The Influence of National Culture on the Relationship between Family Firm Heterogeneity and Degree of Internationalisation
MSc Thesis International Business and Management University of Groningen
Faculty of Economics and Business
Aafke van Bruggen S2663376
Supervisor: dr. M.C. Sestu Co-Assessor: dr. A. Kuiken
June 05, 2020
14.993 words
ABSTRACT
Family firm heterogeneity is a field of research among family business scholars that recently captured attention. This research focuses on the relationship between family firm heterogeneity and the degree of internationalisation. Herein, bifurcation bias is considered as a source of family firm heterogeneity and is suggested to explain family firm’s diverging internationalisation paths partly. The presence of respectively nonfamily shareholders, an external CEO and nonfamily directors on the board of directors within the firm is proposed to signify family firms that actively safeguard against bifurcation bias. Consequently, this research refers to bifurcation bias while exploring the positive effect of these nonfamily members on the family firms’ degree of internationalisation. Furthermore, the moderating role of national culture on the aforementioned relationship has been explored as well.
This reading made use of a sample of 448 family firms worldwide, with data referring to 2019. The empirical results show that family involvement in the ownership, board of directors or management differs among family businesses and influences the internationalisation of the family firm. The presence of nonfamily shareholders, an external CEO or nonfamily directors is positively related to the degree of internationalisation of family firms. Additionally, the findings only partially confirm the moderating role of collectivism and uncertainty avoidance on the relationship between family firm heterogeneity and the degree of internationalisation. Further, empirically evidence could not confirm the moderating effect of long-term oriented cultures. These findings are important for the research and practice of family businesses, as they provide additional insights on family firm heterogeneity, specifically bifurcation bias, in relationship to internationalisation.
Key words: Family firm heterogeneity, Bifurcation bias, External ownership, External CEO,
External director(s), Internationalisation, National culture
TABLE OF CONTENT
1. INTRODUCTION ………..………6
2. THEORETICAL FRAMEWORK AND HYPOTHESES DEVELOPMENT ……..……10
2.1. Bifurcation Bias as Source of Family Firm Heterogeneity ………..………..…10
2.2. Bifurcation Bias in Family Firms and Internationalisation ………..……...12
2.2.1. External ownership and internationalisation ………...….13
2.2.2. External CEO and internationalisation ……….…14
2.2.3. External directors and internationalisation ………....15
2.3. National Culture, Bifurcation Bias and Internationalisation ………....17
2.3.1. Collectivism, bifurcation bias and internationalisation ………...18
2.3.2. Uncertainty avoidance, bifurcation bias and internationalisation …………...21
2.3.3. Long-term orientation, bifurcation bias and internationalisation ………..24
2.4. Conceptual Model ………...…26
3. METHODOLOGY ………...26
3.1. Sample and Data Collection ………....26
3.2. Variables and Measures ………...27
3.2.1. Dependent variable ………...27
3.2.2. Independent variables ………...28
3.2.3. Moderating variables ……...……….28
3.2.4. Control variables ……...………..………..29
4. PRELIMINARY DATA ANALYSIS ………....31
5. RESULTS ………..32
5.1. Descriptive Statistics ……….. 33
5.2. Correlation Analysis ………....33
5.3. Regression Analysis ………....36
5.3.1. Hypothesis testing results ………..41
5.4. Robustness Check ………...41
6. DISCUSSION ………....42
6.1. Theoretical Contributions ………....46
6.2. Managerial Implications ………. 47
6.3. Limitations and Future Research ……….………....48
REFERENCES …..……….………..50
APPENDICES ………..60
LIST OF FIGURES AND TABLES
Figure 1: Conceptual model………...26
Table 1: Definitions and calculations of the variables………29
Table 2: Descriptive statistics of continuous variables ………33
Table 3: Descriptive statistics of ordinal variables ………33
Table 4: Correlation matrix ………...35
Table 5: Ordinal logistic regression matrix …….……….39
Table 6: Hypothesis testing results ………42
ABBREVIATIONS
Abbreviation Full Word
CEO Chief Executive Officer
COLL Collectivism
DOI Degree of internationalisation
FSTS The ratio of foreign subsidiaries to total subsidiaries
LTO Long-term orientation
TCE Transaction cost economics
UAI Uncertainty avoidance
1. INTRODUCTION
The world’s largest cosmetics company, L’Oréal, is placed at number 41 in the Global Family Business Index. Nevertheless, the Bettencourt family holds only one-third of the outstanding shares, only three family members are included in the fifteen-headed board of directors, and the CEO of the firm is a nonfamily member (EY & University of St. Gallen, 2019). The perhaps less widely known company E. & J. Gallo Winery, a large American wine company, is included within the same Family Business Index. The corporate structure of this firm, however, differs significantly from the organisational structure of L’Oréal. The Gallo family entirely owns the winery, the board of directors is utterly comprised out of family members, and the CEO is part of the family (EY & University of St. Gallen, 2019). Perhaps more interesting, while E. &J.
Gallo Winery aims to become the leader in the United States wine industry, is L’Oréal far more internationally oriented (“E.&J. Gallo Wine,” 2020; “L’oréal,” n.d.).
These two brands reflect a field of research among family firm scholars that recently captured attention. Whereas early family business literature predominantly focused on analysing the differences between family firms and nonfamily businesses, current research tries to understand the differences between family firms as well (Daspit, Chrisman, Sharma, Pearson,
& Mahto, 2018). This attention shift seems essential since the dissimilarities in the behaviour and performance among family firms are potentially as large as, if not larger than, the differences between family and nonfamily organisations (Chua, Chrisman, Steier, & Rau, 2012).
Extant research demonstrated that family businesses adopt a variety of organisational
structures that affect their strategic behaviours. Consequently, governance structure is regarded
as a primary source of family firm heterogeneity (Daspit, Chrisman, et al., 2018). For example,
De Massis, Kotlar, Chua, and Chrisman (2014) argued that family involvement in ownership,
board and management would only lead to family-oriented behaviour when the involved family
has both the ability and willingness to pursue family-oriented particularistic goals. The ability
(discretion to act) and willingness (disposition to act) of families involved within the family
firm vary in type and amount among different family businesses. Therefore, it is reasoned to be
a source of heterogeneity (Chrisman, Chua, De Massis, Frattini, & Wright, 2015). Rau,
Schneider-Siebke, and Günther (2019) suggested that the underlying value structures of family
firms are causing heterogeneity among family businesses, and these family firm values can be
found in governance structures. These authors, among others, contributed to the family business
literature by showing how differences in governance arise from the family’s involvement in ownership and management and can result in a variety of outcomes (Chua et al., 2012).
