THE INFLUENCE OF BOARD NATIONALITY
DIVERSITY ON THE DEGREE OF FIRM
INTERNATIONALIZATION IN EUROPE
Doortje Vos (S2384612)
MSc International Financial Management
Faculty Economics and Business
University of Groningen
Supervisor: Prof. Dr. C.L.M. Hermes
June 2014
ABSTRACT
This study investigates the influence of board nationality diversity on the degree of firm
internationalization, using a sample of 355 listed European companies during 2005-2010. Building on a theoretical framework based on both the agency theory and the resource dependency theory, this research suggests that there is a clear positive association between the extent of foreign directors and the degree of internationalization of a firm. The empirical results show a clear positive relationship between both the sum of foreign directors and the percentage of foreign directors and all the measures for the degree of firm internationalization (commercial and financial internationalization).
2 1. INTRODUCTION
Internationalization is becoming more important for firms in the last decades as the global economy is becoming more complex and competitive, which increases the firm’s need for international expansion to remain successful as a firm (European Commission, 2014). Internationalization enables the firm to obtain competitive advantages which are unavailable to domestic firms. These advantages include an increased market, economies of scales and scope, access to low cost resources, and reduction in risks (De Jong & van Houten, 2014). However, firm internationalization is also associated with managerial and operational complexity. There is a greater diversity of cultures, customers, competitors, business networks and regulations which top management has to consider, which increases the information processing, coordination and agency demands (Sanders & Carpenter, 1998; Oxelheim & Wihlborg, 2008). The complexity and resulting information processing requirements associated with internationalization have important implications for the boards’ composition. Greve et al. (2009) argue that firms “match
managers to strategies” in the context of firm internationalization. This suggests that a firm who pursues an internationalization strategy should have an international board in order to match the challenges associated with an internationalization strategy. Hitt et al. (2006) mention that the board of directors does influence organizational decisions to diversify internationally. According to Rivas (2012) board diversity positively contributes to international business activities. Diverse directors hold unique information, bring enhanced perspectives, and increase access to valuable and rare resources, which reduces the managerial and operational complexity associated with internationalization (Carter et al., 2003; Erhardt et al., 2003; Luo, 2005).
3 Motivated by this statement and the empirical results so far on TMTs nationality diversity and firm internationalization, the main object of this study is to investigate the relationship between board nationality diversity and firm internationalization to deepen the understanding of the influence of board diversity on internationalization.
The focus of this study includes the 15 original European Union countries. This research theoretically builds on the agency theory and the resource dependency theory, arguing that boards are there to monitor and control management and to provide essential linkages between the company and its needed resources (Fama, 1980; Fama & Jensen, 1983; Pfeffer, 1972, Pfeffer & Salancik, 1978). Board nationality diversity is an important source of managerial competence and managerial ability to deal with the complexity for the firm internationalization process. Of importance is that foreign directors will bring an enhanced perspective, have a greater processing capacity and have vital resources, which results in a better understanding of strategic decisions pertaining to internationalization (Carter et al., 2003; Luo, 2005; Nielsen, 2010b).
Based on these theories, one can assume that a more nationality diverse board results in an increased degree of firm internationalization. Therefore, the central research question for this paper is: Does board nationality diversity influences the degree of firm internationalization in Europe? By addressing this question, this research will contribute to the existing literature in several ways.
Firstly, this research is the first to study the relationship between the influence of foreign directors on firm internationalization internationalization in Europe. It contributes to the existing literature and empirical findings on the relationship between board diversity and firm internationalization, especially as it elaborates on the work of Oxelheim et al. (2013). The research is broadened by adding new measures for commercial internationalization (through the ratio of foreign assets to total assets) and using another different measure for firm internationalization (if the firm has issued American depository receipts). Furthermore, the focus of this study is on the original 15 European Union countries instead of only Nordic countries as in Oxelheim et al. (2013), which gives an enhanced European perspective. This study shows that the extent of foreign directors of firms in Europe positively influences both commercial and financial internationalization.
4 that endogeneity issues can bias results and must be circumvented. Therefore, this research adds to the understanding of the potential endogeneity issues related to research on board composition and board characteristics.
The remainder of the paper is divided into five sections. The next section presents the literature review, which is followed by a section explaining the sample selection, the sample characteristics, the
5 2. LITERATURE REVIEW
A change in the operating environment of the firm and its governance issues it faces, which is the case when the firm decides to internationalize its operations, requires a specific board composition. Firm internationalization increases managerial and operational complexity, as there is a greater diversity of cultures, customers, business networks and regulations which top management has to consider, which increases the information processing, coordination and agency demands (Sanders & Carpenter, 1998; Oxelheim & Wihlborg, 2008). The complexity and resulting information processing requirements associated with internationalization have important implications for board composition. Boards are assumed to serve different functions, depending on different theoretical views, and these functions are influenced by the internationalization process. Both the agency theory and the resource dependency theory reflect the potential benefits and costs which are related with the inclusion of foreign board members within firms with an international strategy. From an agency theory perspective, boards are there to grant shareholder’s wishes. Boards monitor and discipline management to align the interests of managers with those of shareholders. From a resource dependency theory perspective, boards serve firms by providing essential resources and linkages to these firms. This section argues, from both theoretical perspectives, why a positive relationship between the extent of board internationalization and firm internationalization is expected.
2.1. The agency theory
6 governance issues they face. Carter et al. (2003) and Erhardt et al. (2003) both suggest that a more diverse board may monitor top management better as board diversity increases board independence. Directors with a different background might ask different questions as directors with a more traditional background, and conflicts can emerge due to board diversity which allow for a broader range of opinions to be considered. Scholars have investigated the effects of diversity in boards, with the emphasis on demographic characteristics, (e.g., age, gender, race, ethnicity, education, tenure, functional background and other experiences) on several organizational outcomes, such as the firm’s performance (Milliken & Martins, 1996, Carter et al., 2003; Erhardt et al., 2003; Adams & Ferreira, 2009; Campbell & Vera, 2010). Less attention is given to the nationality diversity of board members compared to the characteristics mentioned. However, nationality diversity influences executive orientation and strategic decision making (Nielsen & Nielsen, 2013). Most of the existing studies which consider nationality diversity are primarily focussing on top management teams (TMTs) instead of board members, from an upper echelon theory perspective (for an extensive review see Carpenter et al., 2004). According to the upper echelon theory, strategic choices and actions taken by TMTs are influenced by TMTs’ managerial demographic
characteristics (Hambrick & Mason, 1984). These characteristics are reasonable proxies for executive cognitions, values and personalities (Carpenter et al., 2004). Although ambiguity exists by defining the members of a TMT, the more traditional TMT is limited to executives alone (Carpenter et al., 2004) while the board exists of executives and non-executives for a one tier board, and of executives, non-executives and a supervisory board in case of a two tier board. An important difference in the roles of boards and TMTs is that boards are only responsible for monitoring and influencing strategy, instead of
implementing strategy. Besides the different roles, boards and TMTs do also have competing, if not sharply divided, goals and agendas (Fama, 1980; Fama & Jensen, 1983). Therefore the research based on TMT nationality diversity is not necessarily applicable and comparable with board nationality diversity (Rivas, 2012). However, due to the lack of empirical research and results on board nationality diversity the research on TMTs is taken into consideration.
