THESIS
The effects of local national culture on the composition of MNC subsidiary management teams
ABSTRACT
With borders becoming ever more diluted, products and personnel have been allowed to travel more freely around the world. This enables companies to spread their subsidiaries into vast amounts of different cultures. Even though the environments are becoming more complex, managers still need to be able to interpret this complexity and be able to make the right strategic decisons. By using upper echelon theory as a stepping stone the argument is made that for a manager to be effective, he needs to understand the environment that surrounds the organization that they manage. This paper implies that in order to understand and be effective in different cultural environments around the globe, different types of management teams are required. Therefore the culture that surrounds the subsidiary in question affects the choice of managers, and we end up with a research question of: To what extent does the local culture surrounding a subsidiary of an MNC, affect the managerial composition?. By utilizing Hofstedes cultural dimensions for establishing an understanding local culture, and creating moderating variables to explain the differences between the parent and local culture, we argue that each dimension has an effect on predicting the nationality and the likelihood of tenured managers to be sitting on the management board of the subsidiary. topmAlthough results were conflicting, valuable insights were extracted regarding possible confounding and moderating variables paving the way for a better understanding of the topic at hand.
H.K. Blankenstein s3275175 Words:12601
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Contents
Introduction ... 3
Literature review ... 4
Upper echelon theory and Management composition ... 4
Management composition variables ... 6
Hypothesis development ... 8
Cultural differences ... 8
Moderating variables ... 12
Methodology ... 20
Sample ... 20
Data collection and coding ... 20
Analysis ... 24
Discussion ... 28
Limitations ... 30
Conclusion ... 32
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Introduction
Even when considering the slowdown of the expatriate boom of 1990-2000, the question remains – what is the best way to choose the managers for a subsidiary? There are constant arguments for convergence on the institutional, cultural, and economic levels, and it is clear that the differences between different areas remain significant. The choice for MNC’s has always been between sending their own managers to control the subsidiaries in different countries, or to give power to the local managers. The variance in the outcome of these choices has the potential to be vast, as according to upper echelon (UE) theory the managers use their own cognitive values in order to interpret the surrounding culture when they make strategic choices (Hambrick & Mason, 1984). As a more practical example a local manager who knows the local culture will theoretically adapt the company more towards the local ways, which most likely have a proven track record in the area, but differentiate from the company strategy. On the other hand, a parent country national manager will be less adept at adapting, but will theoretically be more inclined to manage towards the way that the company has recommended. (e.g. Colakoglu & Caligiuri, 2008)
The basis of the UE theory portrays the notion that managers interpret the external environment through their cognition. As said by Hambrick & Mason (1984), “the decision maker is being exposed to ongoing stream of stimuli … outside the organization” (p.195) and their “[cognition] filter and distort the decision maker’s perception of what is going on and what can be done about it” (p.196). As arguably one of the main measures of the external environment today is culture, Hambrick & Mason’s (1984) idea can be adapted to present that managers are under influence of the surrounding cultural stimuli, and their ability to filter this information and utilize it greatly effects their ability to make the correct choices. In this area focus has been put on understanding the use of, for instance, multicultural teams in International Joint ventures to boost creativity (e.g. Ogzen et al, 2014), and the direct effect of culture on management team compositions remains without extensive research. Fulfilling this research gap would synthesize theoretical knowledge of this area and give researchers a better understanding of the linkages between cultural dimensions and manager choice, and on a real-world stage would provide business leaders a theory to explain how managerial positions should be filled in subsidiaries. To provide this information we will focus on the following research question.
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To tackle this research this paper will initially discuss the upper echelon theory and delve into the cultural dimensions to understand the differences between cultures. After this the aim will be to create a model with hypotheses to test. We also propose that there are moderating variables like the institutional and cultural distances between the HQ and the subsidiary. Finally, data collection and analysis will be carried out in order to answer the research question in the conclusion.
Literature review
Upper echelon theory and Management composition
A key question in business research is understanding why organizations make decisions, and how they can be more efficient and effective in their daily tasks. Clearly, managers are in a vital position to change the way that organizations behave, and the upper echelon theory is a very good basis to build from to create a further understanding (Hambrick & Mason, 1984). Theorized by Hambrick and Mason (1984), it went against the common views of the time where organizations were believed to run themselves essentially by basic laws of supply and demand (e.g. Hall, 1977; Hannan & Freeman 1977). Essentially, they were suggesting the characteristics of the managers of a company affect the decisions they make as they took in information external to the company, interpreted it, and then decided on a plan of action. They proposed that these decisions made could not be analysed as being detached from the individuals making them, which was the common view at the time. Hambrick & Mason (1984) agreed with the basis of the dominant coalition theory (Cyert & March, 1963), where strategies and the effectiveness of organizations are derived from the powerful actors in an organization, more specifically the top managers. This statement has significant empirical backing as companies could be seen emphasizing manager experience and historical background (Hambrick & Mason, 1984). Though this trend was visible, prior to Hambrick & Mason (1984), no comprehensive tests had been run. This was probably due to the reasoning that to fully understand this kind of issue, a multidisciplinary approach was needed which was unheard of in the time of the research, which also lead to Hambrick & Mason (1984) utilizing indicators to predict underlying psychological standings of managers.
