al., 2016). The average organizational tenure of the TMT is measured by accumulating the years that TMT members have been working for the firm at the time of the particular market entry, divided by the amount of members.
International experience is measured as the time in years an individual has worked abroad at the time of the particular market entry (Sambharya, 1996). The average international experience of the TMT is measured by accumulating the years that TMT members have been working abroad at the time of the particular market entry, divided by the amount of members. The functional background of an executive is measured by determining whether an executive has worked the most part of his career in an output or a throughput function (Hambrick and Mason, 1984). Categorized under throughput experience is experience in production, operations, finance, accounting, information systems and process R&D (Hambrick and Mason, 1984; Herrmann and Datta, 2002). Categorized under throughput experience is experience in sales, marketing, product R&D and entrepreneurship (Hambrick and Mason, 1984; Herrmann and Datta, 2002). The functional background of an executive is captured with a dummy variable, where mainly throughput functional experience is coded as ‘0’, and mainly output functional experience is coded as ‘1’ (Herrmann and Datta, 2006). Whether the TMT consists mainly of executives with a throughput or an output functional background is determined by determining the background of all executives, and establish what group is in majority.
Whether an executive comes from an uncertainty avoiding culture, is measured by looking at the uncertainty avoidance score of his country of birth, on the scale of Hofstede. Because Hofstede’s scale is a continuous scale from 0 to 120, the uncertainty avoidance scores will be interpreted as an independent variable on a continuous scale (Hofstede and Hofstede, 1991). The average uncertainty avoidance score of the TMT is measured by accumulating the scores of the TMT members and dividing them by three.
discretion are coded as ‘2’and executives with high discretion are coded as ‘3’. Low discretion executives are the executives working in an industry that is rated below-mean by Hambrick and Abrahamson (1995), medium discretion executives are working in an industry that is rated around the mean, and high discretion executives are those who work in an industry that is rated above-mean. The industries associated with low discretion are the industries categorized with SIC-codes 1000-1500 (mining industries) and 4000-5000 (transportation and public utilities industries). In this sample, 27 deals were completed in an industry classified as ‘low discretion’. The medium discretion industries are the industries categorized with SIC-codes 2000-4000 (manufacturing industries). In this sample, 103 deals were completed in an industry classified as ‘medium discretion’. The high discretion industries are the industries categorized with SIC-codes 7300-7400 (business services industries). In this sample, 22 deals were completed in an industry classified as ‘high discretion’. The remainder of the deals could not be classified as ‘low-discretion’, ‘medium-discretion’ or ‘high-‘medium-discretion’ based on Hambrick and Abrahamson (1995), and are consequently excluded in the testing of hypotheses 6a, 6b, 6c, 6d, 6e.
Industry SIC code Discretion (mean) Discretion (s.d.) Computer programming 7372 6.38 1.04 Motion picture production 7312 6.08 0.76 Computer equipment 3570 5.77 1.01 Engineering/scientific instruments 3826 5.63 0.92
Games and toys 3944 5.55 1.28
Semiconductors 3674 4.61 1.80 Instruments to measure electricity 3825 4.33 0.87 Security brokers 6211 4.27 1.00 Certified air transportation 4512 3.23 1.09 Trucking (except local) 4213 2.72 0.79
Gold and silver ores 1040 2.42 1.62
Petroleum/natural gas production
1311 2.33 1.67
Overall 4.59
Figure 3: Ratings of managerial discretion per industry (Hambrick and Abrahamson, 1995:1432)
The second moderator, job demand, is measured by looking at the recent performance of a firm. Hambrick et al. (2005) posit that bad recent performances will result in pressure on the executive, where executives with good recent performances face fewer pressures, and thus face lower job demand. The job demand of an executive is captured with a dummy variable, where executives with low job demand are coded as ‘0’, and executives with high job demand are coded as ‘1’. Low job demand executives are the executives whose firm made a profit over the last year, where high job demand executives are those whose firm reported a loss over the last year (Hambrick et al., 2005).
2.3 Control variables
Controlled will be for firm size because larger firms can be expected to enter a foreign market more easily, because they have more resources and expertise (Barkema and Shvyrkov, 2007). Firm size will be measured by the logarithm of the number of employees (Barkema and Shvyrkov, 2007; Herrmann and Datta, 2006).
3. Analytical technique
RESULTS
In this section, the results stemming from the statistical analyses will be reviewed. The outcomes of the correlation analysis, the binary logistic regression analysis, and the moderation analysis will be presented, and based on these outcomes will be concluded which hypotheses are supported by the data.