7 and to overcome difficulties in the information processing and coordinating of the firm. Luo (2005) argues that nationally diverse boards have greater processing capacity and can react to more
environmental cues. These diverse boards have access to rare and valuable knowledge and experiences, which will be integrated into strategic decision making. Greve et al. (2009) argue that firms “match managers to strategies” in the context of firm internationalization. They find, based on a sample of 41 large European firms in the banking and insurance industry, that firms who pursue a geographical and cultural expanding strategy on a larger scale, have higher levels of nationality diversity within the TMT in order to match the challenges associated with an internationalization strategy. In their study, they deliberately avoid the use of foreign sales to total sales ratio as an internationalization measure, but chose a composite of the geographic dispersion of firm operations, the cultural dispersion of firm
operations and the ratio of foreign employees to the total number of employees. Kaczmarek and Ruigrok (2013) likewise use the geographic dispersion of firm operations as part of their composed
internationalization measure, but they also include the foreign sales to total sales ratio and the foreign assets to total assets ratio. They find, based on the 100 largest stock exchange listed companies from the Netherlands, Switzerland and the United Kingdom in 2005, that TMT nationality diversity results in an advantage in firms with a high degree of internationalization.
Moreover, when a firm wants to internationalize financially, by cross listing or issuing American depository receipts, it seeks for foreign financial investors. The presence of a foreign board member signals accountability to the international investor base, as investors can have the perception that a foreign board member is more able to align the investors’ interests with the interests of management. Oxelheim et al. (2013) argue that foreign directors are associated with financial internationalization as foreign directors can mitigate agency problems on behalf of foreign financial investors. They find, based on a Nordic sample, that firms with more foreign block ownership and have shares cross listed on foreign exchanges, have more foreign board members. However, Schmid and Dauth (2014) find, based on a German sample of DAX30 firms between 2005-2008, that top manager’s internationalization (measured by nationality, international education, international work experience and international linkages) needs to exceed a certain threshold before investors include the internationalization characteristics into their investment decisions. They find an inverted U shape relation relationship between TMTs
internationalization and cumulated abnormal returns, which shows that top managers’
8 directors can weaken the boards’ monitoring effectiveness. When there is a difference in cultural values, norms and beliefs, greater complexity can arise in understanding other board members or management and thereby the ability to monitor and control can decrease and agency costs can arise. According to Masulis et al. (2012) foreign board members may have different corporate governance values, and will be less familiar with rules and regulations and management methods of the home country. This may increase disharmony in the board and may hamper the monitoring and controlling functions of the board. Furthermore, when the foreign director is geographically removed from the firm’s corporate headquarter, board attendings and on-site visits are more problematic. Those directors also have fewer connections with the local network and less access to valuable local information, which decreases the ability to monitor top management properly. Masulis et al. (2012) find, based on a sample of US S&P1500 companies between 1998 and 2006, that firms with foreign independent directors show significantly lower returns on assets. Piekkari et al. (2013) researched how the entry of a foreign board member and the subsequent switch of language affects the board functioning. They find, based on a multiple case study of 9 Nordic MNCs between 2001 and 2007, that a change in working language can negatively affect the information access, reduces the board interaction, and may lower the quality of decision making which can decrease the monitoring and controlling function of the board.
In sum, from an agency perspective, board nationality diversity can result in an enhanced perspective which can improve the monitoring and controlling function of the board which positively influences the firm’s internationalization strategy. At the same time, board nationality diversity can increase complexity and disharmony in the board, which can decrease the board’s ability to monitor and control
management resulting in a decrease in the board’s ability to make the right decisions related to the firm’s internationalization strategy. Therefore, the relationship between board nationality diversity and firm internationalization remains an empirical question.
2.2 Resource dependency theory
9 resources to the firm. Diverse directors will hold unique information and bring diverse perspectives, which improves the information processing and coordination of the firm. Furthermore, when a firm’s external environment changes, the need for linkages with this environment increases. The board will be strategically altered in order to facilitate strategic change (Hillman et al, 2000). In line with this
argument, an internationalized board can play an important role in connecting the firm and its environment. Its prior knowledge, expertise, social networks and interconnections of foreign markets represent a vital resource for strategic decisions pertaining to internationalization (Nielsen, 2010b).
According to Kaczmarek and Ruigrok (2013) TMTs can internationalize in two ways, by including internationality experienced managers and by including foreign directors. The first subject has been researched substantially in the academic literature so far, and top manager previous experience with foreign markets is seen as a valuable resource. Scholars found that TMT’ international experiences relate to international presence and diversification, foreign market entry and strategic partners, and less delay in obtaining foreign sales after starting up (Sambharya; 1996; Reuber & Fischer, 1997; Carpenter & Fredrickson, 2001; Herrmann & Datta, 2005; Lee & Park, 2008; Nielsen, 2010b). Oxelheim et al. (2013) find a positive relationship between national board members with international experience and the percentage of foreign sales to total sales and foreign listing. Sambharya (1996) implies that further research should be focused on other aspects of international demographics, such as nationality diversity. Also Nielsen (2010a) suggests that nationality diversity may be an important attribute for future
research. Sambharya (1996) proposes that MNCs with a global strategy need managerial talent with international expertise, which can be achieved by appointing a foreign director. This is an effective way to increase sources of valuable information, increase information processing, and reducing uncertainty and the constraints imposed by the environment (Schmid & Dauth, 2014). Foreign directors, making use of their international social networks and interconnections and having an increased understanding of the international business environment, may be able to see international investment and growth
opportunities. In addition, internationalized boards may have a higher cultural and institutional awareness, which may enhance the process of contract negations with partners, suppliers, customers and employees (Nielsen, 2010b; Oxelheim et al., 2013). Multinational boards also have access to rare and valuable knowledge, resources, expertise and networks contacts in relation to the firms’
10 Nielsen (2010b) finds empirically that, based on a sample of 165 Swiss listed companies in 2004, TMT nationality diversity is positively related to foreign market entries. Nielsen and Nielsen (2013)
demonstrate, based on a sample of 146 Swiss listed firms between 2001 and 2008, that the impact of TMT nationality diversity on performance is strengthened by firm internationalization. Masulis et al. (2010) argue that foreign independent directors enhance the advisory capability of boards, and are valuable for companies with major foreign operations or aspirations to expand internationally. They find that in case of merger and acquisitions, acquirer abnormal returns are significantly higher in deals where the acquirer has a foreign independent director who is from the same region as the target. This suggests that foreign directors may reassure current and potential foreign investors, as shareholders may value the ability of foreign board members to access international networks. Investors may find these firms attractive, which may increase the financial internationalization (Oxelheim & Randøy, 2003; Oxelheim et al., 2013).