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managers. It is these psychological measures in turn that comprise the cognition of the managers, which are then used to make decisions. Figure 1 represents the outcome of Hambrick and Masons (1984) theory. Organizations are in an objective situation, which represents the internal and external factors that are the basis for the strategic choices that the top management team needs to make. These then are interpreted through the characteristics of the top management team; the cognitive values of the individuals, and their basic characteristics of age, education, socioeconomic roots and so on. These are utilized to interpret the objective situation, make strategic choices and the outcome is the performance of the organization (Hambrick & Mason, 1984).
Figure 1: The original Upper Echelon theory (Hambrick and Mason, 1984)
This model has been cited multiple hundred times for a plethora of reasons. Effectively this area of study has grown significantly as organizations seem to have taken to the understanding that executive teams are very powerful in terms of interpreting the environment and affecting organizational outcomes (Hambrick, Finkelstein, & Mooney, 2005). Many authors have linked top management teams to organizational performance (e.g., D’Aveni & Kesner, 1993; Haleblian & Finkelstein, 1993), which has been applicable in many contexts around the world (e.g., Hoffman & Hegarty, 1993; Wiersema & Bird, 1993). There have been a few counterarguments in the manner of for instance age not being a valid characteristic in terms of affecting organizational outcomes (e.g., Smith et al., 1994). Overall the model by Hambrick & Mason (1984) has a significant backing and has proven validity in this field of research, therefore it serves as a good initial point to build on for this research.
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turn of the century, the amount of multinational companies has grown. With individual companies having subsidiaries spread around a vast amount of countries, decision making power of the managers of these subsidiaries is also increasing (eg. Ferner et al., 2004). Thus, their carry more weight in decisions made in that market. Empirical evidence supports the basic assumption that due to differences in the objective situation that managers must adapt to, the individuals on the boards of organizations also differ. Hoffmann & Hegarty (1993) for instance found that there is a significant difference between the executive types among the major four western cultures. Wieresma & Bird (1993) have comparable results linking management composition to culture as their findings of Japanese companies with heterogenous management, were associated with better performance than US based organizations. Geletkanycz (1997) compared tenure to the commitment of the organization to keep status quo whilst accounting for national culture, and found that Hofstede’s (1983) cultural dimensions could be utilized to predict this link.
With the establishment of the UE theory, and the indication by authors like Geletkanycz (1997) that Hofstede’s dimensions may be used to predict management composition, the proposition is made that individual dimensions have specific effects on said composition. This has theoretical backing as for instance, Keck (1997) found that organizations prefer short term management for unstable markets, and long-term management for stable markets. Some authors have found when analysing single industries that organizations picks for management positions during uncertain times is moderated by demographics of the chosen managers (Finkelstein & Hambrick, 1990; Haleblian & Finkelstein, 1993). Even more specifically Carpenter & Fredrickson (2001) found that uncertainty in the surrounding environment is essential to the utilization of the UE theory. The backing for the utilization of cultural dimensions as predictors of management team compositions has significant theoretical backing, thus the dimensions (Hofstede, 1984) can be utilized in a later part of this paper for the creation of hypotheses.
Management composition variables
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smaller fields of research have gone into gender diversity (e.g. Rao & Tilt, 2015), Average education of the management (Bantel & Jackson, 1989), and team size (Bantel & Jackson, 1989). As previously discussed also cultural effects have been a major field of research when it comes to management composition. It is often linked through management composition directly to firm performance (e.g. Richard et al., 2004).
Nationality
Difference among nationalities between members in several types of teams has been mainly covered with the emphasis of locating the link between the composition and the performance of the team (e.g. Fiedler, 1966; Stahl et al., 2009; Gibson & Gibbs, 2006). This research will look at the antecedents to subsidiary management team composition, and use the nationality of the members of the team as one of the indicators of team composition. The national component of the team members is there to represent their connection to the local culture, which will be presented by the cultural dimensions (Hofstede, 1984). The main proposition behind the necessity of analysing the nationality of the managers is three-fold. Firstly, Hambrick & Mason (1984) talk about the necessity of understanding the external environment (culture) to be able to make informed decisions. Secondly, managers especially from the country where the HQ of the MNC is located, can be seen as a form of control; by sending individuals from the HQ as expatriates to the subsidiary they are able to ensure that the subsidiary has shares the same values and goals as the MNC (e.g. Fenwick et al, 1999), instead of allowing local managers to adapt to the environment.
Tenure
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strong empirical evidence that cultural differences may affect the distribution of tenured managers in subsidiaries of MNC’s, and tenure is also mentioned in the original UE theory proposed by Hambrick and Mason (1984) making it further applicable for this research.
Hypothesis development
Cultural differences
Virtually since its inception, Hofstede’s (1984) research has been the fall-back theory for research regarding cultural differences. With a basis of 117,000 responses from an American MNC, expanding through 40 countries, it was the largest study of its kind. Since becoming the major theory in the discipline, and has received a lot of criticism for instance with the dimensions being bi-lateral (being too simple to capture complexity of culture) and that the study was based on a western based organization, which other studies have since addressed in their own ways (e.g. Schwartz, 1992; Trompenaars, 1997). With that said Hofstede has pushed forward with his theory expanding it to 6 dimensions and having a publicly accessible database of his research1.