Heterogeneity among family firm governance structures might explain why some family firms successfully cross the border while others remain focussed on serving their local market (Majocchi, D’Angelo, Forlani, & Buck, 2018). Notwithstanding this observation, family business heterogeneity has yet played a minor role in the study of family firm internationalisation (Arregle, Hitt, & Mari, 2019; Debicki, Miao, & Qian, 2020).
However, quite recently, Kano & Verbeke (2018) proposed that bifurcation bias may help explain the diverging internationalisation levels among family firms. Herein, the authors built upon Gedajlovic and Carney's (2010) and Verbeke & Kano's (2010, 2012) application of Transaction Cost Economics (TCE) theory to the family firm. Bifurcation bias refers to a dysfunctional bias caused by the asymmetrical treatment of family-based assets and nonfamily- based resources (Verbeke & Kano, 2012). This bias results in an automatic assumption of family members being more desirable than nonfamily employees, despite their actual level of skills and commitment (Arregle, Duran, Hitt, & van Essen, 2017). Therefore, bifurcation bias embodies a governance-related obstacle to efficient family firm internationalisation (Kano &
Verbeke, 2018). Verbeke and Kano (2012) emphasise that the degree of bifurcation bias varies among family firms; most family businesses find themselves at some point on a continuum from biased to bias-free. The level of bifurcation bias is likely to depend, among other things, on the institutional and cultural context (Verbeke, Yuan, & Kano, 2019) and the presence or absence of effective safeguards against bifurcation bias within the family firm (Majocchi et al., 2018). Consequently, bifurcation bias is suggested as a vital source of heterogeneity among family businesses and is likely to partly explain family firm's diverging internationalisation paths (Kano & Verbeke, 2018; Verbeke & Kano, 2012).
Bifurcation bias as a source of heterogeneity, especially regarding family firm internationalisation, is a relatively new construct. At present, only little research exist to illustrate the impact of bifurcation bias on disparities in internationalisation among family firms (Verbeke et al., 2019). Hence, more research is needed to hone and refine this concept (Kano
& Verbeke, 2018). Investigating how this bias influences family firm internationalisation seems necessary, as it is yet unclear how internationalisation in family businesses is initiated and developed (Almodóvar, Verbeke, & Rodríguez-Ruiz, 2016).
As noted by Verbeke and Kano (2012), the extent and impact of bifurcation bias will be
significantly affected by national culture. National culture is embedded in the values, beliefs
and behaviours of a country’s residents (Hofstede, 2001). Consequently, national culture might
partly explain why some families place great emphasis on family-based assets within the family firm, whereas others value a more equal treatment of family-based assets and nonfamily-based resources (Samara, Jamali, & Parada, 2019). However, to my understanding, no empirical research exists that investigates the effect of national culture on the relationship between bifurcation bias and family firm internationalisation. As a matter of fact, studies addressing other sources of family firm heterogeneity seem to overlook largely the role of cultural contexts as well (e.g., Daspit et al., 2018; Rau et al., 2019; Schmid, Ampenberger, Kaserer, & Achleitner, 2015).
The ignorance of national culture within family firm research is worrying, as there is a vast amount of research stressing the fundamental influence of national culture on a company’s internationalisation strategy (e.g. Kessapidou & Varsakelis, 2002; López-Duarte, Vidal-Suárez,
& González-Díaz, 2016). Subsequently, the neglecting of national culture in current family business research might contribute to the gap in our understanding regarding the nature of the relationship between family firm heterogeneity and internationalisation (Eddleston, Jaskiewicz,
& Wright, 2019; Verbeke et al., 2019). Since expanding into foreign markets is becoming increasingly important for firms to survive, and still a large part of all business entities is family- owned, it is vital to explore the aforementioned relationship (Claver et al., 2018; Fang, Kotlar, Memili, Chrisman, & De Massis, 2018). It seems a promising approach to investigate bifurcation bias as a source of heterogeneity further, as well as to analyse the moderating effect of national culture on the relationship between this bias and family firm internationalisation.
Hence, this paper addresses the following research question: “how does national culture moderate the relationship between family firm heterogeneity and the degree of internationalisation within family firms?”
This work can be positioned within the recent focus on heterogeneity among family firm
internationalisation research. Building upon the work of Verbeke and Kano (2018) and
Majocchi et al. (2018), I propose that the degree of bifurcation bias could be reflected in family
firms through the level of family ownership, family involvement on the board of directors and
family membership of the Chief Executive Officer (CEO). The presence of nonfamily
shareholders, directors or CEO could indicate that internationalisation decisions are entrusted
to the most skilled professionals, regardless heritage. Consequently, professionalising the
family firm by attracting these nonfamily members may prevent family-based assets from
becoming liabilities when crossing the border (Kano & Verbeke, 2018). Accordingly, the
presence of nonfamily shareholders, directors or CEO might signify family firms that actively
safeguard against bifurcation bias within the internationalisation context (Kano, Ciravegna, &
Rattalino, 2020).
Thus, I expect that a higher degree of family involvement in ownership or management, as a reflection of bifurcation bias, may lead to a lower degree of internationalisation. The notion that family involvement in ownership and management is a primary source of heterogeneity affecting the goals, resources, and performance of a family firm is not new (Daspit, Chrisman, et al., 2018). However, by addressing bifurcation bias, I aim to provide a more refined picture of family involvement as a source of heterogeneity affecting family firm internationalisation.
This paper further elaborates on how cultural-specific factors might influence the relationship between family firm heterogeneity and the degree of internationalisation. Although it comes with some caveats, dimensions from Hofstede’s national cultural framework will be considered to operationalise national culture. Country-scores from Hofstede’s national cultural framework on collectivism, uncertainty avoidance and long-term orientation will be used to test the moderating effect of national culture on the relationship between family firm heterogeneity and their degree of internationalisation among the world’s 500 largest family firms.