The latest, and for this research most important empirical research on foreign directors and firm internationalization, is done by Oxelheim et al. (2013). Their research is based on a sample of 346 publically traded non-financial firms headquartered in Denmark, Finland, Norway or Sweden in 2006. They argue that foreign directors understand the international business environment better, may signal the firms’ commitment to constituencies abroad, and bring expertise and network ties to the firm which could result in better access to foreign resources, foreign investment and operating decisions. Their study investigates the relationship between firm internationalization, divided into commercial and financial internationalization, and foreign directors. The percentage of foreign board members to the total number of board members is the measure for the dependent variable. The independent variables are measured as the percentage of foreign sales to the total sales for commercial internationalization and foreign listing and the percentage of foreign-owned shares in the total sum of the five largest share blocks in the firm for financial internationalization. They find that foreign directors are positively related to foreign sales using a Tobit regression, however this result is no longer significant when using a fixed effects regression. Estimated with both the Tobit regression and the fixed effects regression, foreign directors are positively related to foreign listing and foreign block ownership. These results show that foreign directors are associated primarily with financial internationalization, but commercial
11 In sum, from a resource dependency perspective, board nationality diversity increases resources,
knowledge, expertise, social networks and interconnections of the board which increases the ability of the board to make strategic decisions related to internationalization. Therefore, I believe that there is a positive relation between the degree of nationality diversity and the degree of firm internationalization. This results in the following hypothesis:
12 3. SAMPLE SELECTION, SAMPLE CHARACTERISTICS, METHODOLOGY AND DESCRIPTIVE STATISTICS
3.1. Sample selection
The sample is based on public companies listed in 2005 on the main stock exchange indices1 of the original 15 European Union countries: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden and the UK. The 10 countries who gained access in 2004 are not included in the sample due to more problematic data availability. Although most of the main stock exchange indices have approximately 20-30 companies listed, the main stock exchange index of Luxembourg (LuxX) consists of considerable less companies and the main stock exchange index of the UK (FTSE 100) consists of considerable more companies. The companies listed on the main stock exchange index of Luxembourg are included. In case of the UK, approximately the 30 biggest companies, based on market capitalization, are selected. After correcting for missing values, the sample selection resulted in 355 companies.
For these companies, annual data was collected on relevant board variables including each of the years 2010, and annual data was collected on firm internationalization including each of the years 2005-2012. Data on commercial internationalization was extracted from Datastream/Worldscope. Financial internationalization was partly extracted from Datastream/Worldscope. Data on American depository receipts was gathered from the website of BNY Mellon, using the depository receipts directory online. Data on board variables, such as director’s nationality, age and gender were obtained from company’s annual reports. The nationality and the gender of the board members are defined as the nationality and gender as reported by the company. The year of birth reported by the company is used to calculate the directors’ age. When the data on board variables was not available in the annual reports, different sources have been used to complete this data. These sources exist out of different websites: the company websites, Google Finance, ZoomInfo and Top Management.
Data on financial control variables were obtained from Datastream/Worldscope, of which the group identification codes (GIDs) are used to identify the different industries within the sample. Annual data on cross boarder merger and acquisitions (M&As) was extracted from BvD Zephyr.
1 ATX, BEL20, OMXC20, OMXH25, CAC40, DAX, Athex 20, ISEQ 20, MIB, LuxX, AEX, PSI-20, IBEX 35, OMXS30, FTSE
13 3.2. Sample characteristics
Table 1 outlines the distribution of the 355 company’s countries and industries. France is the country with the largest number of companies (10.14%) and Luxembourg with the lowest number of companies (1.41%). In terms of industries, financials (24.23%) is the sector with the largest number of observations, followed by industrials (18.59%). Oil and gas (4.23%) is the sector with the lowest number of
observations.
Table 1. Distribution of companies in the sample across countries and industries.
COUNTRY GID0 GID1 GID2 GID3 GID4 GID5 GID6 GID7 GID8 GID9 TOTAL Austria 2 2 6 1 0 1 1 2 5 0 20 Belgium 0 2 3 1 2 3 2 0 5 0 18 Denmark 1 0 7 5 7 1 1 0 6 0 28 Finland 1 5 7 2 1 2 1 1 2 2 24 France 1 1 7 7 2 6 1 3 5 3 36 Germany 0 4 3 6 2 3 1 2 7 2 30 Great Britain 2 3 1 6 2 2 2 2 9 0 29 Greece 2 0 2 2 0 2 2 1 6 1 18 Ireland 0 0 4 4 1 4 1 0 6 0 20 Italy 2 0 2 3 0 1 1 3 15 0 27 Luxembourg 0 2 0 1 0 1 0 0 1 0 5 Netherlands 2 2 6 3 0 4 1 0 4 3 25 Portugal 0 1 4 0 0 6 2 1 3 3 20 Spain 2 0 6 1 0 7 2 6 6 1 31 Sweden 0 1 8 4 0 2 2 0 6 1 24 TOTAL 15 23 66 46 17 45 20 21 86 16 355
The industries are classified according the group identification numbers, extracted from Datastream/Worldscope with GID0 (oil & gas), GID1 (basic materials), GID2 (industrials), GID3 (consumer goods), GID4 (health care), GID5 (consumer services), GID6 (telecommunications), GID7 (utilities), GID8 (financials) and GID9 (technology).