Out of the original four dimensions, three will be utilized: Individualism vs Collectivism, Power distance and Uncertainty avoidance. The reasoning to leave out Masculinity vs Femininity is due to it having less theoretical and empirical backing of its relation to the dependent variables researched. The only backed up research regarding the masculinity dimension and the dependent variable of tenure was in relation to the gender of the managers, which falls outside the scope of this research. This limited use of the dimensions of culture is not uncommon. A plethora of authors have discussed this area of research as is portrayed in the table below, and do not discuss fields that are as extensive as Hofstede’s initial 4, not to mention the 2 more he has added in the past years to bring the dimensions up to 6 that stand today. For instance, another major author in the field of cultural differences in Schwartz (1992), has a similar view to 3 of the 4 of Hofstede’s dimensions (1984) (table 1). In reference to this paper utilizing the 3 dimensions chosen above should create a valid view of the cultures in question in order to analyse whether national culture effects the composition of management teams of subsidiaries.
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Table 1 presenting Hofstede’s dimensions compared to other well-known cultural theorists
Hofstede (1984) Masculinity/ Femininity Individualism/ Collectivism
Power Distance Uncertainty Avoidance Other Inkeles and Levinson (1969) Conceptions of self Relation to authority Relation to risk Trompenaars (1997) Neutral/ Emotional Universalism/ particularism Individualism/ Communitarism Attitudes to self Specific/ Diffuse Achievements/ ascription Attitudes to environment Paternalism Schwartz (1994) Mastery/ Harmony Autonomy/ Conservatism Hierarchy/ egalitarianism Steencamp (2001) Autonomy/ Collectivism Egalitarianism/ hierarchy Uncertainty avoidance Mastery/nurturance Individualism vs Collectivism
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Hypothesis 1a: The level of Individualism of the local culture is negatively related to the number of local managers on the board of the subsidiary.
When implementing this dimension to the managerial tenure variable the findings are interesting. Effectively collectivistic cultures show a herd like pattern in their decision making (Beckmann et al. 2008). When linking this to age the finding was that younger individuals stray from this cultural phenomenon more often, therefore companies surrounded by a collectivistic culture find themselves with older managers with much experience in their careers (Beckmann et al., 2008).
Hypothesis 1b: The level of Individualism of the local culture is negatively related to the number of tenured managers on the board of the subsidiary
Power Distance
“Power distance is the extent to which the members of a society accept that power in institutions and organizations is distributed unequally” (Hofstede, 1984, p.83). So effectively it explores to what extent people are contempt with the power being distributed in a highly hierarchical fashion. For example; if the Power distance dimension of a country is low, they do not accept this manner of power distribution and will demand more equality. In a high-power distance country, the consensus in the culture is that a higher-ranking individual in the company should be obeyed with no questions asked (Adler, 1991). Effectively managers are a different class than the workers in these cases and therefore it would not matter who held positions on the managerial team of the subsidiaries, as their decisions would not be questioned. Turning this around to a low power distance country, you are likely to see more local individuals on the managerial board. Being a subsidiary of a foreign MNC coming into a country where they are more open to questioning the division of power, it is not a stretch to suggest that if there were a local on the managerial board of that subsidiary, the local culture would be more accepting and easier to contend with as an MNC.
Hypothesis 2a: The level of Power Distance of the local culture is negatively related to the number of local managers on the board of the subsidiary.
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suggest that on the bipolar continuum of power distance, when power distance increases, you are likely to see older and less experienced managers.
Hypothesis 2b: The level of Power Distance of the local culture is negatively related to the number of tenured managers on the board of the subsidiary.
Uncertainty avoidance
Uncertainty avoidance is defined as the extent to which the people in a society are willing to accept uncertainty and ambiguity. Therefore, countries with high uncertainty avoidance will strive towards rigid codes so that the outcome of stations is clearer, and the people in that society will stray away from taking risks, as this could lead to an unknown future (Hofstede, 1984). This dimension has previously been alluded to promote the idea that in uncertain situations organizations like to utilize short term specialized management in order to push through the uncertain times (Keck, 1997). In the cultural definition of Uncertainty avoidance however it is a larger picture at stake. It is not the company that fears the uncertainty that lies ahead, but rather the whole culture surrounding the subsidiary. In a high uncertainty avoidance culture, the individuals in the surrounding environment will be looking to have leadership whose decisions they can trust. It is unlikely then, that an MNC that implements a foreign management board in a subsidiary would do well, as the locals may distrust the opinions of the foreigners. This hypothesis is backed up by the need for external legitimacy, where the organization needs to adapt to the local culture in order to be efficient in the local environment (eg. Lawton et al, 2000). By potentially introducing uncertainty through the implementation of non-home country national managers, a company risks losing legitimacy and alienating key stakeholders in the country (Lawton et al, 2000). This leads to the hypotheses:
Hypothesis 3a: The level of Uncertainty avoidance of the local culture is positively related to the number of local managers on the board of the subsidiary.
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1991). This then leads us to suggest that with greater uncertainty avoidance in the environment, an organization is likely to have less tenured managers.
Hypothesis 3b: The level of Uncertainty avoidance of the local culture is negatively related to the number of tenured managers on the board of the subsidiary
Moderating variables
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2004), which will be the initial building block for our hypothesis; presenting that more distance will create more pressure to conform to the local environment. Ionascu et al (2004) confirms this thinking with his proposition that when the difference between the origin country of the MCN grows when compared to the country of the subsidiary, the obstacles to transfer practices and gain local legitimacy will also grow.