1. Descriptive statistics and correlations
During the gathering of the data, it turned out that data on the international experience of executives were too hard to find. Due to this, hypotheses 3a and 3b cannot be tested. On the other independent variables, a sufficient amount of data was found. For each independent variable, data from at least 209 cases were available (Table 1: Descriptive statistics). Thus, the N of every independent variable is at least 209.
The correlation analysis shows some cases of correlating variables (Table 2: Correlation matrix). As could be expected, high correlations exist between the CEO characteristics and the TMT characteristics in the categories age, tenure, background, and uncertainty avoidance. This can be explained by the fact that the TMT averages consist for at least one third out of the CEO characteristic because the CEO is part of the top management team. Two other variables that also could be expected to correlate, are age and tenure. There was a significant positive relationship between age and tenure, r =.378, p < 0.01. There was also a significant positive relationship between TMT age and TMT tenure, r =.452, p < 0.01. A more striking correlation exists between CEO background and tenure. Between these two variables, there was a significant negative relationship, r =-.16, p < 0.05. This means that executives with a throughput functional output tend to have a longer tenure. TMT background and TMT age correlated as well. There was a significant positive relationship between TMT age and TMT background, r =.146, p < 0.05.
Multicollinearity between these variables, however, does not exist, because the correlation is lower than 0.5 (Sandberg, 2014).
- INSERT TABLE 1 HERE (APPENDIX 1) – - INSERT TABLE 2 HERE (APPENDIX 1) -
2. Independent variables
the bigger the firm, the higher the likelihood of choosing a joint venture over an acquisition. On the five percent-level, however, neither of the control variables are statistically significant.
Hypotheses 1a and 1b expected a negative effect of CEO age and average age of the TMT on the riskiness of the entry mode chosen. Younger CEOs were expected to choose acquisitions over joint ventures more often than older executives. Older executives were expected to be more risk averse, and subsequently, tend to choose joint ventures over acquisitions. However, no significant relationship is found between age and entry mode decision (Hypothesis 1a: B = 0.014, p = .556; Hypothesis 1b: B = .016, p = .597).
Hypothesis 2a proposed that CEOs that serve relatively short in an organization, engage in more risky entry modes than CEOs that are active in the organization for a relatively longer period of time. The data show a significant negative relationship between tenure and the deal type, B = -.062, p < 0.05. This means that an increase in tenure enlarges the chance of choosing a joint venture over an acquisition. Hypothesis 2b is not supported in model 6 (B = .018, p = .445). In model 9, TMT tenure shows a positive significant relationship on the ten percent level, B = .08, p < .1). This is contradictory to hypothesis 2b, that expected a negative effect.
Hypothesis 3a and 3b proposed a relationship between the executive’s international experience and entry mode decision. Due to a lack of data, these hypotheses could not be tested.
Hypotheses 4a and 4b linked functional background with the entry mode decision. CEOs or TMTs with mainly throughput functional experience were expected to engage in high control entry modes. The data do not show a significant relationship between the functional background of executives and the entry mode chosen. So, hypotheses 4a (B = -.176, p = .578) and 4b (B = -.468, p = .421) are not supported by the data.
Hypotheses 5a and 5b related high uncertainty avoidance to a high control entry mode, by proposing that executives born in a high uncertainty avoiding country would choose acquisitions over joint ventures. They were expected to do so, in order to minimalize the risk. However, hypothesis 5a is not supported by the data (B = .001, p = .964), and neither is hypothesis 5b (B = .006, p = .641).
- INSERT TABLE 3 HERE (APPENDIX 1) -
The moderation analysis reveals two significant interaction effects (Table 4: Moderation analysis). First, the analysis shows a significant interaction effect between managerial discretion and organizational tenure. Hypothesis 6b proposed that the relation between organizational tenure and the chosen entry mode is amplified by the amount of managerial discretion an executive has. There was a significant interaction between organizational tenure and managerial discretion on the deal type, B = .119, p <0.05. This means that for executives with a low level of discretion, long-serving executives are more likely to choose a joint venture over an acquisition. Contrary to the hypothesis, the model shows that a longer tenure is positively related with acquisitions under situations of high discretion. So, in a situation of low discretion, a longer tenure leads to a higher likelihood of a joint venture, where in a situation of high discretion, tenure leads to a higher likelihood of an acquisition.