14
Table 2. Distribution of sample firms per country for the period 2005 to 2010. Including the total number of firms,
average board size, average amount of foreign board members on a board and the percentage of foreign board members on a board. The board exists of executives and non-executives for a one tier board, and of executives, non-executives and supervisory board members in case of a two tier board
COUNTRY # of total firm year data Average board size Average # of foreign board members % of foreign board members Austria 120 18.09 2.37 13.09% Belgium 108 14.49 5.21 35.97% Denmark 168 12.92 2.67 20.68% Finland 144 17.91 3.81 21.25% France 216 15.78 3.69 23.42% Germany 180 26.31 4.03 15.05% Great Britain 174 13.60 5.60 41.15% Greece 108 12.08 1.51 12.50% Ireland 120 12.82 2.76 21.52% Italy 162 16.87 1.98 11.73% Luxembourg 30 16.19 10.55 62.06% Netherlands 150 13.54 6.73 49.70% Portugal 120 11.12 1.40 12.59% Spain 186 15.05 1.75 11.62% Sweden 144 20.60 4.42 21.48% TOTAL 2130 16.41 3.73 22.67% 3.3. Methodology
To test the influence of board nationality diversity on firm internationalization, an ordinary least-square (OLS) regression without and with lagged explanatory and control variables is applied. Moreover, a two-stage least-square (2SLS) regression is employed.
To investigate the relation between board nationality diversity and firm internationalization, the following regression model is used:
(1)
Where is the constant term, is the coefficient, is the error term, defines the firm and defines
the country.
The dependent variable, , is further divided into commercial
15 (1997) criticise the use of unidimensional measures as they can misrepresent the breadth and depth of internationalization. The variable for commercial internationalization is based on the composite measures of Sullivan (1994) and Sanders and Carpenter (1998) and is a composite of 2 proxies: foreign assets as a percentage of total assets and foreign sales as a percentage of total sales.
(
)
The first measure for financial internationalization consists of the company’s number of cross listings ( ). A company is cross listed when it lists ordinary shares on a different exchange other than its home stock exchange. As this is the case for most of the companies in the sample, the focus is on the number of listings. A dummy variable is set to 1 if the company’s shares are cross listed above the median of the number of cross listings (>2.00) of all the firms in the sample; and 0 otherwise (<2.00). The other measure for financial internationalization is whether the company has issued American depositary receipts ( ). A dummy variable is included which is set to 1 if the company has issued ADRs, and 0 otherwise.
The independent variable ( ) is the extent of foreign directors in a board and accounts for the boards nationality diversity. This measure is exists of and
. is the sum of foreign board members on a board, is the percentage of foreign directors over the total number of directors on a board. A director is seen as a foreign director when his nationality is dissimilar as the company’s country of origin.
16 executives and non-executives for a one tier board, and of executives, non-executives and supervisory board members in case of a two tier board. This control variable is included as a larger board can have more expertise, knowledge and resources, which can reduce the risks and costs of internationalization and therefore stimulate internationalization (Sanders & Carpenter, 1998; Rivas, 2012). In line with the studies of other scholars (Sanders and Carpenter, 1998; Masulis, 2012; Rivas, 2012; Kaczmarek & Ruigrok, 2013; Oxelheim et al., 2013) control variables for firm size ( ) and firm performance ( ) are included in the regression. Firm size is measured by logarithm of the firm’s total assets and firm performance is measured as EBITDA divided by total firm assets. Both are included as a larger and more successful firm is better able to overcome structural and financial difficulties inherent to the internationalization process, and therefore influences internationalization. Industry specific dummies are included, which control for industry effects that might influence internationalization (Rivas, 2012). Further, country influences are controlled for by including country dummies. Detailed definitions of the variables can be found in table 11 in the appendix.
A common problem in empirical work based on the board of directors is the endogeneity issue (Hermalin & Weisbach, 2003). An endogeneity problem can imply that causality between the dependent and independent variables runs both ways. In the context of this research, this can mean that firm internationalization is a result of the nationality diversity of the board of directors, while at the same time firm internationalization itself is a factor that potentially influences the composition of the board of directors, and therefore the board’s nationality diversity. If there is an endogeneity problem, which is not controlled for in the regression analyses, OLS coefficient estimates can be biased. To handle the
endogeneity problem, lagged variables can be used (Hermalin & Weisbach, 2003). In the OLS regression 1 year lagged variable are used for the explanatory and control variables, which results in the following estimate:
(2)
Where defines the year, and the other terms are as previously defined.
17 The following system of equations is estimated using 2SLS:
(3) (4) Where is a vector of other explanatory variables hypothesized to affect internationalization, is a vector of other explanatory variables to affect the extent of foreign directors, is the coefficient, and the other terms are as previously defined.
Vector includes the same control variables used in equation (1). The control variables for vector are in line with the work of Oxelheim et al. (2013) and include , , and . On top of these variables, and are included as instrument variables. 2 is the
research and development intensity of a firm, which is measured as the research and development expenditures divided by the firm’s total sales (Oxelheim et al., 2013). This measure is a proxy for growth opportunities. Foreign directors more likely appear at firms that have larger growth/more growth opportunities (Masulis et al., 2012). is an annual dummy variable which is set to 1 if the company has been involved in a cross border acquisition, and 0 otherwise. Cross border M&As can lead to a reshuffling of directors to new positions: individuals from both boards (and both nations) often end up in a new board, which can increase the board’s nationality diversity (Staples, 2007; Van Veen & Marsman, 2008). According to Staples (2007) an M&A is by far the most common way for a company to end up with a multinational board.
The 2SLS analysis exists of two stages. In the first stage the reduced form equation is estimated by OLS (a regression of the endogenous repressors upon all instruments) to obtain the fitted values for the extent of foreign directors. In the second stage the equation (3) is estimated by OLS, while replacing all
endogenous variables on the right hand side with their fitted values for the extent of foreign directors from stage one.
3.4 Descriptive statistics
Table 3 shows the descriptive statistics on all board and firm characteristics for all companies in the sample in the period 2005 to 2010. All continuous variables are winsorized at 1%-99% to reduce the influence of outliers.
2 Following Oxelheim et al. (2013) R&D is set to 0 whenever financial information is available for the firm but no
18 The descriptive statistics show that firms’ commercial internationalization is approximately 36.6% on average, that 42.8% of the firms are cross listed on more than 2 stock exchanges and 47.8% of the firms issue American depository receipts. Firms have on average 3.73 foreign directors in their board (23.4%), the percentage of board members who are female is 9.8%. The average board age is 56.42 years and the average board size is 16.42. The firm size is approximately 16.43 (in LN of total assets) and the return on assets for all firms is on average 11.2%. Firms have on average an R&D intensity of 1.3% and 29% of the firms in the sample have been involved in a cross border acquisition. Table 12 in the appendix show the descriptive statistics over time for all firms in the sample.