To measure these institutional differences, the definitions of Normative and Regulative distance by Gaur et al. (2004), defined as the norms that govern people’s behavior, and the rules and laws to ensure stability and order respectively, will be utilized. Cognitive distance is not included as it comprises of the routines and scripts that are commonly used in the country to assign meanings and solver problems (Ionascu et al., 2004). It is also very difficult to measure, as to be precise, psychological testing would need to be carried out, much like in the UE theory. In its place as the third moderating variable to display institutional distance cultural distance will be utilized. Utilizing Hofstede’s (1983) dimensions to display
differences in countries is not new, Ionascu et al. (2004) used a calculation of the dimensions to demonstrate normative distance, and Johanson and Valne (1977) view culture as a main component to “preventing the flow of information to, and from a market” (Johanson and Valne, 1977 p. 24). According to Gaur et al (2007), institutional theory can be implemented alongside cultural theories to gain a deeper understanding of the differences between different environments. Furthermore, utilizing them together should create a clear picture of the
challenges that MNCs face when deciding how to staff and run their subsidiaries (Gaur et al.,2007). Overall it should therefore be a viable variable to link with institutional distance in order to explain differences in adaption of subsidiary top management teams to local cultural environments. Overall the choice remains for the companies to either move towards
isomorphism with the local firms and gain legitimacy in the local market, or to keep
legitimacy inside the company and fight the pressure to move towards a more local attitude (e.g. Rosenzweig & Singh, 1991). Therefore, the vaster this distance is, the main hypothesis is that that the less the HQ will attempt to overcome the issues it faces to control the subsidiary, and instead let the national managers adapt the subsidiary to the local culture.
Regulatory Distance
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country of the company, or due to locals being against adapting to foreign implementations if they do not adhere to the local standards (e.g. Pennings, 1993). Regulatory differences are simpler to define than normative or cultural differences. This is because it is built from the constitutions, laws, and property rights (Chao and Kumar, 2009), which are found in a written format in a high majority of countries. Furthermore, companies more commonly promote the regulatory institutions to being of high value in terms of adaption, as without a level of adaption to them, simply functioning as a company within a new country may be very difficult (Ionascu et al., 2004). Overall the consensus in theories is that differences have the potential to at least make it more difficult to work efficiently within a new country. It becomes ever more prevalent where the regulatory institutions are not sufficiently adept, and where the regulations are far different from the home country (Ionascu et al., 2004). Chao and Kumar (2009) also link regulatory distance to be a moderator when comparing management team diversity and performance, and a similar set of hypotheses will be proposed. The more regulatory distance that takes place between the HQ of a company and the subsidiary, the more culture effects the board composition of subsidiaries.
Hypothesis 4a: The level of regulatory distance between the HQ and the subsidiary, increases the effect of the local cultures individualism on the number of local managers on the board of the subsidiary
Hypothesis 4b: The level of regulatory distance between the HQ and the subsidiary, increases the effect of the local cultures Power distance on the number of local managers on the board of the subsidiary
Hypothesis 4c: The level of regulatory distance between the HQ and the subsidiary, increases the effect of the local cultures Uncertainty avoidance on the number of local managers on the board of the subsidiary
Normative distance
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differences prove more difficult to adapt to as they are not so obvious (Boyacigiller, Goodman and Phillips, 2004). This is due to their nature of being the norms and ways of thinking of the local population (kostova, 1999), which are obviously more difficult to measure. Especially in this case adaption to the local environment is easier when information is gathered by the use of a local source, for instance by utilizing a local manager (Ionascu et al., 2004). Ionascu et al. (2004) also suggest the importance of applying such a method to gain external legitimacy becomes more important whenever the normative distance grows. Chao and Kumar (2009) propose that normative distance is a moderator between management team diversity composition and performance, and the proposition is put forth here that it also effects the composition of the management team itself. Similar to regulatory distance, in terms of normative distance there is a vast amount of research proposing that when the distance increases, adaption to the local environment becomes more important to be effective. To conclude, hypotheses suggest that with the growth of normative distance, the cultural effects on the management team composition grow, as they become more important as determinants of managers that can be utilized in order to adapt to the local environment.
Hypothesis 5a: The level of normative distance between the HQ and the subsidiary, increases the effect of the local cultures individualism on the number of local managers on the board of the subsidiary
Hypothesis 5b: The level of normative distance between the HQ and the subsidiary, increases the effect of the local cultures Power distance on the number of local managers on the board of the subsidiary
Hypothesis 5c: The level of normative distance between the HQ and the subsidiary, increases the effect of the local cultures Uncertainty avoidance on the number of local managers on the board of the subsidiary
Cultural distance
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being familiar with the environment in question (Eden & Miller 2004). With such a situation, it is essential to search for local assistance in order to understand the environmental differences (Eden & Miller, 2004; Xu, Pan & Beamish, 2004). Eden & Miller (2004) also state that the necessity of doing so rises with cultural distance, and the rise of the resulting unfamiliarity hazards.
Though there are many success stories of expatriate managers, issues arise if there are major ‘clashes’ with the cultures in question (Schermerhorn & Bond, 1997). For example, when a leader comes from an individualistic/low power distance culture to a collectivistic/high power distance culture, there is a vast difference in how individuals act and especially in the way they lead. The main issue is if these clashes become common and spill over into more clashes (Smith & Bond, 1994). To summarize, cultural distance is an accepted and effective tool to be used alongside institutional distances to measure cross country distances (House et al., 2004). In some cases, cultural distance has been used as an indicator for cognitive and normative institutions as they theoretically explain some of the underlying characteristics of the local populous (e.g. Ionascu et al., 2004). It is overall not surprising that research and theories regarding cultural distance suggests and alignment with institutional differences; where the distance grows, the effect of local culture increases in terms of determining the subsidiary management composition.