The contributions of this empirical research are twofold. First, this study adds to the field of research addressing family firm heterogeneity in relationship to internationalisation. In doing so, this research answers the family business scholars’ call for exploring the effect of family firm heterogeneity on internationalisation (Verbeke et al., 2019). By considering bifurcation bias as a source of heterogeneity, this study contributes to the small amount of research on TCE relating family firm heterogeneity to internationalisation (Kano & Verbeke, 2018). Second, by considering national culture as moderator, this cross-country study both tries to close the gap in current studies regarding the absence of moderating factors and the neglecting of culture-specific factors (Debicki et al., 2020; Kano & Verbeke, 2018; Scholes, Mustafa, & Chen, 2016; Wąsowska, 2017). Further, this study underwrites to family business practice by identifying cultural-specific factors relevant to family business owners and managers to internationalise. Understanding this relationship might help family firm owners and managers to cross the border successfully.
The remainder of this paper is structured as follows. Section 2 includes the theoretical framework. From there, several hypotheses will be formulated from which a conceptual model is derived. In section 3, the research objective, data collection, measurement, are described.
The main results are analysed and discussed in section 4. After, several implications to theory
and practice, as well as limitations and directions to future research are presented.
2. THEORETICAL FRAMEWORK AND HYPOTHESES DEVELOPMENT
2.1 Bifurcation Bias as Source of Family Firm Heterogeneity
Gedajlovic and Carney (2010) and Verbeke and Kano (2010) proposed that the tension between the predominant theories and frameworks of family firm research (i.e., agency, stewardship theory) could be reconciled by reference to TCE. Building upon the work of Gedajlovic and Carney (2010), Verbeke and Kano (2010) suggested that family firms fundamentally differ from nonfamily businesses, although recognising heterogeneity among family firms, due to the presence of family-based human asset specificity. This refers to the unique access of family firms to a stable and loyal human resource base, namely, family members (Verbeke & Kano, 2010). Family members are usually involved, and socialised, within the business long before employment. Part of their value to the family firm is derived from this long-term socialisation process, which facilitates the transfer of family firm-specific knowledge, shared values and social capital (Chua et al., 2012). “Outsiders” did not enjoy a long-term socialisation process and therefore do not possess this idiosyncratic knowledge (Kano et al., 2020). Consequently, family-based human asset specificity might lead to both high exit barriers to eliminate unproductive family members and high entry barriers to acquiring potentially more productive nonfamily employees (Verbeke & Kano, 2012). Besides, both the quantity and qualities of this unique employee base is suboptimal in comparison with the total supply on the labour market (Gedajlovic & Carney, 2010; Verbeke & Kano, 2010).
To overcome the problems associated with family-based human asset specificity, professionalisation is suggested as only viable option (Chua et al., 2012). Professionalisation can enable family firms to recombine pre-existing family resources with complementary resources resided outside the family (Kano et al., 2020). According to Verbeke and Kano (2012), professionalisation could be achieved by hiring external managers and delegate more authority to them. Other scholars suggested a less binary view of professionalisation, including professionalisation through establishing adequate governance structures such as boards, or by attracting external board members (Dekker, Lybaert, Steijvers, Depaire, & Mercken, 2013;
Dekker, Lybaert, Steijvers, & Depaire, 2015).
However, professionalisation is argued to lead to internal bounded reliability problems
within family firms (Verbeke & Kano, 2012). Bounded reliability refers to situations where
expressed (or reasonably expected) commitments to achieve a particular outcome do not always
result in this desired outcome, due to various factors. These factors include cases of failed
human commitments without intentional deceit (excluding technical incompetence), such as preference reversal associated with reprioritisation and scaling back on over-commitment (Verbeke & Greidanus, 2009). Professionalisation may create an explicit separation between family and nonfamily members within family businesses (Daspit, Madison, Barnett, & Long, 2018). This distinction potentially results in the unequal treatment of family and nonfamily members by the firm (Verbeke & Kano, 2012). Therefore, the combination of family-based asset specificity with bounded rationality and-reliability may create bifurcation bias in family businesses (Kotlar & Sieger, 2019). Bifurcation bias is defined by Verbeke and Kano (2012:
1189) as a dysfunctionality whereby “family employees are treated by default as highly valuable, firm-specific assets, being ‘on the inside for the long run’, and as loyal stewards with a long-term commitment to the firm, while nonfamily employees are dealt with as easily substitutable, commodity-like, short-term assets, and as self-serving agents who ultimately remain ‘outsiders’ even if used/internalized temporarily by the firm”. Bifurcation bias inhibits family firms to economise on bounded rationality and bounded reliability, thereby preventing an objective, systematic assessment of family-based versus nonfamily-based assets (Verbeke
& Kano, 2010, 2012). The degree and configurations of bifurcation bias present within a family firm varies among family businesses, thereby forming an essential source of heterogeneity (Chua et al., 2012).
Extant literature on bifurcation bias as a source of heterogeneity considers it to be a multidimensional construct (Majocchi et al., 2018). Some authors suggested the variance in monitoring of both family and nonfamily employees as a manifestation of bifurcation bias.
Hence, when family firms apply equal levels of monitoring among family and nonfamily employees, a strategic choice is made to treat employees evenly regardless of family status (Daspit, Chrisman, et al., 2018; Madison, Daspit, Turner, & Kellermanns, 2018). Others argued the desire to preserve socioemotional wealth, in the presence of family-centred noneconomic goals, could be an expression of bifurcation bias (Verbeke et al., 2019). Jennings, Dempsey and James (2018) contributed to the family firm literature by reviewing extant work on bifurcation bias, concluding bifurcation bias can manifest itself in personnel selection, compensation, performance appraisal, training and development and retention.
In sum, prior literature provides essential insights into the manifestations of bifurcation
bias as a source of heterogeneity among family businesses. Despite these significant insights,
accurate operationalisation and quantification of the degree of bifurcation bias within family
firms remain difficult (Kano & Verbeke, 2018). Majocchi et al. (2018) argued that the degree
of bifurcation bias is likely to depend to some extent on the economising strategies adopted by
family firms to reduce this dysfunctionality. The authors proposed that attracting external capital, the recruitment of outside managers, a combination of these strategies or the accumulation of foreign experience of family member managers could reduce the level of bifurcation bias within a family firm. This suggestion is in line with Kano and Verbeke (2018).