Table 3. Descriptive statistics for board and firm characteristics in the period 2005 to 2010.
Mean Median Minimum Maximum Std. Dev. Observations C_INTERNATIONALIZATION 36.569 35.845 0.000 97.692 28.133 2130 CROSSLISTING 0.428 0.000 0.000 1.000 0.495 2130 ADR 0.478 0.000 0.000 1.000 0.500 2130 BOARDFOREIGN (SUM) 3.734 3.000 0.000 25.000 3.586 1830 BOARDFOREIGN (%) 0.234 0.180 0.000 1.000 0.219 1830 BOARDFEMALE (%) 0.098 0.080 0.000 0.520 0.090 1833 BOARDAGE 56.421 56.600 46.744 65.898 3.886 1791 BOARDSIZE 16.422 15.000 5.000 42.000 6.085 1833 FIRMSIZE (LN) 16.430 16.379 10.010 21.905 2.034 2012 ROA 0.112 0.103 -1.892 0.795 0.112 2012 R&D (%) 0.013 0.000 0.000 0.536 0.040 2130 M&A 0.290 0.000 0.000 1.000 0.454 2130
Commercial internationalization increases in 2007 (38.2%) but decreases after 2007 to be on
approximately the same level in 2010 as in 2005 (36.3%). The cross listing variable is a constant variable, as it does not change over time, and is therefore the same (47.8%) for the years 2005 to 2010. A
19 from 1.4% in 2005 to 1.1% in 2010, the percentage of companies who have been involved in a cross boarder acquisition decreased to 25.1% in 2010.
20
Table 4. Pairwise correlation matrix for all the variables from the period 2005-2010
VARIABLES 1 2 3 4 5 6 7 8 9 10 11 12 1 C_INTERNATIONALIZATION 1 2 CROSSLISTING 0.155*** 1 3 ADR 0.079*** 0.189*** 1 4 BOARDFOREIGN (SUM) 0.242*** 0.228*** 0.083*** 1 5 BOARDFOREIGN (%) 0.268*** 0.224*** 0.085*** 0.896*** 1 6 BOARDFEMALE (%) 0.020 0.019 0.146*** 0.074*** 0.042* 1 7 BOARDAGE 0.003 0.272*** 0.074*** 0.073*** 0.120*** -0.206*** 1 8 BOARDSIZE -0.019 0.101*** 0.013 0.239*** -0.092*** 0.106*** -0.005 1 9 FIRMSIZE (LN) -0.124*** 0.386*** 0.195*** 0.237*** 0.116*** 0.082*** 0.349*** 0.400*** 1 10 ROA 0.116*** 0.027 -0.097*** -0.056** 0.007 0.031 -0.131*** -0.176*** -0.382*** 1 11 R&D (%) 0.171*** 0.018 -0.019 0.131*** 0.167*** -0.034 0.083*** 0.010 -0.066*** 0.048** 1 12 M&A 0.080*** 0.059** -0.036 0.031 0.032 0.003 -0.010 0.027 0.044* 0.041* 0.038 1
21 4. RESULTS
This section presents the results from the OLS regression without lagged explanatory and lagged control variables, the OLS regression with lagged explanatory and lagged control variables and the results from the 2SLS regression. These estimations will be used to determine the effect of the extent of foreign directors on the degree of firm internationalization and whether results differ when endogeneity issues are addressed.
4.1. OLS analysis without lagged explanatory and lagged control variables 4.1.1. OLS analysis without industry and country control variables
Table 5 shows the results of the OLS analysis, where firm internationalization is regressed on the extent of foreign directors and on the control variables for European firms within the time period 2005 to 2010. Firm internationalization is further divided into commercial and financial internationalization (and financial internationalization further into cross listing and ADR).
The results in table 5 show that the extent of foreign directors does influence internationalization positively, which is in line with the theoretical argumentation of this paper. Column 1 and 2 show that the number of foreign directors and the percentage of foreign directors positively influence commercial internationalization, at the 1% level ( =2.175 and =36.914). This result is in line with the empirical results of Kaczmarek & Ruigrok (2013) and supports the empirical results of Oxelheim et al. (2013) which partially explain a positive relationship between foreign directors and foreign sales. As can be seen in column 3 and 4, the estimates show a positive relationship between the number of foreign directors and the percentage of foreign directors and cross listing, at the 1% level ( =0.021 and =0.368). These results are in line with the work of Oxelheim et al. (2013) and indicate that the extent of foreign directors positively affects crosslisting. Column 5 and 6 show that the extent of foreign directors positively
influence the company’s issuing of ADRs at the 5% level ( =0.007 and =0.110). These results suggest that the extent of foreign directors do positively affect all forms of internationalization researched.
Looking at the control variables, commercial internationalization is positively influenced by board age at the 5% and 10% level =0.435 and =0.328). Board size influences commercial internationalization positively at the 1% level ( =0.420) when the percentage of foreign directors is taken as measurement in the regression. This means that a larger board or a higher average age of the board members results in a higher degree of commercial internationalization. Furthermore, firm size negatively influences
22 positively influence commercial internationalization at the 1% level ( =16.193 and =15.513). This indicates that smaller firms or firms which are performing well are more commercially internationalized. For financial internationalization, a positive relation exists between board age and cross listing at the 1% level ( =0.019 and =0.018). Board size negatively influences cross listing, at the 5% level ( =-0.005) when the amount of foreign directors is taken as measurement in the regression. These results indicate that a smaller board or a higher average age of the board members results in more cross listing of the firm. Furthermore, firm size and return on assets are both positively related to crosslisting at the 1% level ( =0.099 for firm size, and =0.878 and =0.870 for return on assets). This suggest that firm size and return on assets positively affects cross listing.
Table 5. Commercial and financial internationalization in European firms 2005 - 2010.
This table shows the results of the OLS analysis without inclusion of lagged explanatory and lagged control variables. Columns 1 and 2 show results from commercial internationalization, columns 3 till 6 show results from financial internationalization, where column 3 and 4 (5 and 6) show results based on cross listing (ADR). All are regressed on the number of foreign directors and the percentage of foreign directors, where controls are added for the percentage of female directors, board age, board size, firm size and return on assets.