The second significant moderation effect is the interaction between the level of uncertainty avoidance and managerial discretion, tested in hypothesis 6e. There was a significant interaction between uncertainty avoidance and managerial discretion on deal type, B = .0724, p < 0.01. This means that under high managerial discretion, the effect of uncertainty avoidance on the entry mode decision is bigger than in situations of medium or low discretion. This supports hypothesis 6e, which proposed that managerial discretion would amplify the relation between uncertainty avoidance and entry mode decision. Under situations of low discretion, high uncertainty avoidance leads to joint ventures. Under situations of high discretion, uncertainty avoidance leads to a full control entry mode, namely acquisitions.
Considering managerial discretion, no statistically significant evidence was found on neither the interaction between discretion and age of the executives (B = 0.059, p = .128), nor on discretion and the functional background of executives (B = -17.47, p = .978). So, hypotheses 6a and 6d were not supported. Hypothesis 6c could not be tested due to the absence of data on international experience.
hypothesis 7e (B = .033, p = .4409). Hypothesis 7c could not be tested due to the absence of data on international experience.
DISCUSSION
The purpose of this study was to find out how experiences, values, and personalities of executives influence the entry mode choice of the firm they lead. Another purpose was to understand how these antecedents of the entry mode decision were moderated by the managerial discretion and the job demand the executive functions under. The influence of personal background on firm strategy was proposed in the upper echelons theory of Hambrick and Mason (1984). I used their theoretical perspective, the upper echelons theory, to formulate hypotheses 1a, 2a, 3a, 4a, and 5a. Because Finkelstein (2007) and Hambrick (2007) added that leading an organization is a shared activity, I decided not only to look at CEOs, but at multiple members of the executive board, which lead to hypotheses 1b, 2b, 3b, 4b, and 5b. In addition to the upper echelons theory, Finkelstein and Hambrick (1990) introduced the moderator managerial discretion, which refers to the latitude of power an executive has. Proposed is, that the higher the discretion, the more the predispositions of an executive will be reflected in his decisions (Finkelstein and Hambrick, 1990). I added this moderator into this research in hypotheses 6a, 6b, 6c, 6d, and 6e. The second moderator added in this research is job demand, which is the difficulty of the job (Hambrick et al., 2005). Job demand is tested in hypotheses 7a, 7b, 7c, 7d, and 7e.
1. Conclusions
The data supported hypothesis 2a, that proposed that shorter serving CEOs engage in more risky entry modes. This is in line with Herrmann and Datta (2006) and Laufs et al. (2016), who debated that employees that work in a firm for a shorter period have a higher risk propensity, where employees working in a firm for a longer period tend to be more risk-averse.
joint ventures, logically, a pattern of market entry through acquisitions can be expected in more firms than a pattern of market entry through joint ventures. This view is confirmed by Westphal and Fredrickson (2001), who debate that executives with a long tenure believe more strongly in the value of the firm’s strategy. To gain more inside in this relationship, it would be interesting to study the impact of entry mode choice in the past on entry mode choice in the future. Or, more in general, the impact of strategic decision making in the past on future strategic decision making. To research this, one could look up the entry modes an executive chose in the past and test whether executives who chose mode X in the past, are tending to choose mode X again at the time of a subsequent entry mode decision.
The results of the testing of hypothesis 6b, which proposed a moderating effect of managerial discretion on the relationship between tenure and entry mode choice, show a significant interaction between managerial discretion and organizational tenure. However, in situations of low discretion, the relationship between tenure and entry mode is negative. This means a higher likelihood for a joint venture. In situations of high discretion, the relationship is positive, showing a higher likelihood of an acquisition. Thus, the data indicate that the dependent variable reacts stronger to changing values of the moderator than on changing values of the independent variable. In this research, the data suggest that managerial discretion is positively related with the entry mode choice. So, low managerial discretion is related to a low risk, low control entry mode, and high managerial discretion is related to a high risk, high control entry mode. To study whether there is a direct relation between managerial discretion and entry mode choice deserves attention in the future. The data in this research indicate that executives with a lot of power prefer risky strategies with high levels of control. This would point towards empire building (Borges, Correia-da-Silva, and Laussel, 2012; Jensen, 1986). In empire building, executives increase their power by increasing the resources under their control (Jensen, 1986). Acquisitions increase the size of the firm and offer the executive high levels of control (Erramilli and Rao, 1993). This future research could be done by establishing carefully the managerial discretion of executives throughout different industries, and test whether there is a link with the entry modes they choose. The three levels of managerial discretion as discussed by Finkelstein and Hambrick (1990) lead to a score on managerial discretion. By means of a regression analysis, determined can be whether there is a significant relationship between managerial discretion and the entry mode decision.