Hypothesis 6a: The level of cultural distance between the HQ and the subsidiary, increases the effect of the local cultures individualism on the number of local managers on the board of the subsidiary
Hypothesis 6b: The level of cultural distance between the HQ and the subsidiary, increases the effect of the local cultures Power distance on the number of local managers on the board of the subsidiary
Hypothesis 6c: The level of cultural distance between the HQ and the subsidiary, increases the effect of the local cultures Uncertainty avoidance on the number of local managers on the board of the subsidiary
Deeper analysis of Tenure
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cultural distance) hold true, as they discuss the variation caused by the difference of the parent country and the host country when discussing subsidiary management composition, where tenure remains as a determinant. With this said, to be thorough more evidence for the proposition that distance leads to more adaption to the local environment even in terms of tenure will be provided. The original UE theory suggest that more tenure will produce a higher potential for the managers to gather and utilize information that they have access to (Hambrick & Mason, 1984). Essentially Hambrick & Mason (1984) put forth that cognition is gained through years of training and acting in the field, and when a situation arises that a decision or adaption is necessary, higher tenure managers will be more adept in dealing with it. On the flipside, this means that younger tenure managers will have a smaller frame of reference from their training and experience, and therefore not be able to be so effective at adapting (Hambrick & Mason, 1984). Further, they are likely to take more risks due to this smaller amount of knowledge (Finkelstein & Hambrick, 1996). The definition of risk is important here, as longer tenure managers have a lower likelihood of sufficiently adapting to the surrounding environment, and they rather utilize methods that they have seen work before in their prior experience as a manager (Hsu et al,. 2013). Shorter tenure managers on the other hand will take more time to analyse and understand the surrounding environment, and make choices based on the gathered information, rather than their history as a manager (Miller, 1991). Therefore, when referring to risk taking, Hambrick & Mason (1984) refer to the ability to make decisions that are more adaptive and the outcomes may be less known. In terms of international diversification this kind of extensive gathering of information and its analysis is very important in order to be efficient due to the external culture surrounding any foreign subsidiaries, and the extent of differences between home and host country (Hsu et al, 2013). With this said they do not overrule the effects of the local cultural norms, as presented by the cultural dimensions. In combination with the discussion of the moderators’ prior, and this further analysis of surrounding theories, the final hypotheses reflect the idea that where distance is larger, the effect of the cultural dimensions about predicting the management team composition of the subsidiary increases.
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Hypothesis 7b: The level of regulatory distance between the HQ and the subsidiary, increases the effect of the local cultures Power distance on the number of tenured managers on the board of the subsidiary
Hypothesis 7c: The level of regulatory distance between the HQ and the subsidiary, increases the effect of the local cultures Uncertainty avoidance on the number of tenured managers on the board of the subsidiary
Hypothesis 8a: The level of normative distance between the HQ and the subsidiary, increases the effect of the local cultures individualism on the number of tenured managers on the board of the subsidiary
Hypothesis 8b: The level of normative distance between the HQ and the subsidiary, increases the effect of the local cultures Power distance on the number of tenured managers on the board of the subsidiary
Hypothesis 8c: The level of normative distance between the HQ and the subsidiary, increases the effect of the local cultures Uncertainty avoidance on the number of tenured managers on the board of the subsidiary
Hypothesis 9a: The level of cultural distance between the HQ and the subsidiary, increases the effect of the local cultures individualism on the number of tenured managers on the board of the subsidiary
Hypothesis 9b: The level of cultural distance between the HQ and the subsidiary, increases the effect of the local cultures Power distance on the number of tenured managers on the board of the subsidiary
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Methodology
This research aims at understanding the linkage between the local culture of a subsidiary, of an MNC, and the management composition of that subsidiary. Hypotheses have been developed to demonstrate that this relationship is moderated by the institutional and cultural differences of the HQ and the subsidiary. The hypotheses suggested are all compiled into appendix 1, and are presented as a model in figure 2. The findings from these hypotheses will enable us to answer the research question: “To what extent does the local culture surrounding a subsidiary of an MNC, effect the managerial composition?”. To answer the research, question a statistical analysis will be carried out on the quantitative data gathered.
Sample
For the sample, we have created 5 criteria to create a database that can be managed and interpreted for our chosen variables, but also is vast enough to be able to answer our research question. The research method chosen has been adopted and adapted from (Gong, 2006) who also researched a comparable situation with management teams. Firstly, the management teams of the subsidiaries will have to have 3 or more managers. Secondly, the information about the subsidiary must contain the complete names of the managers on the board. Thirdly, the information must contain data on strategic importance, i.e. Information of the basic operations of the company must be available. Fourth, to lower the variability in HQ culture and other unforeseeable variables, the HQ of the MNC must be in the United States. And finally, this dataset must be under 10 years old.
The LexisNexis Directory of Corporate Affiliations database was used. It has been used in similar research into subsidiary management teams (e.g. Gong, 2006), and therefore it can reliably be said it will contain the necessary information for this research. In combination with the criterion above, a sample size of 309 managers from 57 different subsidiaries of 39 individual corporations was gathered. The sample covered 9 different countries (Netherlands, Spain, France, Poland, Italy, Germany, Thailand, Japan, and China).