C_INTERNATIONALIZATION F_INTERNATIONALIZATION CROSSLISTING ADR 1 2 3 4 5 6 BOARDFOREIGN (SUM) 2.175*** 0.021*** 0.007** (12.060) (6.752) (1.958) BOARDFOREIGN (%) 36.914*** 0.368*** 0.110** (12.636) (7.436) (2.017) BOARDFEMALE (%) 7.795 6.473 0.038 0.023 0.803*** 0.799*** (1.092) (0.910) (0.315) (0.190) (6.042) (6.010) BOARDAGE 0.435** 0.328* 0.019*** 0.018*** 0.004 0.004 (2.447) (1.846) (6.416) (6.502) (1.173) (1.075) BOARDSIZE -0.012 0.42*** -0.005** -0.001 -0.008*** -0.007*** (-0.101) (3.648) (-2.470) (-0.336) (-3.633) (-3.043) FIRMSIZE (LN) -2.590*** -2.581*** 0.099*** 0.099*** 0.046*** 0.046*** (-6.577) (-6.586) (14.802) (14.822) (6.247) (6.261) ROA 16.193*** 15.513*** 0.878*** 0.870*** -0.187* -0.189* (2.681) (2.577) (8.58) (8.52) (-1.666) (-1.683)
Industry dummies included NO NO NO NO NO NO
Country dummies included NO NO NO NO NO NO
Observations 1767 1767 1767 1767 1767 1767
R-squared 0.101 0.108 0.227 0.231 0.066 0.066
23 The results related to the issuing of ADRs show that the percentage of female directors influences the issuing of ADRs at the 1% level ( =0.803 and =0.799). Board size negatively influences the issuing of ADRs at the 1% level ( =-0.008 and =-0.007). This indicates that smaller boards with a greater
percentage of female directors positively affect the issuing of ADRs. Firm size is positively related to the issuing of ADRs at the 1% level ( =0.046) while return on assets is negatively related to the issuing of ADRs at the 10% level ( =-0.187 and =-0.189).
4.1.2. OLS analysis with industry and country control variables
The firms in the sample are from different industries and countries (see table 1 for detailed information on industries and countries) and as industries and/or countries can influence internationalization, this difference needs to be controlled for in the regression analysis3.
Table 6 shows the results of the same OLS analysis re-estimated with inclusion of industry and control variables. Comparing the results from table 5 and table 6, similarities and differences can be seen in the results. This suggest that the results in table 5 were influenced by the omitted industry and country variables, and that the results of table 5 are potentially biased.
Looking at the results in table 6, the positive relationship between the extent of foreign directors and internationalization remains significant.
The board and firm specific control variables in the re-estimated analysis show some differences with the first analysis. A possible explanation for these differences can be based on country influences. Scholars try to explain how sets of institutions in different countries or regions lead to different economic systems. According to Van Veen & Marsman (2008) differences in governance regimes can influence board characteristics, as these regimes influence board recruitment processes explicitly or implicitly. Female directors now significantly negatively influence commercial internationalization at the 5% level ( =-15.809 and =-16.283). This result is contradicting with the empirical results of Thomas et al. (2012). Furthermore, average board age and board size do not significantly influence commercial
internationalization any longer, while the sign for firm size has changed. Firm size now positively affects commercial internationalization at a significant level of 1% ( =2.236 and =2.333). The level of
3
24 significance and the sign has changed for the return on assets, ROA now influences commercial
internationalization negatively, at the 10% level ( =-10.669 and =-10.768).
For financial internationalization, there exists a positive relation exists between female board members and cross listing at the 10% level ( =0.247 and =0.240) and between female board members and the issuing of ADRs at the 1% level ( =0.727 and =0.721). According to Hillman et al. (2007) institutional investors increasingly examine boards for gender heterogeneity. Therefore, firms have to increase the extent of female directors to obtain or maintain legitimacy towards these institutional investors (Van Oostveen, 2012). Hence, this suggests that international investors find firms with greater gender
diversity more attractive, and therefore these firms are more cross listed and issue more ADRs. However, this proposition is still an empirical question.
Board age still influences cross listing, although the level of significance has decreased to 5% ( =0.008 and =0.008). Board age is now also positively related to ADRs at the 5% level ( =0.01 and =0.009). The results of Rivas (2012) research show a negative relationship between average board age and
commercial internationalization, but the relationship between board age and financial
internationalization is not explored. The argumentation behind a negative relationship between board age and commercial internationalization is that older executives tend to be more conservative and tend to be risk averse Barker and Mueller (2002). An internationalization strategy requires a higher degree of risk taking as a domestic approach (Rivas 2012), thus having board members which are prone to risk taking will probably benefit the internationalization process. However, Rivas (2012) also mentions that an older group of board members can provide experience, wisdom and resources. It may be possible that an average higher board age signals accountability and reassure international investors. However this subject is open for further research.
Furthermore, board size does no longer affects cross listing significantly. However, board size negatively influences the issuing of ADRs. Research by other scholars on the effect of board size shows mixed results. A larger board can provide an increased pool of expertise and resources for the organization (Pfeffer, 1972) and can have an increased variety of perspectives on corporate strategy. However, a larger board can be more difficult to coordinate and can also inhibit the boards ‘ability to make strategic decisions. Decisions that involve complex and ambiguous tasks, such as the issuing of ADRs, are less favourably affected by large group dynamics (Goodstein et al., 1994).
25
Table 6. Commercial and financial internationalization in European firms 2005 - 2010.
This table shows the results of the OLS analysis without inclusion of lagged explanatory and lagged control variables. Columns 1 and 2 show results from commercial internationalization, columns 3 till 6 show results from financial internationalization, where column 3 and 4 (5 and 6) show results based on cross listing (ADR). All are regressed on the number of foreign directors and the percentage of foreign directors, where controls are added for the percentage of female directors, board age, board size, firm size, return on assets and industry & country dummies. C_INTERNATIONALIZATION F_INTERNATIONALIZATION CROSSLISTING ADR 1 2 3 4 5 6 BOARDFOREIGN (SUM) 0.960*** 0.014*** 0.009** (5.285) (4.155) (2.321) BOARDFOREIGN (%) 14.903*** 0.211*** 0.144** (4.913) (3.856) (2.250) BOARDFEMALE (%) -15.809** -16.283** 0.247* 0.240* 0.727*** 0.721*** (-2.219) (-2.284) (1.924) (1.871) (4.957) (4.917) BOARDAGE 0.283 0.245 0.008** 0.008** 0.01** 0.009** (1.520) (1.316) (2.486) (2.325) (2.468) (2.384) BOARDSIZE -0.210 -0.022 -0.004 -0.001 -0.007** -0.005** (-1.540) (-0.167) (-1.492) (-0.423) (-2.554) (-2.033) FIRMSIZE (LN) 2.236*** 2.333*** 0.117*** 0.119*** 0.063*** 0.064*** (4.380) (4.584) (12.765) (12.961) (5.865) (5.958) ROA -10.669* -10.768* 0.666*** 0.665*** -0.036 -0.036 (-1.874) (-1.889) (6.497) (6.478) (-0.295) (-0.299)
Industry dummies included YES YES YES YES YES YES
Country dummies included YES YES YES YES YES YES
Observations 1767 1767 1767 1767 1767 1767
R-squared 0.357 0.356 0.375 0.374 0.135 0.135
Constant is not reported. Robust t-statistics in brackets. ***, **, * denote statistical significance at 1%, 5% and 10%. Industry and country control variables are included in this analysis.