making. These findings are supportive to the national character-theory, which proposes that countries vary in psychological characteristics, and that firm strategy will reflect the characteristics of the home country of the executive who made the decision (Hennart and Larimo, 1998). The literature is ambiguous about the influence of the home country on firm strategy. Hennart and Larimo (1998) did not find a significant relationship between uncertainty avoidance, power distance, and firm strategy, where Ringov and Zollo (2007) found significance evidence of national culture on corporate social performance, and Varsakelis (2000) found that national culture influences the amount of money invested in R&D. To gain more insight in this matter, it would be useful to investigate whether high levels of discretion enlarge the extent to which an executive’s cultural predispositions are expressed in his decisions. When the culture of a person is expressed in his decisions under high discretion, this offers an opportunity for firms. By appointing an executive from a certain culture and allowing him a high degree of discretion, a firm can predict partially what kind of decisions the executive might take, by looking at his country of origin.
2. Limitations
A limitation that stands out is the inability to test hypotheses 3a and 3b. Intended was to gather the data on the international experience of executives via desk research. In many cases, it was not possible to find the number of years an executive worked abroad. Due to limited time and resources, decided was to leave the testing of hypotheses 3a and 3b out. When there would have been more time, this information could have been gathered by using surveys. Laufs et al. (2016) used this method in their upper echelons study. The disadvantage of this approach is the typically low response rate, in case of Laufs et al. (2016) 11 %. Researchers equipped with more monetary resources could buy access to online databases with this data. Herrmann and Datta (2006) used 5 databases to gather data on CEO characteristics.
knowledge stretches, no other authors managed to relate antecedents to this many entry modes. In most studies, researchers choose to compare two or three entry modes. Herrmann and Datta (2002) used a binary dependent variable for entry modes, with the options ‘full control’ and ‘shared control’. Laufs et al. (2016), also used a binary dependent variable, and separated ‘equity modes’ from ‘non-equity modes’. Forlani et al. (2016) used three options: ‘no control’, ‘joint venture, and ‘full control’. Herrmann and Datta (2006) compared joint ventures, acquisitions, and greenfield investment, and found age, tenure and functional background as significant antecedents of entry mode choice. When there would have been more time available, the data collection process could have been prolonged. In this additional time, deals classified as exporting, contractual transfer and wholly owned greenfield operations and associated executive characteristics could have been found. With these additional data, my regression analysis could have been extended, and the entry mode research would have been more complete.
The third limitation is that the sample used is limited because it only exists of Dutch and German publicly listed firms. This limits the generalizability of the findings (Tsang, 2004). Replication and extension of this research is needed to see whether the results would differ amongst other countries and amongst non-publicly listed firms (Forlani et al., 2016). In fact, every upper echelon study with a different sample or a different setting would examine the generalizability of my results (Herrmann and Datta, 2006).
the low response rate, and possibly biased sample, but Cavanaugh, Boswell, Roehling and Boudreau (2000) managed to do a longitudinal study on self-reported work stress among U.S. managers. Next to the questions on stress, questions on aspirations and the task challenges could be included and combined. Together with the recent performance, this would form a more inclusive measure of job demand.
The fourth limitation is the way that the cultural influence is tested in hypotheses 5a and 5b. In this research, tested is the influence of the country of origin on the entry mode decision. The measure was the uncertainty avoidance score of the country of birth of an executive. Future research could improve this research and improve the understanding of uncertainty avoidance and risk propensity on strategic decision making, by measuring these psychological traits at the individual level, instead of giving all compatriots the same score. This would enable the researcher to link the construct more directly to the organizational outcome. This could be done by adding questions on risk propensity to the same survey we propose to use to gather data on international experience and job demand.
Next to these limitations, that concern this research, in particular, there is a more elemental limitation of demographics–based research. Priem, Lyon, and Dess (1999) raise the issue of construct validity. It is questionable whether demographic data are the correct proxy for the researched construct (Priem et al., 1999). Moreover, if a significant relationship exists between a demographic factor and an organizational outcome, it is not sure it was the construct related to this demographic factor that leads to the organizational outcome (Priem et al., 1999). Future research could improve the construct validity, by measuring constructs like risk-aversion or desire for control directly through surveys and interviews instead of through demographic factors. Researchers acknowledge this but choose for demographic factors because of the difficulty associated with obtaining psychological data on executives (Herrmann and Datta, 2002; Hambrick, 2007).
3. Future research
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