Data collection and coding
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each individual used in this research further. When it comes to their nationality, we utilized a method similar to Gong (2006), and in order to be efficient used the names (mainly surnames) to determine nationality. The way to make this a viable method is threefold. Firstly, by utilizing countries with distinctive languages from each other (like was done when gathering our database), it becomes reasonably reliable to determine if an individual is of the nationality of the host country. Secondly, to double-down on this matter, 2 other students were used to individually assess the names for their nationality. Thirdly, any digressions were researched further until the nationality of each manager could be determined with a reasonable level of confidence. Overall while doing this the managers were coded into HCN (home country national), PCN (Parent country national) and 3CN (3rd country national), which was then streamlined into HCN’s and others for the uses of this research.
When it comes to the tenure of the managers, every individual was researched for reliable information to be able to clarify if their management experience is over 10 years. In most cases, by using for instance Bloomberg director information or LinkedIn, the background of the managers could be easily found. In other cases, newspaper articles, or company articles were the only sources of information when it comes to the management history of the individuals. Where possible, multiple sources were used to create confidence for using single sources for some individual managers. This information was then coded into managers with 5 or less years of experience, 10 or less years of experience, and others.
For gathering the cultural data to use to analyse the subsidiary local culture and to further calculate the cultural difference between the MNC HQ and the subsidiary, the database provided by Hofstede2 was utilized. It covers 100 countries and has been proven to be a reliable source for research such as the one we are proposing. In terms of calculating cultural distance we will use the method Kogut & Singh (1988) used in their research comparing cultural distance and the probability of a joint venture. Algebraically presented
Where, Iij is the index of the ith cultural dimension and country j.
Vi is the variance of the ith dimension
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u is the second culture, so Iiu represents the index of the second country in dimension i.
For institutional distance, we will utilize the same method used by Gaur et al (2007) when they were investigating institutional environments effect on staffing strategies at subsidiaries. They used the world competitiveness yearbook3 to see the normative and regulative elements of the institutions in the HQ and the subsidiaries host country. In terms of this paper, the Global competitiveness report 2015-20164 will be used in a similar fashion. 9 elements were selected, 4 regulative (Anti-Monopoly policy, Strength of auditing and reporting standards, efficiency of legal framework in settling disputes, and intellectual property protection) and 5 for normative (wastefulness of government spending, favouritism of decisions of government officials, transparency of government policy making, burden of government regulation, judicial independence). All factors chosen were in line with Gaur et al (2007), with a few tweaks due to differences in sources, for instance representing Gaur et al’s (2007) governments reliance to economic challenges as wastefulness of government spending in this paper. After collection, a factor analysis (principal components analysis) with varimax rotation was conducted. In both, regulatory and normative, only one factor with an eigenvalue over 1 was found, and all elements had clear loadings of over 0.865. To check the reliability of the created measures, an item-to-total correlation was run on SPSS, and a Cronbach’s alpha of .974 was given in both cases. This is much higher than the cut off .6 therefore it can be confidently said that the received factor scores will function well to analyse the institutional difference between the Host, and parent country. To generate this distance, the generated variable was normalized, and the parent country (United States) institutional score was subtracted from the Host countries in question to create the following scores
3 http://www.imd.org/wcc/wcy-world-competitiveness-yearbook/
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Table 2: Factor scores of regulatory and normative distances Constructs Measurement items
factor loadings variance explained (%) Cronbach's Alpha Regulatory
distance anti-monopoly policy 0.985 92.6 0.974
Strength of auditing and reporting
standards 0.967
Efficiency of legal framework in
settling disputes 0.952
Intellectual property protection 0.945
Normative distance Favouritism in government decisions 0.974 87.48 0.974 Transparency in government policy making 0.969 Wastefulness of government spending 0.96 Judicial independence 0.903 Burden of government regulations 0.865
When a distance calculation was made, the following table was generated by subtracting the value for United States (parent country in this study) from the host country values. The following table shows the gathered value which will be implemented to demonstrate the institutional distances between the countries.
Table 3: Regulatory and normative
distance from parent country
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Analysis
For the analysis, a multiple regression was carried out due to the abundance of continuous variables. To carry out multiple regression, a correlation analysis must be carried out between the independent variables. The correlation table is provided in table 4, and table 5 shows the VIF values of the independent variables, indicating no issues with multicollinearity (Neter et al., 1990).
Results of the hypothesis tests.
We first tested the correlation between the cultural dimensions and number of home country national managers on the board of the subsidiaries, and the hypotheses related to the moderation effects, table 6 presents the results. Model 1 is the baseline, containing only the independent and dependent variable. Model 2 demonstrates the cultural distance moderator, model 3 the regulatory distance moderator, and finally model 4 the normative distance moderator. In terms of the hypothesis, model 1 shows significance and therefore the combination of the 3 dimensions can be used to predict the number of home country nationals on the management board; more specifically 87% according to the R-squared value. With this said, only uncertainty avoidance shows significance, and accordingly Hypotheses H1a and H2a are rejected. Referring back to the hypotheses, H3a expects a negative relationship, but the beta value present in table 6 is positive; therefore, this hypothesis is also rejected. Models 2-4 in table 6 all show no significance. Consequently, we must conclude that the moderation effects proposed in hypotheses H4abc, H5abc and H6abc are not supported in this data.