4.2. OLS analysis with lagged explanatory and lagged control variables
26 4.2.1. OLS analysis without industry and country control variables
The results in table 7 show that the extent of foreign directors does influence internationalization, which is in line with the theoretical argumentation of this paper. Although there are similarities with the results of the OLS regression without lagged explanatory and lagged control variables (table 6), there are also differences.
27
Table 7. Commercial and financial internationalization in European firms 2006 - 2011.
This table shows the results of the OLS analysis where the explanatory and control variables are lagged 1 year. Columns 1 and 2 show results from commercial internationalization, columns 3 till 6 show results from financial internationalization, where column 3 and 4 (5 and 6) show results based on cross listing (ADR). All are regressed on the number of foreign directors and the percentage of foreign directors, where controls are added for the
percentage of female directors, board age, board size, firm size and return on assets.
C_INTERNATIONALIZATION F_INTERNATIONALIZATION
CROSSLISTING ADR
All explanatory and control variables are lagged for 1 year
1 2 3 4 5 6 BOARDFOREIGN (SUM) 2.007*** 0.021*** 0.003 (11.09) (6.752) (0.96) BOARDFOREIGN (%) 33.598*** 0.368*** 0.049 (11.439) (7.436) (0.898) BOARDFEMALE (%) 14.361** 13.210* 0.038 0.023 0.784*** 0.783*** (2.005) (1.847) (0.315) (0.190) (5.939) (5.927) BOARDAGE 0.501*** 0.404** 0.019*** 0.018*** 0.003 0.003 (2.807) (2.263) (6.416) (6.502) (0.925) (0.882) BOARDSIZE -0.011 0.385*** -0.005** -0.001 -0.007*** -0.006*** (-0.093) (3.326) (-2.470) (-0.336) (-3.132) (-2.859) FIRMSIZE (LN) -2.359*** -2.342*** 0.099*** 0.099*** 0.044*** 0.044*** (-5.968) (-5.944) (14.802) (14.822) (6.008) (6.029) ROA 17.632*** 17.051*** 0.878*** 0.870*** -0.085 -0.086 (2.909) (2.818) (8.58) (8.52) (-0.762) (-0.766)
Industry dummies included NO NO NO NO NO NO
Country dummies included NO NO NO NO NO NO
Observations 1767 1767 1767 1767 1767 1767
R-squared 0.090 0.094 0.227 0.231 0.055 0.055
Constant is not reported. Robust t-statistics in brackets. ***, **, * denote statistical significance at 1%, 5% and 10%. Industry and country control variables are not included in this analysis.
4.2.2. OLS analysis with industry and country control variables
28 Looking at the results in table 8, the positive relationship between the extent of foreign directors and internationalization remains significant. In contrast with the first results of OLS analysis described in table 7, column 5 and 6 in table 8 show that both the number of foreign directors and the percentage of foreign directors are positively related to the issuing of ADRs by the company at the 10% level ( =0.007 and =0.106). These results suggest that the extent of foreign directors do positively affect all forms of internationalization researched.
Table 8. Commercial and financial internationalization in European firms 2006 - 2011.
This table shows the results of the OLS analysis where the explanatory and control variables are lagged 1 year. Columns 1 and 2 show results from commercial internationalization, columns 3 till 6 show results from financial internationalization, where column 3 and 4 (5 and 6) show results based on cross listing (ADR). All are regressed on the number of foreign directors and the percentage of foreign directors, where controls are added for the
percentage of female directors, board age, board size, firm size, return on assets, industries and countries.
C_INTERNATIONALIZATION F_INTERNATIONALIZATION
CROSSLISTING ADR
All explanatory and control variables are lagged for 1 year
1 2 3 4 5 6 BOARDFOREIGN (SUM) 0.904*** 0.014*** 0.007* (4.933) (4.155) (1.763) BOARDFOREIGN (%) 13.544*** 0.211*** 0.106* (4.425) (3.856) (1.652) BOARDFEMALE (%) -6.375 -6.852 0.247* 0.240* 0.691*** 0.688*** (-0.887) (-0.953) (1.924) (1.871) (4.573) (4.552) BOARDAGE 0.302 0.268 0.008** 0.008** 0.010** 0.009** (1.610) (1.424) (2.486) (2.325) (2.435) (2.366) BOARDSIZE -0.184 -0.007 -0.004 -0.001 -0.007** -0.005* (-1.338) (-0.052) (-1.492) (-0.423) (-2.305) (-1.915) FIRMSIZE (LN) 2.724*** 2.828*** 0.117*** 0.119*** 0.061*** 0.062*** (5.290) (5.507) (12.765) (12.961) (5.675) (5.760) ROA -7.379 -7.504 0.666*** 0.665*** 0.121 0.120 (-1.285) (-1.305) (6.497) (6.478) (0.998) (0.992)
Industry dummies included YES YES YES YES YES YES
Country dummies included YES YES YES YES YES YES
Observations 1767 1767 1767 1767 1767 1767
R-squared 0.343 0.341 0.375 0.374 0.111 0.111
29 4.2.3. Robustness Test
Two robustness tests are carried out to verify the results of the analysis. The regression analysis in table 7 is re-estimated using 2 and 3 year lags for the explanatory and control variables. The results of these regressions can be found in tables 16 and 17 in the appendix. Although the results are robust, there are some small differences in the significance of the results. Looking at commercial internationalization, the significance of female directors is increasing with adding more lags (1% for using the 3 years lag
regression) and the return on assets is decreasing in significance (not significant any more in the regression with a 3 years lag). The results related to cross listing are consistent with the results of table 6. For ADRs, the significance for board size reduces, although this result is still significant at a 5% level. Overall, it can be concluded that the results are consistent.