They proposed that explicit merit-based hiring and promotion, offering training to family members, along with the establishment of formalised decision-making mechanisms and objective measures of international performance could be sufficient safeguards against bifurcation bias. Indeed, Verbeke et al. (2019) also highlighted the establishment of proper governance mechanisms as a strategy to economise on bifurcation bias.
Based on aforementioned studies, this research suggests that the presence of an external CEO, external capital, as well as, the presence of nonfamily members on the board of directors signify family firms that actively safeguard against bifurcation bias. Foreign work experience of family members is excluded since the positive effect of international experience on bifurcation bias only existents when external managers are absent within the firm (Majocchi et al., 2018). Therefore, it is plausible that international experience is already embodied in the presence of nonfamily managers (Calabrò, Torchia, Pukall, & Mussolino, 2013). The presence of nonfamily directors on the board is arguably an additional sign of family firms being less inhibited by bifurcation bias. According to Nordqvist et al. (2014), boards with nonfamily directors are more effective as a tool for monitoring and control than if there are only family members present on the board. Therefore, boards with nonfamily directors present might be more likely to monitor and control family and nonfamily managers to the same extent (Madison et al., 2018).
2.2 Bifurcation Bias in Family Firms and Internationalisation
Crossing the border provides firms with an opportunity for growth and value creation, but also includes high risks, costs and requires a strong commitment of recourses (Ray, Mondal, &
Ramachandran, 2018). While this applies to all firms, studying internationalisation is particularly intriguing regarding family firms. Internationalisation often poses additional challenges for family firms due to their unique characteristics (Tsang, 2018).
Internationalisation requires family businesses to objectively assess extant family-based
resources, upgrading extant resource bundles to transfer them successfully across borders and
recombine these enhanced resources with new ones in foreign environments (Kano & Verbeke,
2018). The presence of bifurcation bias inhibits objective assessment and efficient
recombination of these resources. Family decision-makers might overestimate the non-location boundedness of family-based resources and underestimate the potential of nonfamily resources (Verbeke et al., 2019). Consequently, bifurcation bias constrains an objective assessment of the value of existing resources in host markets and inhibit resource bundling if the family is unwilling to surrender some control necessary to attract complementary resources (Kano et al., 2020).
Further, the presumed location advantages of the foreign country preferred by specific family members may be overestimated. This could lead to location decisions based on private benefits to the family rather than economic value to the firm (D’Angelo, Majocchi, & Buck, 2016; Kano & Verbeke, 2018). Accordingly, the absence of professionalism coherent to the presence of bifurcation bias is argued to hinder family firms when trying to internationalise successfully (Almodóvar et al., 2016). Economising on bifurcation bias is therefore vital in the context of international expansion (Verbeke & Kano, 2012). Indeed, an economising mindset could set family businesses up for successful recombination of resources when crossing the border (Kano et al., 2020). Family firms who actively try to overcome bifurcation bias by employing secure professionalisation practices should be as effective in assessing internationalisation opportunities as nonfamily businesses. More important, these family firms should be more effective than family firms with weak professionalisation practices (Eddleston, Sarathy, & Banalieva, 2019). Consequently, the presence or absence of effective mechanisms to manage bifurcation bias could explain why some family firms succeed overseas, and others do not. As argued below, the presence of external capital, directors or a nonfamily CEO might signify family firms that have employed effective safeguards against bifurcation bias.
2.2.1 External ownership and internationalisation
The presence of bifurcation bias implies that the personal preferences of family members on key internationalisation decisions may be prioritised over efficiency-based evaluation of potential internationalisation strategies (Verbeke et al., 2019). Prioritising affect-based decisions over efficiency-based decisions is likely to negatively affect a firm’s strategic choices when crossing the border (Arregle et al., 2019). Additionally, family member shareholders are argued to inhibit structured, formalised decision-making processes, which increases the risk of such biased decision making (Kano & Verbeke, 2018).
By contrast, external shareholders have a direct interest in promoting strategies to
decrease the dysfunctional bias within family firms (Majocchi et al., 2018). External
shareholders, while protecting their investments, encourages formalised decision-making
processes such that family firms are better able to economise on bifurcation bias (D’Angelo et al., 2016; Kano & Verbeke, 2018). For instance, nonfamily shareholders will require professional accounting and reporting systems to obtain adequate information on the financial performance of the business. This, in turn, limits the families ability to confiscate firm capital for personal benefits, by, for instance, increasing their salaries (Calabrò et al., 2013; Gedajlovic
& Carney, 2010).
As noted, bifurcation bias constraints effective internationalisation activities within family firms (Kano et al., 2020). Family businesses who attract external capital seem to employ professionalisation practices actively and should therefore be able to better monitor against bifurcation bias. Family firms without the presence of nonfamily shareholders are likely to exercise weaker professionalisation practices and experiencing problems rooted in bifurcation bias (Eddleston, Sarathy, et al., 2019).
Additionally, external shareholders provide access to supplementary financial resources and business contracts, which could increase the family firms’ legitimacy abroad (Lahiri, Mukherjee, & Peng, 2020). Consequently, opening the family firms’ governance to external parties is likely to positively influence the internationalisation strategy of the family business (Arregle, Naldi, Nordqvist, & Hitt, 2012).
Accordingly, family firms that choose to professionalise by attracting external shareholders might be more effective in making internationalisation decisions. Family firms that remain for a large part family-owned, in turn, might be more inhibited by bifurcation bias which prevents them from making rational internationalisation decisions. Therefore, I hypothesise the following:
Hypothesis 1a. Family firms with a higher percentage of shares held by external shareholders will have a higher degree of internationalisation, compared to family firms with a low percentage of shares held by an external shareholder.
2.2.2 External CEO and internationalisation
The role of nonfamily managers is much discussed in family firm research (i.e., D’Angelo et al., 2016; Wąsowska, 2017). Concerning bifurcation bias, nonfamily managers within the family business might safeguard against this bias since external managers are less affected by bounded rationality and bounded reliability in their decision making (Chrisman, Memili, &
Misra, 2013; Majocchi et al., 2018).