Table 4 Descriptive statistics and correlations
mean s.d. 1 2 3 4 5
1. Home country national manager percentage 62.9956 10.45312
2. Managers under 10-year tenure percentage 35.0622 10.89747 0.10
3. Power Distance 57.1111 14.67519 0.453 0.754 *
4. Individualism 54.5556 22.46170 -0.211 -0.636* 0.636
5. Uncertainty Avoidance 71.5556 20.85133 0.742* -0.083 0.359 0.343
*Correlation is significant at the 0.05 level (2-tailed)
Table 5 VIF values
1. Power Distance 1.148
2. Individualism 1.007
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Table 6
Dependent variable: Home country national manager percentage model 1 model 2 model 3 model 4
Independent variables Power Distance 0.318 0.981 -1.439 1.245 Uncertainty avoidance 0.886* 1.852 2.762 -1.271 Individualism -0.327 -2.903 -0.558 -0.632 Moderators Cultural distance -2.296 Regulatory Distance -0.375 Normative Distance 1.518 Interactions
Power distance x Cultural distance 0.2
Uncertainty avoidance x Cultural Distance 0.65
Individualism x Cultural Distance -0.928
Power distance x Regulatory distance -1.381
Uncertainty avoidance x Regulatory distance -0.297
Individualism x Regulatory Distance 1.822
Power Distance x Normative Distance 1.126
Uncertainty avoidance x Normative Distance -0.292
Individualism x Normative Distance -2.139
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Table 7
Dependent variable: Tenure over 10 years percentage model 1 model 2 model 3 model 4
Independent variables Power Distance 0.478 0.591 1.637 -0.132 Uncertainty avoidance -0.219 -1.208 -1.749 0.513 Individualism -0.406 3.303* -0.079 0.034 Moderators Cultural distance 3.055 Regulatory Distance 0.368 Normative Distance -0.625 Interactions
Power distance x Cultural distance -1.316
Uncertainty avoidance x Cultural Distance 0.729
Individualism x Cultural Distance -1.883
Power distance x Regulatory distance 0.773
Uncertainty avoidance x Regulatory distance -1.798
Individualism x Regulatory Distance 0.643
Power Distance x Normative Distance -0.756
Uncertainty avoidance x Normative Distance 0.819
Individualism x Normative Distance 0.376
Discussion
Building on the UE concept brought to life by Hambrick & Mason (1984), this paper attempts to combine the idea of the importance of having the right kind of cognition in subsidiary management teams of multinationals, by analysing the management team composition. This has been supported by a plethora of authors, for instance Hoffmann and Hegarty (1993) found that, when comparing the management composition between the four major western cultures, there were significant differences. Results like these would therefore propose that there is a significant connection between the surrounding culture and top management teams. This paper attempted to shed light on this connection by analysing 2 dependent variables to explain management team composition in a simple form, and by utilizing Hofstede’s (1983) dimensions (uncertainty avoidance, power distance, individualistic vs collectivistic) as independent variables to define the cultural environment. Furthermore, moderating variables pertaining to the distance between the host and parent country were created in line with authors like Ionascu et al. (2004) whom effectively suggest that greater the distance, the more adaption to the local culture is necessary. Overall, 9 main hypotheses were created with a combined amount of 24 sub-hypotheses when all interactions were finally discussed.
Hypothesis 1ab relate to individualism v collectivism dimensions effects on dependent variables. Our analysis showed, that in relation to the amount of host country national managers on the board and to the prevalence of shorter tenure managers, this dimension had no significance and the hypotheses were rejected. In terms of theoretical backing this outcome is unexpected. Theoretical backing shows that collectivistic cultures can be very defensive of their own, and that when it comes to picking a foreign individual over a home country national, they will do so very rarely (Hofstede, 2011). Bhagat (2002) directly suggests that such issues can be addressed best through the utilization of home country managers, to lower the liability of foreignness caused by the collectivistic culture. Accordingly, the first hypothesis suggested that this dimension should directly relate to the number of home country nationals on the subsidiary management teams, but our analysis shows that this is not the case. In a similar fashion, due to the herd-like behaviour demonstrated by collectivistic cultures (Hofstede, 1983; Beckmann et al., 2008), authors suggest that more experienced managers would be found in these cultures (e.g. Beckmann et al., 2008). This is due to the risk-taking tendency of the lesser tenured managers, which may cause them to stray from the herd.
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backing for the hypotheses concerning power distance and home country managers was the high potential for variance in management styles. Power distance as a dimension refers to the tendency of societal members to accept unequal distribution of power in the surrounding society (Hofstede, 1984), which can lead to greatly differing management styles, from high hierarchical to very flat structures (Adler, 1991). In a more general term, if power distance is high, employees will take orders without asking questions, making it more possible for foreign country nationals to be effective in management roles, even in otherwise difficult environments. This led to the hypothesis that when power distance grows, the amount of host country nationals on the management team will likely decrease. To refer to the tenure hypothesis, Beckmann et al. (2008) found that in terms of power distance, age and tenure were the most important selection criterion for managers. The hypothesis between power distance and tenure was created to be in line with his findings, but as with the correlation between power distance and home country nationals, it was found to be insignificant.