4.3. 2SLS analysis
4.3.1. 2SLS analysis (without industry and country control variables)
Table 9 on the next page shows the results of the 2SLS analysis, where firm internationalization is regressed on the extent of foreign directors and on the control variables for European firms within the time period 2005 to 2010, using two instrumental variables ( and ). The results show that the positive relationship between the extent of foreign directors and commercial internationalization remains significant at the 1% level ( =8.739 and =117.008). The extent of foreign directors does not influence financial internationalization significantly.
30
Table 9. Commercial and financial internationalization in European firms 2005 - 2010.
This table shows the results of the 2SLS analysis of the relationship between internationalization and the extent of foreign directors using two instruments ( and ). Columns 1 and 2 show results from commercial
internationalization, columns 3 till 6 show results from financial internationalization, where column 3 and 4 (5 and 6) show results based on cross listing (ADR). All are regressed on the number of foreign directors and the
percentage of foreign directors, where controls are added for the percentage of female directors, board age, board size, firm size and return on assets.
C_INTERNATIONALIZATION F_INTERNATIONALIZATION CROSSLISTING ADR 1 2 3 4 5 6 BOARDFOREIGN (SUM) 8.739*** 0.027 -0.004 (5.342) (1.305) (-0.169) BOARDFOREIGN (%) 117.008*** 0.376 -0.071 (6.025) (1.364) (-0.233) BOARDFEMALE (%) -4.397 -5.159 0.026 0.022 0.823*** 0.826*** (-0.443) (-0.577) (0.202) (0.172) (5.881) (5.883) BOARDAGE 0.253 -0.036 0.019*** 0.018*** 0.004 0.004 (1.056) (-0.156) (6.233) (5.591) (1.235) (1.220) BOARDSIZE -0.695*** 0.864*** -0.006* -0.001 -0.007** -0.008*** (-3.051) (4.978) (-1.900) (-0.249) (-2.099) (-2.771) FIRMSIZE (LN) -4.581*** -3.993*** 0.097*** 0.098*** 0.049*** 0.049*** (-6.398) (-6.923) (10.540) (12.016) (4.850) (5.420) ROA 7.261 7.616 0.869 0.869*** -0.173 -0.172 (0.875) (1.025) (8.175) (8.234) (-1.480) (-1.470)
Industry dummies included NO NO NO NO NO NO
Country dummies included NO NO NO NO NO NO
Observations 1767 1767 1767 1767 1767 1767
R-squared -0.576 -0.274 0.225 0.231 0.061 0.060
Constant is not reported. Robust t-statistics in brackets. ***, **, * denote statistical significance at 1%, 5% and 10%. Industry and country control variables are not included in this analysis.
Table 10. Results of the Durbin-Wu-Hausman test.
Columns 1 and 2 show results from commercial internationalization, columns 3 till 6 show results from financial internationalization, where column 3 and 4 (5 and 6) show results based on cross listing (ADR).
C_INTERNATIONALIZATION F_INTERNATIONALIZATION
CROSSLISTING ADR
1 2 3 4 5 6
Difference in J-stats 28.840*** 25.081*** 0.105 0.000 0.212 0.367
Evidence of an endogenous variable YES YES NO NO NO NO
31 The results of the DWH test show important considerations. On the one hand, the extent of foreign directors shown to be endogenous related to commercial internationalization. Using an OLS can lead to biased coefficient estimates in this case. Therefore, methods as an OLS analysis with lagged explanatory and lagged control variables or an 2SLS analysis are preferred. On the other hand, the extent of foreign directors is exogenously related to financial internationalization. This suggests that methods such as the 2SLS analysis may yield estimators that are consistent but not efficient in the analysis. Therefore, the use of an OLS analysis is preferred, as the estimates of the OLS model can provide more accurate information on the relationship between the extent of foreign directors and financial internationalization.
32 5. DISCUSSION AND CONCLUSION
5.1. Conclusion
This study builds on the work of Oxelheim et al (2013). The results of this research increase the understanding of the relationship between board diversity and board characteristics on the one hand, and internationalization on the other hand. Building on a theoretical framework based on both the agency theory and resource dependency theory, this research suggests that there is a clear positive association between the extent of foreign directors and the degree of internationalization of a firm. This framework gives an answer to the question how board nationality diversity (and board characteristics) relates to internationalization. This proposed relationship is supported by the results of the empirical analysis, using data from 355 European firms over 2005 to 2010. The results show that firms with a higher number of foreign directors and a higher percentage of foreign directors are more commercially internationalized, are more cross listed and issue more ADRs. From a firm internationalization
perspective, it can be said that board diversity and board characteristics do matter (Carpenter et al., 2004; Schmid & Dauth, 2014).
For commercial internationalization, this research proposes that a nationality diverse board can bring an enhanced perspective, which improves the monitoring and controlling function of the board. A
nationality diverse board can increase resources and knowledge, which increases the ability of the board to make strategic decisions, and which can both positively influence the firm’s degree of
internationalization.
33 5.2. Scholarly implications
The findings from this study have several implications for research on board diversity and board
characteristics related to strategic actions and decisions. I contribute to the existing work in the field by investigating the impact of the extent of foreign directors on the firm’s degree of internationalization. This study is the first to investigate the relationship between board nationality diversity and the degree of firm internationalization in Europe, while taking the potential endogeneity problem into
consideration. Empirical results show that the extent of foreign directors is an endogenous variable related to commercial internationalization. Therefore, scholars researching the relationship between board diversity and/or board characteristics and internationalization should take into consideration the potential endogeneity problems and should chose an appropriate analysing method. The influence of industry and country effects on empirical results should also be taken into consideration.
5.3. Managerial relevance
This study has important managerial implications. As globalization increases the need for firm internationalization, more firms will try to implement a successful internationalization strategy. This internationalization strategy goes along with great managerial and operational complexity, and therefore every action or decision which can potentially influence this process should be taken into consideration. This research implies that the firms who are striving for internationalization should increase their extent of foreign directors, as the extent of foreign directors positively influences
internationalization. A nationality diverse board will also signal accountability to investors and reassure them, which will help the firm to financially internationalize. Therefore, companies should recruit more foreign directors.
5.4. Limitations and further research
34 Besides this, the results of this research open up possibilities for further research. Scholars can
investigate the relationship between board nationality diversity and other measurements for internationalization, such as M&As. Furthermore, board nationality diversity can be broadened into board internationalization, where other measures such as international education, international work experience and international linkages can be added (Schmid & Dauth, 2014). Blau’s index of diversity (1977) can also be used as a more sophisticated option. Another topic which would be intriguing for future research is the effect of country and industry influences on board characteristics and
internationalization. The results show that country and industry differences are apparent, although this research does not investigate these findings further. According to Van Veen & Marsman (2008)
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