Regarding internationalisation, nonfamily managers may reduce the priority given by
family firms to firm-specific assets by implementing monitoring measures to mitigate
dysfunctional bifurcation bias (Majocchi et al., 2018). Complementary, external managers help professionalising family firms by increasing the diversity of perspectives, experience and talent within the firm. Combining these diverse perspectives with the critical insights of family members could improve the strategic decision-making quality within family firms (Madison et al., 2018). This is beneficial for family businesses when crossing the border (Kano et al., 2020).
Consequently, the presence of nonfamily managers is expected to have a positive effect on the cross border activities of family businesses (D’Angelo et al., 2016).
Besides these arguments that have been deployed in prior research, the bifurcation bias perspective provides an additional compelling explanation of why specifically the presence of an external CEO may influence the family firms’ ability to internationalise successfully. The CEO has an exceedingly strong impact on the strategic decisions made by the firm, including decisions to internationalise (Calabrò et al., 2013). Therefore, the transition from family to nonfamily CEO represents a significant decision within family firms. As stated by Chang &
Shim (2015), the best nonfamily CEO selected from the entire population should be more skilled and experienced than even the most talented member of the founding family. Hence, the presence of a nonfamily CEO may represent a family firm capable of cherishing the skills and unique contribution of nonfamily members within the family firm. This ability is regarded as a sign that the family firm effectively economises on bifurcation bias (Verbeke & Kano, 2012).
In turn, limited presence of bifurcation bias enables family businesses to organise ongoing transfer and recombination of existing firm-specific resources with new resources needed for successful international expansion (Kano et al., 2020). Otherwise, the presence of a family CEO arguably embodies a family firm who values specific family firm human assets over economic goals when developing internationalisation strategies (Kano & Verbeke, 2018). Additionally, the external CEO brings supplementary skills and experience needed for making effective internationalisation decisions (Chang & Shim, 2015).
Hence, the degree of internationalisation might be higher when the family firm hires a nonfamily CEO. More formally:
Hypothesis 1b. Family firms who hire an external CEO will have a higher degree of internationalisation, compared to family firms who have a family member CEO.
2.2.3 External directors and internationalisation
Majocchi et al. (2018) argued that the joint presence of external shareholders and nonfamily
managers might be a signal that the family firm has overcome bifurcation bias. Thereby, they
seem to overlook the importance of board professionalisation in order to reduce bifurcation
bias. The board of directors monitors and advises top managers, such that their interests are aligned with that of shareholders (Mustakallio, Autio, & Zahra, 2002). In the presence of bounded rationality and reliability, biased family directors are expected to emphasise the preservation of family values and family-firm specific resources while advising top managers.
Further, in this situation, the board of directors is likely to distrust a nonfamily CEO and other nonfamily managers (Verbeke & Kano, 2012). Additionally, if family firms employ an external CEO, but remain a strong family legacy by holding severe influence on the board of directors, the CEO may feel constrained in executing strategic changes. The external CEO may maintain the status quo through strategic continuity and family traditions due to potential conflicts with stated family values and strategies (Chang & Shim, 2015).
Henceforth, the appointment of nonfamily directors on the board might indicate that the family firm is actively employing professionalisation strategies to economise on bifurcation bias. Nonfamily directors are argued to increase the effectiveness and formality of the board as a monitoring mechanism (Nordqvist et al., 2014). The increased effectiveness might be established because external directors on the board are more likely to objectively monitor and evaluate the value of both nonfamily and family managers (Verbeke & Kano, 2012). This could also lead to less distrust against external CEOs, resulting in CEOs feeling less constrained in executing strategic changes (Chang & Shim, 2015). Consequently, I expect that family firms with nonfamily directors on the board may establish boards that are more effective on monitoring and advising top managers. This increased effectiveness improves the board as a strategic resource, thereby creating a competitive advantage necessary for family businesses to internationalise successfully (Calabrò, Mussolino, & Huse, 2009).
Moreover, external directors may provide additional knowledge-based resources inherent to their network relationships outside the family realm (Sciascia, Mazzola, Astrachan,
& Pieper, 2013). This additional social capital brought by external directors is argued to be necessary to facilitate internationalisation (Evert, Sears, Martin, & Payne, 2018).
Consequently, I expect that when nonfamily members are involved in the board of directors, the degree of internationalisation of the family firm is higher. Accordingly, I hypothesise the following:
Hypothesis 1c. Family firms with a higher percentage of external directors on the board of
directors will have a higher degree of internationalisation, compared to family firms with a low
percentage of external board members.
2.3 National Culture, Bifurcation Bias and Internationalisation
Apart from the notion that not all family firms are exposed to the same extent of bifurcation bias, not all biased firms are equally destructively affected in terms of performance outcomes (Verbeke et al., 2019). Verbeke & Kano (2012) note that the extent and impact of bifurcation bias are likely to vary across societies and will be considerably influenced by cultural contexts.
This research argues that national culture moderates the relationship between bifurcation bias and the family firms’ degree of internationalisation. After all, managerial decision-making, as well as decisions made by the board of directors, are affected by the cultural context in which managers and directors operate (Steenkamp & Geyskens, 2012). Indeed, Verbeke et al. (2019) also proposed that national culture could act as safeguarding tool to correct for the adverse effects of biased decision-making within family firms.
National culture is defined as “the collective programming of the mind distinguishing the members of one group or category of people from others”(Hofstede, 2001: 1). Various conceptualisations and dimensions of national culture have been proposed, and empirically supported over time (Hofstede, 2001; House, 2004; Inglehart & Baker, 2000; Schwartz, 1992).
Hofstede has been critiqued for using data of questionable quality, using single company data,
misinterpreting the meaning of dimensions and presuming a too stable notion of national culture
(Beugelsdijk & Welzel, 2018). While recognising these critiques, this paper considers three
dimensions of Hofstede’s national cultural framework: Individualism vs Collectivism
(hereafter collectivism), Uncertainty Avoidance and Long-Term Orientation. This choice has
been made based on research conducted by Beugelsdijk, Maseland, and van Hoorn (2015), who
replicated Hofstede’s dimensions of national culture and concluded cross-country differences
do not consistently decrease over time. Thereby, the validity and reliability of the assumptions
underlying the use of Hofstede’s dimension scores are empirically confirmed. The dimension
long-term orientation was excluded within the research, but the importance of this dimension
is stressed in other research (i.e., Bearden, Money, & Nevins, 2006; Venaik, Zhu, & Brewer,
2013). Further, Beugelsdijk et al. (2015) were not able to provide a significant replication of
the Masculinity vs Femininity dimension. Besides, a literature review conducted by Kirkman,
Lowe, & Gibson (2006) found that scant evidence involving Masculinity vs Femininity exists
in decision-making studies. Hence, Masculinity vs Femininity is not investigated in the present
study. Since the dimensions Power Distance and collectivism are highly correlated, the choice
has been made to exclude the Power Distance dimension as well ( Steenkamp & Geyskens,
2012).