Hypothesis 3ab tackle the proposed correlation between the cultural dimension of uncertainty avoidance and the dependent variables. By definition, this dimension relates to the strive of the individuals within the culture to stray away from accepting uncertainty and ambiguity in their lives (Hofstede, 1984). In relation to management, countries with high uncertainty avoidance the populous rallies behind individuals they can trust, which we propose therefore are locals. In terms of tenure, shorter tenured managers work better in uncertain environments (Miller, 1991; Hsu et al., 2013) as they will use the information in their environment to create their opinions, rather than relying on personal experience (Hambrick & Mason, 1984). Therefore, we suggested that when the culture has less uncertainty avoidance, the number of lower tenure managers will increase. In our analysis, there was a significant correlation between uncertainty avoidance and number of home country managers on the board of the subsidiaries. The significance was only at the .05 level, and a beta value of 0.886 was found. Though the result is significant, the beta value indicates a positive relationship, whereas our hypothesis proposed a negative relationship. Therefore, with the non-significance of uncertainty avoidance to tenure in table 7, both hypotheses 3ab were rejected.
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Though the results were insignificant in proving our hypotheses, they do pose an interesting result otherwise. While they do not provide significance for individual dimensions (except uncertainty avoidance to host country national management percentage), the baseline models (table 6 and 7) relating to the relationship between the dimensions and top management team composition both show significance. This would therefore suggest that even if individual dimensions do not correlate to management team composition, the combination of the variables has explanatory power. A relative idea is when BMI and height on their own are not good predictors of health risks, but when combined become a powerful too in their prediction; a similar case may stand here. With this mentioned, the R-squared values are 0.871 and 0.769 respectively, and higher values would be preferred to make this argument more valid.
Limitations
With the outcome of the research being the support of only one of the initial hypothesis, the limitations must be given a good look to understand if there are any vast reasons for the given outcomes.
The data for the Cultural dimensions was taken directly from the official website. This data is utilized by thousands of authors on an annual basis, and although the cultural factors have received much critique, they still stand as the premier way of measuring cultural differences. It must be suggested that may be, in this case, the cultural dimensions selected to not efficiently measure the culture, or at the very least the parts that affect the dependent variables chosen. With this said, the choice of the dimensions was motivated and backed up with previous papers, especially when it came to hypothesis generation. Furthermore, 2 out of the 3 used dimensions had a significant relationship to the dependent variable, one of which simply had an inverse relation to the one expected. Overall, it does not seem that there are any issues when it comes to these variables.
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arguably without having access to company databases it is very unlikely to be able to gather more than 75% of a sample in this kind of research.
The level of Host country national managers was collected in relation to a similar study made, with some extra precautions. Though understandably the methodology of measuring the nationality of individuals when it came to their name, by using multiple assessors and internet sources where possible the data should be very reliable. This underlying study calculated a 95% reliability for their database. In this research, a further step was taken by selecting host countries that have vastly different languages to make selecting home country nationals from the list more accurate. Overall, this variable should also stand up to further testing.
Cultural distance was measured with a commonly used methodology, essentially utilizing the differences in each dimension to compile an overarching difference between the host, and parent country. For creating this moderator, the Hofstede dimensions were utilized, and as discussed above the information should be very reliable. When it comes to creating it into a distance variable, it can be argued that a factor analysis like the institutional distance variable could have been used.
Institutional distance data was collected from the Global competitiveness report. The report is created with representatives of each country, and is a 300-page report containing information on 110 different variables and representing near all countries around the world. As it is also published by the World Economic Forum, the sources and information it contains seem reliable.
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Conclusion
In this paper, the well-respected and adapted upper echelon theory (Hambrick & Mason, 1984) was suggested to be able to explain the reasoning for differing management
compositions around the world. It was combined with the cultural dimensions of Hofstede (1984), which were used to explain the external environment subsidiary management teams needed to adapt to. The dependent variable in the management team composition was
represented by tenure and host country nationalism, both of which have significant backing in research to have an influence on the performance of a company. This was all combined to attempt to explain the research question “To what extent does the local culture surrounding a subsidiary of an MCN, effect the managerial composition?”. The hypotheses created with theoretical backing to answer this question all were rejected, leading us towards an
understanding that there is not much influence by the surrounding culture in terms of effect on the management team composition. With this in mind, the study did find that the models created with the independent variables had significance in explaining variance in both of the dependent variables, so although this study finds that there is no correlation with specific cultural dimensions, there is a suggestion for future research to see if the combination of dimensions could be utilized in order to answer a similar question.
Also, we submit that in future research in the field, emphasis should be made to lower the variance potentially caused by differences in different industries, and for instance strategic standing within a company. Though difficult to measure, both factors and many others have backing in theory to suggest that they may also be significant in terms of determining the adaption of local practices in terms of subsidiary management teams. At the very least, they should be controlled for when studies are carried out. Furthermore, though the methods utilized in this paper, for instance for the gathering of the dependent variable data, have theoretical backing, and the data is gathered from reliable sources, we propose that the methodology should be refined further to reduce potential noise in the data. This could potentially already be solved with a much higher sample size, and taken into the account the lack of outliers even in the database used here it may also be possible that the methodology is valid, nevertheless we suggest further planning in future research. Furthermore, an aspect that this paper did not account for is the performance of the subsidiary. Arguably all the
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environment, decisions like these are difficult to make. In this case an alternate explanation for our results arises, stating that MNC’s may have not perfectly adapted their subsidiaries; the only way this may be confirmed is through controlling for it in future research.
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