Moreover, the dimensions collectivism, uncertainty avoidance and long-term orientation are directly relevant for understanding the moderating role of national culture in the relationship between bifurcation bias and the degree of internationalisation. The degree of collectivism present in a culture is linked with the consequences of integrating nonfamily members in family groups (Samara, Jamali, & Parada, 2019). It could be a stout predictor of the preference family members give to non-location bounded family-based resources over the potential of nonfamily resources. Additionally, considering the critical role assumed by uncertainty in TCE, the cultural value of uncertainty avoidance is especially relevant in this respect (Steenkamp & Geyskens, 2012). Further, family firms hindered by bifurcation bias are known to see family members as long-term assets, whereas external managers and employees are seen as easily substitutable, short-term resources (Verbeke & Kano, 2012). As argued below, the degree of long-term orientation present in cultures might partly explain the priority given by these family firms to long-term family member assets.
2.3.1 Collectivism, bifurcation bias and internationalisation
The collectivism dimension refers to the degree to which people in a society are integrated into groups (Hofstede, 2001). Loose ties between individuals characterise individualistic cultures;
everyone is expected to look after him- or herself. Contrary, collectivism reflects cultures where people are integrated into strong, cohesive ingroups and experience unquestionable loyalty to the members of this group (Hofstede, 2011). This cultural dimension affects an individual’s cognitive, affective, and behavioural orientation toward others. For instance, as compared to individualistic cultures, people embedded in collectivistic societies tend to assume greater trust of benevolence from their ingroups (Chen, Peng, & Saparito, 2002). Further, collectivistic cultures tend to be more embedded in their families and are more likely to assign stereotypical characteristics for individuals based on their family membership (Samara, Jamali, & Parada, 2019).
Extant research shows that family firms embedded within collectivistic cultures
consider family members as part of the firms’ ingroup (Chakrabarty, 2009). On the contrary,
people that do not have a prior relationship with the family are regarded as part of the outgroup
(Samara & Berbegal-Mirabent, 2018). From a bifurcation bias approach, this notion has several
implications. Family firm employees embedded in collectivistic societies are more likely to
view the unequal treatment of family and nonfamily members as fairly congruent with general
societal practices (Verbeke et al., 2019). Further, the desire to accumulate and preserve family-
based resources might be more intense in family firms based in collective cultures compared to
individualistic societies (Kellermanns, 2005). Hence, collectivism might stimulate the occurrence of bifurcation bias within family firms. Contrary, individualism may discourage bifurcation bias since family members are more focused on individual excellence instead of loyalty to the family (Sharma & Manikutty, 2005). Indeed, Verbeke et al. (2019) proposed similarly that family members and nonfamily employees within embeddedness-centred cultures are more likely to view bifurcation bias as acceptable, thereby increasing the likelihood of bifurcation bias. The authors further stated that because bifurcation bias is less seen as dysfunctionality within such cultures, the adverse effects of this bias is limited. Therefore, they indirectly suggest economising on bifurcation bias could be less necessarily within collectivistic cultures. Here, in the context of internationalisation, I tend to disagree with the authors.
Successful internationalisation requires objective recombination of family-firm specific advantages with new resources in host environments. Bifurcation bias a priori inhibits such recombination (Kano & Verbeke, 2018). Further, the prevalence of noneconomic goals within family firms makes some level of bifurcation bias inevitable (Verbeke & Kano, 2012).
Therefore, the negative relationship between bifurcation bias and internationalisation should be present in both collectivistic and individualistic cultures. However, assessing the degree of bifurcation bias within family firms by the presence of above-mentioned nonfamily members might not be equally effective across family firms embedded in collectivistic and individualistic countries. Personal values of decision-makers, influenced by the prevailing national culture, affect the strategic decisions made by a family firm (Sharma & Manikutty, 2005). Hence, fundamental differences across national cultures might explain why the effect of nonfamily involvement on internationalisation varies in family firms from different regions worldwide (Piva, Rossi-Lamastra, & De Massis, 2013).
External shareholders are expected to encourage rational decision-making within the family firm (Kano & Verbeke, 2018). However, in strong collectivistic cultures, the role of rationality is often abbreviated and enacting divisive goals and practices are discouraged (Gupta &
Kirwan, 2013). Additionally, collectivistic family firms emphasise the maintenance of trust and
harmony within the family and among other networked groups. Trust is established sooner if
there already exists a social, interpersonal relationship with the (potential) external shareholder
(Yan & Sorenson, 2006). Consequently, if family firms embedded in a collectivistic society
attract external capital, it is likely that these nonfamily shareholders still have close ties to the
family (Lv & Li, 2015). Therefore, nonfamily shareholders attracted to family firms embedded
in collectivistic cultures might be more likely to understand and tolerate the emphasis placed on family firm-specific resources. This suggestion is in line with Yan and Sorenson (2006).
They proposed that nonfamily members within strongly Confucian influenced family firms are expected to understand and tolerate particularistic treatment of family resources. Hence, I hypothesise that external shareholders within family firms embedded in collectivistic societies are less likely to objectively assess and recombine existing family firm-specific resources with host country resources in foreign locations, compared to nonfamily shareholders within family firms embedded within individualistic societies.
Hypothesis 2a. The positive effect of external shareholders on the degree of internationalisation within family firms will be weaker in collectivistic countries, compared to individualistic countries.
Astrachan, Keyt, Lane, and Yarmolouk (2002) state that the role of nonfamily executives is to assist in bringing professionalism to the family firm by not participating in family altercations.
The authors further emphasise that the ability of the nonfamily CEO to professionalise the family firm is dependant of the contextual surrounding of the family business. Additionally, Madison et al. (2018) highlight the importance of nonfamily executives to increase the diversity of perspectives while professionalising the family firm. Applying the same logic as above, if family firms embedded in a collectivistic society hire a nonfamily CEO, it is likely that this executive still has close ties to the family (Yan & Sorenson, 2006). The potential of an external CEO to professionalise the family firm might be weakened by the close ties between the CEO and the family (Li et al., 2015). Further, nonfamily CEO’s may find it harder to promote strategies to reduce inequalities between family members and nonfamily members when the firm is embedded in a collectivistic society as the emphasis within the family firm is laid on preferring the ingroup family members (Li, Lam, & Fu, 2000). Hence, an external CEO within a family firm embedded in a collectivistic society might be less able to recombine family firm- specific resources with external resources rationally. More formally:
Hypothesis 2b. The positive effect of the presence of an external CEO on the degree of internationalisation within family firms will be weaker in collectivistic countries, compared to individualistic countries.
The effect of nonfamily directors on internationalisation might differ across collectivistic and
individualistic cultures. Samara and Berbegal-Mirabent (2018) argued that within collectivistic
cultures, emphasis is placed on family dynamics. The authors suggested that independent
directors may lack the understanding of these family dynamics, which is crucial for family business performance. Supplementary, Sharma & Manikutty (2005) proposed that irrespective of shareholdings, major decisions within family firms embedded in collectivistic cultures are expected to be established through consensus among family members. Contrary, decision- making within family firms embedded in individualistic societies is likely to be formed through formal mechanisms such as voting in a board meeting. A more active board of directors, as in individualistic cultures, is expected to increase the effectiveness of the board in providing resources (Corbetta & Salvato, 2004).
Hence, I argue that the presence of external directors better signifies family firms that safeguard against bifurcation bias if the family firm is embedded within an individualistic country, as compared to collectivistic countries. Consequently, the positive effect of external directors in internationalisation may be weaker when the family firm is resided in a collectivistic culture.
Hypothesis 2c. The positive effect of external directors on the degree of internalisation within family firms will be weaker in collectivistic countries compared to individualistic countries.
2.3.2 Uncertainty avoidance, bifurcation bias and internationalisation
The uncertainty avoidance (from strong to weak) dimension indicates to what extent country residents feel either uncomfortable or comfortable in unstructured situations. Strong uncertainty avoidance cultures try to minimise the occurrence of such unknown situations by implementing strict behavioural codes, laws and rules (Hofstede, 2011). Organisations within such cultures are likely to use formal rules and standardised processes to control the rights and duties of employees. Contrary, firms embedded in countries with more tolerance for ambiguity exhibit a stronger willingness to take risks and prefer fewer rules (Dimitratos, Petrou, Plakoyiannaki, &
Johnson, 2011).
The extent to which a family firm is exposed to bifurcation bias might be influenced by the level of uncertainty avoidance within the society the business is embedded. On the one hand, firms within strong uncertainty avoidance cultures are shown to emphasise uniformity and consistency in rules (Nurim, Anggraini, & Supriyadi, 2019). Therefore, family firms resided in such cultures might be less affected by bounded reliability problems. Bounded reliably is argued to be less present when the family firm develops clear guidelines, implements contractual safeguards and establishes organisational routines (Verbeke & Greidanus, 2009).
Family firms embedded in strong uncertainty avoidance cultures are likely more inclined to
implement these regulations and routines. Consequently, strong uncertainty avoidant family
firms might be more likely to implement formal monitoring practices and monitor family and nonfamily employees to the same extent (Verbeke & Kano, 2012).
Other sides, however, a lower tolerance for ambiguity encourages family firms to maintain control within the family (Basuki, Nurim, & Anggraini, 2014). Problems associated with bounded rationality might be emphasised when the family firm is embedded in a strong uncertainty avoidance culture. Namely, family firms affected by bounded rationality are likely to place greater emphasis on family firm-specific resources as compared to external resources (Verbeke & Kano, 2012).
Hence, an apparent effect of the level of uncertainty avoidance on the bifurcation bias present within a family firm could not be theorised here. However, as stated by Verbeke and Kano (2012), all family firms are at least to some degree negatively affected by the bifurcation bias. Economising on bifurcation bias is necessary for family firms embedded in both strong and weak uncertainty avoidance cultures. However, assessing the degree of bifurcation bias within family firms by the presence of above-mentioned nonfamily members might not be equally effective across family firms resided in countries with varying levels of uncertainty avoidance. Namely, uncertainty avoidance is likely to impact corporate governance and corporate decision making (Antonczyk & Salzmann, 2014; Handley & Angst, 2015). Further, the risk-taking behaviour of family firms is argued to partly depend on the degree of uncertainty avoidance in the respective culture (Kempers, Leitterstorf, & Kammerlander, 2019).
External shareholders are argued to encourage formalised decision-making processes and internal policies to decrease the degree of bifurcation bias within the family firm (Majocchi et al., 2018). These activities are employed in order to protect their investments (D’Angelo et al., 2016). However, external shareholders embedded in a strong uncertainty avoidance culture view uncertainty as a continuous threat that must be fought (Hofstede, 2011). Therefore, nonfamily shareholders with lower tolerance for ambiguity might be less likely to promote risky decision-making strategies since this is regarded as jeopardy for their investments.
Additionally, as stated above, family firms resided in strong uncertainty avoidance countries
are already more likely to implement clear guidelines and formal decision-making processes
(Nurim et al., 2019; Verbeke & Greidanus, 2009). Consequently, the employment of external
shareholders to strong uncertainty avoidance family firms could be seen as an unnecessary risky
decision by family members within the business. Hence, I hypothesise the following:
Hypothesis 3a. The positive effect of external shareholders on the degree of internationalisation within family firms will be weaker in strong uncertainty avoidance countries, compared to weak uncertainty avoidance countries.
Internationalisation requires firm CEOs to make risky decisions in highly uncertain, unstructured situations (Ray et al., 2018). Although Hofstede (2001) stated uncertainty avoidance does not equal risk avoidance, individuals in strong uncertainty avoidance societies tend to be more sceptical about the potential rewards of risky decision-making (Antonczyk &
Salzmann, 2014). Hence, the positive effect of hiring an external CEO on the family firms’
internationalisation might be weaker when the tendency to avoid uncertainty is high.
Furthermore, strong uncertainty avoidance is associated with intolerance of deviant ideas and strict behavioural codes (Hofstede, 2011). Consequently, an external CEO within a strong uncertainty avoidant family firm might be less inclined to decrease the degree of bifurcation bias within the firm. Economising on bifurcation bias entails changing current managerial practices (Verbeke & Kano, 2012). This might conflict with the persuasion within strong uncertainty avoidance societies that change is dangerous (Hofstede, 2011). Therefore, I hypothesise the following:
Hypothesis 3b. The positive effect of an external CEO on the degree of internationalisation within family firms will be weaker in strong uncertainty avoidance countries, compared to weak uncertainty avoidance countries.
External directors are argued to be more likely to objectively monitor and evaluate the value of both nonfamily and family managers (Verbeke & Kano, 2012). However, family firms embedded within strong uncertainty avoidance cultures already emphasise uniformity and consistency in rules (Nurim et al., 2019). The difference in monitoring between family directors and external directors might be less clear within strong uncertainty avoidance cultures compared to other societies. In line with earlier arguments, employees and managers within family firms embedded in a strong uncertainty avoidance society might regard nonfamily directors as unnecessary uncertainty that must be fought (Hofstede, 2011). In this case, external directors will less reflect lower levels of bifurcation bias within the family firm. More formally:
Hypothesis 3c. The positive effect of external directors on the degree of internationalisation
within family firms will be weaker in strong uncertainty avoidance countries, compared to weak
uncertainty avoidance countries.
2.3.3 Long-term orientation, bifurcation bias and internationalisation
Long-term oriented societies tend to be more future-oriented and are characterised by steady perseverance and thrift. Contrary, short-term oriented countries tend to emphasise the past and present, valuing respect for tradition and social obligations (Hofstede, 2011). This cultural dimension is likely to influence the degree and effect of bifurcation bias present within family firms (Verbeke & Kano, 2012).
Within family businesses resided in a long-term oriented society, family and nonfamily members alike are expected to be future-oriented (Hofstede, 2001). Therefore, arguably, they are both more expected to be ‘in it for the long run’. However, perhaps somewhat counterintuitive, this research argues this might not lead to a less damaging effect of bifurcation bias on performance outcomes within the family firm. The expression of being future-oriented could be different for family and nonfamily members within the business. Long-term orientation includes that decision-making is likely to be based on protecting the endurance of the firm (Debicki et al., 2020). When bifurcation bias is strong, long-term oriented family members are cognitively biased toward respecting family values when making important strategic decisions. They may view internationalisation activities as a risk to the family’s long- term wealth (Verbeke et al., 2019). Thus, the desire to control the family business for the long run might make family members overly cautious (Lumpkin, Brigham, & Moss, 2010).
Contrary, long-term oriented nonfamily members might be more focus on the firm’s long-term economic goals (Verbeke & Kano, 2012). Therefore, although both family- and nonfamily members within a long-term oriented country are expected to be future-oriented, bifurcation bias might still inhibit effective internationalisation of family firms embedded in such societies (Kano & Verbeke, 2018).
Dou, Su and Wang (2019) theorised that long-term orientation facilitates the achievement of noneconomic family-specific goals when family members largely hold the firm’s shares. The presence of long-term oriented external shareholders arguably leads to a greater emphasis on long-term economic goals. On the contrary, short-term oriented external shareholders are likely to think only for oneself and are more likely to remain focused on the present or past (Hofstede, 2011; Hofstede & Minkov, 2010). As internationalisation is a long-term, future-oriented process (Melin, 1992), I hypothesise the following:
Hypothesis 4a. The positive effect of external shareholders on the degree of internationalisation
within family firms will be stronger when the firm is embedded in long-term oriented countries,
compared to short-term oriented countries.
Extant research proposes that family firms embedded within long-term oriented societies will be less risk-taking due to their strong commitment to ensure sustainability and long-term survival (Arregle et al., 2012; Díez-Esteban, Farinha, & García-Gómez, 2019). Therefore, family CEOs might overly rely on family-based resources over host country resources in foreign locations when making strategic internationalisation decisions, since these well-known assets entail less risk. Future-oriented external CEOs, however, might see risky internationalisation decisions as a potential financial success that protects the long-term endurance of the firm (Debicki et al., 2020). I expect that the positive effect of an external CEO, as reflectance of the family firm’s ability to economise on bifurcation bias, on the degree of internationalisation will be stronger when the family firm is embedded in a long-term orientated society. Namely, being future-oriented makes nonfamily members more aligned with the firm’s long-term economic goals (Verbeke & Kano, 2012). More formally:
Hypothesis 4b. The positive effect of the presence of an external CEO on the degree of internationalisation within the family firm will be stronger when the firm is embedded in long- term oriented countries, compared to short-term oriented countries.
Extant research showed that nonfamily directors within family firms make the decision-making process of the CEO and managers less intuitive and more rational (García-Ramos, Díaz-Díaz,
& García-Olalla, 2017). Further, long-term oriented external directors might be more likely to advise the family firm to actively employ internationalisation strategies, compared to short- term oriented external directors. That is because external directors embedded within a long- term oriented society view internationalisation as a strategy to ensure long-term success for the firm and shareholders (Debicki et al., 2020). Contrary, short-term oriented nonfamily directors are less likely to advise the family firm to undertake risk-taking activities (Díez-Esteban et al., 2019). Hence, I hypothesise the following:
Hypothesis 4c. The positive effect of external directors on the degree of internationalisation
within the family firm will be stronger when the firm is embedded in long-term oriented
countries, compared to short-term oriented countries.
2.4 Conceptual Model
The expected hypothetical connections suggested in the preceding sections are for clearer understanding stressed in the model presented below. This conceptual model will create the basis for the empirical analysis conducted further in this research.
Figure 1: Conceptual model
3. METHODOLOGY
3.1 Sample and Data Collection
To test the above constructed hypotheses, data from the Global Family Business Index was used as main source. This Index is a global ranking of family-owned businesses by revenues and includes the world’s 500 largest family firms. It was drafted by EY
1in collaboration with
1 EY refers to the global organisation and may refer to one or more, of the member firms of Ernst & Young Global Limited (EY & University of St. Gallen, 2019).
